#1: It Bursts the IPO Bubble
The dot-com boom and subsequent bust a decade ago was
largely the result of companies going public when they weren’t
financially viable; that kind of fraud is far less likely under Sarbox. Thomas
Martin, a partner at law firm Dorsey & Whitney, says Sarbox
encourages small and growing companies to become profitable and have a strong
revenue stream before they make their public debut. “Companies are
intelligently attempting to acquire and build enough bulk to justify the
expense of Sarbanes-Oxley,” Martin says.
Innovation Advisors, a number of smaller public companies are making the
decision to go private. “The burden of Sarbanes Oxley convinces them
that they’re not getting enough benefit from being publicly held,”
he says.
#2: It Increases Investor Confidence
There has been a noticeable drop in the number of major
cases of accounting fraud since 2002. PriceWaterhouseCoopers found that federal
class-action suits were down 36 percent in 2006 compared to the year before,
and cases overall were at a 10-year low. “The law did exactly what it
was intended to do: reestablish investor confidence after a series of large
financial scams,” says Sanjay Narain, a partner at Ernst &
Young. “Investors want their money to be safe, and Sarbox gives them
that sense of safety.”
J.R. Reagan, managing director of the public
sector security group at BearingPoint, adds that strong financial controls
provide protection from employee theft and other PR disasters that influence
investors. “When TJ Maxx had its customers’ credit card data
stolen,” he says, “the company learned the hard way that the
perception that you have weak financial controls can have a serious adverse
effect on your stock price.”
#3: It Holds CEOs Accountable
It’s not unreasonable to expect CEOs and CFOs to
know whether or not their companies are financially sound, says John Hagerty,
vice president and research fellow at AMR Research. “The bottom line
is that the quarterly statements must be signed by the CFO and the CEO —
the exact people that any sane investor would expect to know what’s
going on inside the company.” If Kenneth Lay had been forced to sign
Enron’s financial reports, his “I was in the dark”
defense would have seemed laughable.
#4: It Really Does Reduce the Cost of Financial Controls
Rolling financial controls into one report can reveal
expensive redundancies. “Once a company has achieved compliance, it
typically has sufficient documentation and understanding of internal controls
to figure out where money can be saved,” says Daniel Schroeder, an
officer at accounting firm Amper, Politziner and Mattia. Ernst & Young
partner Narain agrees, citing the example of a client who had delayed
implementing automated controls in order to meet a software installation
deadline. Instead, the company used paper-based methods to ensure that a
manager approved every change to a financial record. While this was easier to
implement in the short term, the paperwork took extra manpower and was prone to
errors — a red flag for external auditors. A Sarbox audit strongly
recommended that the company go back and implement the automated controls,
which not only made the controls easier to audit, it significantly reduced manpower
costs.