The federal law known as the Sarbanes-Oxley Act of 2002 was enacted in direct response to accounting scandals at major companies such as Enron and WorldCom. It requires much more detailed financial reporting for public companies to protect shareholders from accounting errors and fraudulent practices. There are criminal penalties of up to 20 years in prison for falsifying information.
Now the act has been in effect for a few years, is it working as intended? Or does it primarily add to the paperwork and cost burden for public companies?
Mercer Bullard, a law professor at the University of Mississippi, said the hot issue right now is the effect of Sarbanes-Oxley on small companies which are trying to obtain a congressional exemption from many of the most important provisions of the act.
“I believe investors are entitled to be protected regardless of the size of the company if that company wants access to the public markets,” said Bullard, who is the founder of Fund Democracy, a mutual fund investor-advocacy organization. “The small business lobby has mounted a very successful campaign which may result in Congress taking action.”
Bullard said there is no question that the fixed costs of complying with certain requirements of Sarbanes-Oxley are more burdensome on a company with only a small asset base. But what critics seem to have forgotten is the purpose is to protect investors.
“The need for that protection has been demonstrated to be more important for small companies than for large companies in the past,” said Bullard, who is frequently quoted by the national financial press such as BusinessWeek, which refers to him as “The Unsung Hero of Fund Investors.” “There is no limit on the small company’s ability to raise money from hedge funds, venture capitalists and other private sources. What they want is access to small investors without agreeing to the protections that are needed in that context.”
But some Mississippi business people involved in complying with Sarbanes-Oxley Act say they aren’t sure the act is all that effective in rooting out corporate crime.
“If people are going to steal, they will steal anyhow,” said one source, who requested not to be named. “If someone is a crook, I don’t think Sarbanes-Oxley is going to make any difference.
“From our standpoint it has added paperwork, but because we have such a strong staff, we ended up hiring only one additional person related to the requirements. Once we went through the first year of figuring out what we had to do to meet the requirements, the burden isn’t nearly what it was. It just took a year or so to figure out what to do and how to do it to make everyone happy. It does cost us something, but it is not a significant amount.”
The source said possibly the act is less burdensome to his company because it is the right size. If a public company is too small, it can be a big financial burden to comply. If a company it too large, it is hard to meet all the requirements.
“I’m not sure the general public understands what is going on,” the source said. “It makes it easier for the government to send the people who run a company to jail, theoretically. You sign a whole lot more papers that say, ‘This is correct.’ In a big company, you are relying on other people’s opinion to begin with. So you might not have personal knowledge of the truthfulness of what you are reporting.”
Mississippi Assistant Secretary of State Jim Nelson, Department of Business Regulation and Enforcement, said the Sarbanes-Oxley Act addresses the need for greater personal accountability and deterrence of wrong doing at the top of the corporate world.
“These scandals grew out of the purposeful misrepresentation of the financial health of the involved companies and misled investors into thinking the companies were on sound financial footing and a worthy investment when in fact, they were not,” Nelson said. “Investors were hurt and many lost their retirement savings. Because the scandals shook investor confidence, they also hurt our national economy and capital markets.”
Nelson said while the costs of complying with the act are significant, it would be a mistake to roll back the major provisions of the legislation such as establishing auditing independence, corporate responsibility and independence of the board of directors, heightened financial disclosures and enhancements of white collar crime penalties.
“With the protections of the act, top corporate executives are paying more attention to the financial numbers of the company he or she is running,” Nelson said. “Gone are the days when the top executive could maintain — as Bernie Ebbers did at his conspiracy and securities fraud trial — that he did not know what was going on.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.
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