As for small public companies that argue that Sarbox costs are threatening their ability to sustain their core business, Wood has no sympathy. “I would say to them that maybe the private markets are better suited to them.”
While Sarbox critics fear the law is driving companies away from the United States, Karolyi has the opposite concern. He worries that efforts to soften its provisions will reduce the valuation premium that NYSE and Nasdaq listings currently garner. “If [the SEC and the Public Company Accounting Oversight Board] are lenient and give all sorts of special provisions and breaks to foreign issuers, the value of the franchise — the U.S. capital markets — and what it represents for these global firms may be lost,” he warns.
Although the SEC has rejected the idea of exempting small companies from Sarbox, the Commission has indicated (during and after its roundtable in May) that it is willing to compromise.
While that may help satisfy critics, Karolyi worries that they will push for more. “The integrity of the law and what it represents could be why we see 30 percent valuation premiums in the U.S. markets,” he says. “If we dilute the standards, that value may dissipate.”
Kate O’Sullivan is staff writer at CFO.
A Bunch of Bad Apples
While beleaguered finance executives often point to Enron and WorldCom as the source of all their Sarbanes-Oxley woes, at least a hint of trouble, in the form of material weaknesses, has turned up at hundreds of companies in the second and third years of Section 404 compliance. — K.O’S.
|Year||Number of Companies Reporting||Number of Material Weaknesses Reported||% of Companies Reporting Weaknesses|
Source: Christopher Cox speech at the SEC roundtable in May
The costs of complying with Section 404 have not declined as markedly as many finance executives expected. Auditor-attestation fees, for example, which were expected to drop by 26 percent in the second year after 404 took effect, fell by just half that amount, according to a study by Financial Executives International. — K.O’S.
|Expected % Decline, 2004–2005||Actual % Decline, 2004–2005|
|*Includes internal staff time and software and consulting fees.