Cost of Compliance Huge, Benefits Yet Unknown

The Sarbanes-Oxley Act of 2002, ushering some of the most sweeping changes to the U.S. securities laws in 70 years, has wrought serious consequences in Corporate America.
Section 404 of the legislation, which has to do with internal controls over financial reporting, has added a whole new layer of compliance to publicly reported companies, said Ted Timmermans, vice president and chief accounting officer at the Williams Cos. Inc.
“What companies have to do now is very formally document all internal controls. You have to do a lot of very, very detailed work that companies just had not done before,” Timmermans said.
“The costs of that have been substantial,” Timmermans added.
Williams added staff throughout the organization since 2002 to absorb new work created by Sarbanes-Oxley compliance guidelines.
Williams chose to expand its internal auditing staff rather than out-source the new work. The internal auditing department at Williams more than doubled, and new coordinating positions ensure that controls are tested properly.
As large public company leaders still mourn the cost of compliance during years one and two, soon it will be smaller companies’ turn, said Jim Downs, chief accounting officer of Energy Transfer Partners LLP.
“More public companies in Tulsa have not yet had to report for Sarbanes-Oxley than have had to. I think the cost is going to be more for them. The difficult thing is that those people are the ones who can least afford it,” Downs said.
Robert Wagner, CFO of Tulsa-based Xeta Technologies, said he is already dreading the cost of compliance. Xeta Technologies will begin to report regarding Sarbanes-Oxley compliance in 2007.
“We did some work a couple of years ago to start documenting processes. Then they (the SEC) started changing requirements, and we feel it doesn’t make sense to spend a lot of money with consultants and internal time until these rules get finalized,” Wagner said.
Whether the benefits of Sarbanes-Oxley compliance will outweigh the costs has yet to be seen.
“I think shareholders are cognizant of the effort, but the proof to the shareholders is going to be the absence of accounting irregularities of the kind that have been very public,” Timmermans said. “That will take a few years of track record to prove, so it’s a little early to tell.”
“I think there will benefits,” Wagner said. “We may discover some weaknesses in our controls that we’re wiring around right now because it’s integrated into our processes. But whether the benefits outweigh the costs – I think the jury is still out on that, especially for smaller companies.”
Though he laments the costs and the lack of guidance from the SEC and the Public Company Accounting Oversight Board during years one and two, Downs said the goal of Sarbanes-Oxley to restore shareholder confidence was achieved. Returns from increased shareholder confidence will be difficult to quantify, however.
“How much is it worth when investor confidence has gone up 10 percent? That’s one of the few investments that a management team would ever make where they don’t have a good feel for what the rate of return is,” Downs said.
“Not to say that restoring investor confidence was not important, because it absolutely was, particularly at the time. You can’t run the risk that the investors will lose confidence in the reporting system with our capital market structure.”
The key to maximizing return, intangible though it may be, and minimizing the incidental cost of reporting internal controls is to change the company’s approach to compliance.
“Controlling costs is about taking SOX compliance from a project to a process – make it be a part of what’s done every day,” Downs said. ?

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