Sarbanes-Oxley Compliance: Insurance for Investors

Lora Bentley

Yesterday, MSNBC reprinted an opinion piece by The Motley Fool's Dale Baker in which he extols the virtues of The Sarbanes-Oxley Act of 2002. He argues that Sarbox critics' most common complaints demonstrate why public companies need such regulation.


Sarbox was enacted in response to the Enron, WorldCom and Tyco debacles, and after it became effective, the "avalanche ... of corporate implosions" came to an end, he says, and U.S. markets are safer for investors as a result. Yes, compliance is expensive, and he doesn't deny that equity firms are taking companies private or that foreign firms may stay away from the U.S. to avoid Sarbox compliance costs.


Baker compares the costs of Sarbox compliance to premiums one pays for auto insurance or professional malpractice insurance. Paying to reduce risk is part of life, he says. Burdensome, yes. A big headache, yes. However, like we must have insurance to drive, companies must comply to be traded in the public markets -- or suffer the consequences. If smaller companies can't handle it, they should go private, and if foreign companies don't want to bother with Sarbox implementation, they should avoid U.S. markets.


Most companies that implement Sarbanes-Oxley successfully report better profits and significant cost savings, to boot.


But that's only one side of the story. As's Andy Patrizio pointed out last week, the fact that foreign companies are leaving U.S. markets is worrisome to economists, not to mention the CEOs and other execs at the New York Stock Exchange and Nasdaq, as well as political heavyweights like New York Democratic Sen. Charles Schumer and New York City Mayor Michael Bloomberg.


Moreover, CFOs and CEOs at large public companies say Sarbox compliance requirements, particularly those set out in Section 404, are so burdensome as to keep them from effectively running their businesses. Though doesn't specify a time frame for these figures, Qualcomm reportedly spent $7 million on compliance. And for midsize companies, Sarbox compliance costs jumped 130 percent, according to one survey, with no discernible ROI.


So how does one decide whether to serve the interests of the investors or the interests of the business? Like everything else in life, it's a balancing act. And it's one that each company must complete for itself.

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