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JULY 19, 2004
Sarbanes-Oxley: Time To Step Up Investors are still getting mugged by corporate accounting scandals Mention "Sarbanes-Oxley" to CEOs, and you're likely to set off angry fulminations against government regulation. They'll complain that it takes too much time to comply with the complex law that requires corporate officers and directors to be more vigilant and accountable to investors. It takes too much paperwork to document company controls. It costs way too much money. Maybe so. But the record shows that since the passage of the Sarbanes-Oxley Act on July 30, 2002, accounting problems have emerged at many companies. While Corporate America's burden of adjusting to higher accounting standards may not be light, it is necessary. It's time for CEOs to stop complaining and suck it up. Lest we forget, shareholders are still getting mugged by corporate accounting scandals. Nortel Networks (NT ) is in trouble because of alleged manipulation of its books that inflated profits. Three top executives were dismissed in April, and profits are likely to be restated. Royal Dutch/Shell Group was found to be overbooking oil and gas reserves on a huge scale, news that caused its stock price to fall sharply. Symbol Technologies (SBL ) settled an SEC enforcement action charging the company with accounting fraud while the SEC indicted 11 former executives. CEOs say that the cost of compliance is onerous. Yet it is hard to see much impact. Earnings are at record levels, and many companies have billions in cash. Moreover, implementing Sarbanes-Oxley is mostly a one-time cost. Once the compliance structures are in place, annual costs should fall. Unfortunately, progress is slow. The Public Company Accounting Oversight Board (PCAOB) recently surveyed 500 big companies. Most are putting new financial controls in place sluggishly. Nineteen percent haven't even started; 32% have just begun; 15% are about ready to go; 20% are beginning to implement the rules; 8% are almost compliant; and a mere 5% are fully compliant. Not all of it is the fault of CEOs. There is a lot of confusion over what the law requires. Consultants are jumping in and frightening boards of directors into covering every contingency at huge expense. A Business Roundtable survey of 150 big-company CEOs showed that half thought full compliance would cost from $1 million to $5 million, while others estimated $10 million. The PCAOB and its head, William J. McDonough, should work to provide better financial guidelines for companies.
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