Sarbanes-Oxley Increases Risks, Costs

A new survey of corporate executives says Sarbanes-Oxley is falling flat.

Finance department chiefs are stepping up Sarbanes-Oxley Act (SOX) compliance activity throughout their organization. But, according to a new survey, many say they feel like they’re just going through motions.

In the latest Management Barometer survey conducted by PricewaterhouseCoopers (PwC), relatively few finance executives believe SOX will do much to restore investor confidence. What they do believe, however, is that the new law will increase certification risk and SOX implementation costs.

To be sure, 84 percent of executives interviewed for the survey report that SOX has changed control and compliance practices at their companies—though not significantly. Only four percent indicate big changes, while 27 percent say changes are modest. A little more than half (53 percent) contend the new law simply formalizes what their company had been already doing.

Most finance executives (82 percent) feel confident that their company is fully compliant with the law; but 13 percent admit they have more work to do.

For all their efforts, however, only 31 percent of the executives polled think SOX really will help restore public confidence in the capital markets. Among this group of naysayers, only three percent believe the law will have a major impact. In contrast, half of respondents go on record to say that the law will have no impact, and 19 percent were uncertain.

The survey opinions are relatively similar when executives gauged the new rule’s effect on shareholder value. Almost one-third (32 percent) of the participants confirm that SOX will have a positive impact on shareholder value. More than half (56 percent) expect its impact to be neutral, while six percent predict a negative effect.

Asked for their overall assessment of SOX, only nine percent judge the law to be a good one, that adequately responses to problems in corporate accounting and reporting. One-third of respondents claim it’s a step in the right direction though, “but more needs to be done.” Meanwhile, 42 percent reckon that SOX is a well-meaning attempt, but saddles companies with unnecessary extra costs.

Fifteen percent conclude the law is “ill-considered and hastily-passed” and therefore, won’t make any difference. A lone one percent surmises the legislation will actually harm capital markets.

Though relatively few executives are gung-ho about SOX, a majority of the respondents report it will add burdens of certification risk and costs. For instance, 65 percent of the executives say that SOX presents increased risk for their CEO and CFO, who are required to certify the company’s financials. Seventeen percent of these participants believe the risk is much higher; while 48 percent perceive risk to be only moderately higher. A few expected to require other executives to give sub-certifications within the company.

The cost of compliance is perceived as modest, so far; a mere three percent of the executives surveyed say it has been very expensive to implement, with 29 percent asserting that implementation was somewhat costly.

More important, 71 percent of the corporate finance department chiefs believe that costs will increase down the road—including 12 percent who expect much higher future costs.

The study found a direct correlation between the executives’ outlook on implementation costs and their evaluation of its impact. Only 31 percent of those worried about higher future costs gave the law a positive overall evaluation. Meanwhile, of the few executives who expected no extra costs of compliance, 70 percent gave positive assessments of SOX.

PwC experts echo the view of most executives in the survey—that it takes more than a law to regain investors’ trust. “Executives credit Sarbanes-Oxley with providing a consistent, formalized structure for corporate governance and control,” said Frank Brown of PwC. But, “it will take demonstrated commitment to transparency, accountability, and integrity to regain public trust.”

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