Jury still out on whether Sarbanes-Oxley Act worth cost

LAWRENCEVILLE - When the Sarbanes-Oxley Act was signed into law, Gary Shell counted himself among the act's worst skeptics.

As the law celebrated its fifth anniversary this week, the vice president of corporate finance for Norcross' EMS Technologies Inc. still has a trace of skepticism in his voice when he speaks of it.

"We've all spent a boatload of money on it, and some good things have come of it, but the jury's out on whether it was worth the cost," Shell said.

The law is the result of several highly publicized cases of corporate fraud involving companies such as Enron, WorldCom and Tyco International. Some investors suffered greatly because of those illegal actions, and Congress began looking for a way to strengthen auditing regulations.

Sarbanes-Oxley, widely referred to as SOX, was the government's response. The bill, especially Section 404, requires auditors of most publicly listed companies to verify the effectiveness of the company's internal controls and procedures for financial reporting.

In its five-year reign, SOX has had a number of effects: an increase in the demand for accounting graduates, an increase in director pay at public companies and an increase in the size and independence of corporate boards, said Jeff Netter, professor of finance at the University of Georgia's Terry College of Business.

But the most obvious effects for local businesses has been an increase in costs and a heavier workload.

Time and money

"It was a very expensive process, a very intensive effort," Shell said. "There were a lot of people working a lot of very, very long days and weekends and holidays. It was pretty rugged."

Netter, who co-authored a study on SOX's effects, said much of the increase in auditing costs was disproportionately felt by smaller firms. Blue-chip companies such as General Electric or Exxon could absorb the costs more easily because they already had large in-house auditing departments.

Gwinnett, however, does not have any of those blue-chip companies.

Gwinnett instead has companies like Concurrent Computer Corp. in Duluth, which has a market capitalization of roughly $110 million (by comparison, General Electric has a market capitalization of roughly $400 billion).

Kirk Somers, vice president of investor relations for Concurrent, said his company's audit fees rose from $285,000 in fiscal year 2004 to $1,030,000 in fiscal year 2005, the first year SOX was in effect.

"I think the requirements for a smaller company, it's a bit excessive," Somers said. "In a small company you already had a solid grasp of what was going on in your accounting practices."

The Duluth-based Agco Corp., which has a much larger market capitalization of $3.54 billion but is still considered a mid-size company, has also felt a strain.

"We have spent millions of dollars in compliance, and most of our colleagues in Atlanta have spent millions of dollars in compliance," said Lara Long, Agco's director of external reporting.

But Netter points out much of the cost was up-front, and firms have since seen a decrease in auditing costs.

Long said Agco outsources the majority of its auditing work to the accounting firm Price Waterhouse Coopers, and those costs have been reduced by about 50 percent since 2004.

Somers said Concurrent's auditing fees decreased 25 percent from its first year complying with SOX in 2005 to its second year complying in 2006.

Shell said EMS Technologies has also seen a drop in the company's auditing costs, but not as much as he'd expected.

"We've definitely seen some improvement ... but the drop-off that was advertised as coming hasn't been as steep of a drop-off as we would like," Shell said. "But we've certainly seen some reduced costs."

But companies are still grappling with expenses that haven't contributed to better products or increased productivity.

"It's a funny set of costs," Shell said. "Normally, if companies are faced with big new unexpected costs ... you try to compensate for it in other places. But in the SOX world ... we weren't able to reduce any kind of cost to offset that. ... It was a bullet right to the bottom line."

The Securities and Exchange Commission has recently adopted new auditing standards to try to reduce costs related to Sarbanes-Oxley. The Public Company Accounting Oversight Board's Auditing Standard 5 gives new guidance on how to comply with Section 404 of the law and is aimed at focusing a company's resources on riskier areas within each business.

Shell said it's too early to tell whether the new standard will help reduce his company's costs.

"It looks like it may help, but the one thing we found out is new rules are an invitation to clarifications," he said. "The announcement of a new auditing rule related to SOX just means we're going to have a steady stream of amendments and clarifications."

So has SOX been worth it all?

Netters said there haven't been any of those high profile corporate fraud cases under Sarbanes-Oxley's rule, but it's still hard to tell if it has been worth the money and trouble it has cost public companies.

"In my view, it probably was an overreaction," Netter said. "It has some benefits. It has some costs.

"It's kind of like seat belts: everybody's safer, but there's a cost to doing it."