Federal regulations in response to Enron, WorldCom and other corporate scandals have been a huge waste of time and money for public companies, and they should be repealed as soon as possible.
That’s the view of Steve Sanghi, CEO of Chandler-based Microchip Technology and one of the East Valley’s most respected executives.
"Our competitors in other countries are dancing in the street," he said. "Our government is doing the job for them to make us less competitive."
The Sarbanes-Oxley Act of 2002 was passed by the Congress to crack down on corporate fraud. The biggest headache for public companies has been Section 404, which requires chief executives and chief financial officers to publish information annually on the scope and adequacy of their internal control systems with evidence that the systems can catch anything that could cause a financial misstatement.
Public companies with a market capitalization of more than $75 million were required to comply with Section 404 last year, while those with lesser market capitalization must be in compliance by the end of this year.
Sarbanes-Oxley also addresses such issues as board composition and duties, and director compensation, and makes chief executive officers and chief financial officers legally responsible for all Securities and Exchange Commission filings, including quarterly and annual reports, and proxy statements.
Microchip Technology’s annual audit costs jumped to nearly $1.2 million from about $300,000 last year because of Sarbanes Oxley, and specifically Section 404, Sanghi said.
"You can’t legislate fundamental honesty and integrity of the employees," he said. "This is really sort of a government at its best trying to hurt their own industry."
But the investing community likes the law’s requirements. Along with the recent convictions tied to the World-Com, Adelphia and Tyco scandals, Sarbanes-Oxley has made a difference for investors, said Joe Blankenship, an account manager at Source Capital Group in Scottsdale.
"In my view it gives the investment community a little more comfort, if you will, because now the officers and directors who sign off on these filings are not only civilly responsible, but, since it’s a law, they could be charged with criminal activity as well," he said.
Tempe-based America West Holdings Corp. spent about $1.2 million last year and about $450,000 in 2003 on 404 compliance, said Elise Eberwein, president of corporate communications.
"When you’re forced to stop and really look at how you can handle all of your internal controls and then document it, that’s not a bad exercise to go through," she said.
Larry Trachtenberg, executive vice president and chief financial officer of Tempebased Mobile Mini Inc., said complying with Section 404 was a daunting task.
"Our additional 404 audit fees were about $400,000, and then we hired a couple of internal auditors, and our staff really had to spend some extra time," he said. "It took them away from other things that they would have been working on to have to work on the 404 compliance."
Unlike Sanghi, however, Trachtenberg believes his company has benefitted overall from Section 404 because more information is going to its board of directors, and there’s better communication between management and independent directors.
COST VS. BENEFIT
The No. 1 complaint in the business community about Sarbanes-Oxley is the cost of compliance, said Rick Rayson, managing partner of Deloitte & Touche’s Arizona practice. His office has helped many companies with 404 compliance through auditing and advisory services.
"Many companies will say perhaps we identified some deficiencies, weaknesses in our controls, but we didn’t need to do the level of detail that was required," he said. "So they got some value, it just did not exceed the cost."
Sarbanes-Oxley and Section 404 didn’t make any activity illegal that wasn’t already illegal, but it should help companies detect fraud before all of the assets are gone, said Perseus Munshi, a lecturer in the School of Accountancy in the W.P. Carey School of Business at Arizona State University.
"There’s no money to recover on Enron, for example, or WorldCom," he said. "Where’s the money going to come from? These people looted the companies, and they spent it all."
The high cost of compliance has caused some private companies to put off initial public offerings, Blankenship said. Also, some smaller public companies that are not listed on the Nasdaq or a national securities exchange, and would like to be, are staying put, he said.
There are also foreign companies that are evaluating whether they want to continue to be listed on U.S. exchanges because it eventually will cost them, Rayson said.
"The SEC and the Public Company Accounting Oversight Board are in the process of issuing guidance to smaller companies that hopefully will ease the burden," he said.
Sarbanes-Oxley specifically targets membership on boards’ audit and compensation committees, requiring members to have no financial ties to the corporation. It also gives each company’s audit committee a lot more power in overseeing accounting policy, Munshi said.
"These are individuals who are not officers of the company, do not accept any consulting or advisory fees from the company, and who are not associated with the company in any significant way," he said. "Also, every audit committee should have at least one of what they call a financial expert."
In addition, Sarbanes-Oxley requires companies to put in place a system in which whistle-blowers can report suspicious or fraudulent activity within the company to the audit committee, Munshi said.
Public companies with bulletin board stocks, at this point, are not required to have an independent financial representative on their boards to head their audit committees, he said.
The part of Sarbanes-Oxley that deals with board composition would serve a useful purpose if a company’s board wasn’t independent, Sanghi said.
"Our board has always been independent," he said. "The audit committee has always been independent. I was the only member of the board that was not independent, and I was not on the audit committee."
America West didn’t have to make any changes in its board makeup and audit committee because of Sarbanes-Oxley, Eberwein said.
Mobile Mini also was already in compliance, Trachtenberg said.
For companies already in compliance with Section 404, the hardest part is behind them, Rayson said.
"Now the key moving forward is how . . . are they gong to sustain compliance," he said. "What we’re recommending is that the compliance with Section 404 and any other aspects of governance need to be integrated into the business as opposed to just a one-time project."
Last year, most public companies had to completely document their accounting processes, including how they process transactions and paychecks, recognized revenue, among other items, Rayson said.
"So companies grossly underestimated the level of effort to be required, the level of advisers they would need to employ and the rigor that the audit firms required," Rayson said. "It was just kind of done by brute force. It was a tremendous undertaking."
To reduce compliance costs going forward, a public company will need to make sure that all employees’ job descriptions include compliance and that it becomes part of the company’s day-to-day operation, he said.
The "heavy lifting" has already been accomplished in terms of compliance, so the cost to America West should be much less going forward, Eberwein said.
"Our day-to-day operations have changed quite a bit because of procedures that we put in place, but we’ll see how much the additional costs come down," Trachtenberg said.
"I don’t know how significantly they’ll come down, at least not this year. We have to update our documentation to make sure that any procedures that have changed are documented and so on."
Sanghi would most like to see Section 404 repealed to stop the financial drain on public companies.
"It will save lots and lots, and lots of money from U.S. public companies, and the money can be deployed to compete effectively with our foreign competition, rather than spend that money on accounting gimmicks," he said.