Is the cost of compliance too high?
By David Raths
One hundred and sixty-eight words. That’s all Section 404 of the Sarbanes-Oxley (SOX) Act is. The brief passage was not hotly debated before the act’s passage in 2002. But this section, dealing with the establishment and auditing of internal financial controls for public companies, has since become the bete noire of the business community.
Creating systems and hiring outside auditors to attest to managers’ internal controls assessments has proven very expensive. AMR Research estimates that companies will spend $6 billion on complying with SOX in 2006, on par with the $6.1 billion spent in 2005. Business groups also maintain that the burden of complying with SOX is putting U.S. capital markets at a competitive disadvantage, driving initial public stock offerings away from the New York Stock Exchange to the Tokyo and London exchanges.
Lobbyists are putting pressure on the U.
With the support of Rep. Nancy Pelosi D-Calif. and congressional members from both parties, pressure is on to revamp Section 404.
The burden of complying with Sarbanes-Oxley (SOX), and in particular, section 404, which addresses the establishment and auditing of internal financial controls for public companies, is shaping up as a hot topic post midterms.
Estimates that the cost of compliance will be as high as $6 billion this year and is having a negative impact on the market has caused representatives from both parties to suggest the rules may need to be re-examined. Among them: President Bush; Vice President Dick Cheney; Treasury Secretary Henry Paulson; Rep. Barney Frank (D-MA), who will be chairman of the House Financial Services Committee in the new Congress; Sen. Chris Dodd (D-CT), who’s in line to lead the Senate Banking Committee; Sen. John Kerry (D-MA); and Sen. Charles Schumer (D-NY).
In addition, lobbyists are putting pressure on the U.
Latest hot topic for the 2006 annual meeting season: corporate political contributions.
Companies are increasingly being asked to disclose the political contributions they make, and to increase internal oversight. The number of shareholder resolutions asking for such steps in 2006 — around 50 — is double last year, said Bruce Freed, co-director of the Center for Political Accountability.
Three major companies, Pepsico, Coca-Cola, and Eli Lilly, have recently agreed to disclose soft money contributions and have their directors oversee use of such funds. In 2005, Morgan Stanley, Johnson & Johnson, and Schering-Plough adopted such policies.
The problem with political contributions, Freed argued, is that they can fund activities that conﬂict with a company’s stated policies, or be unrelated to its core business. While soft money disclosure resolutions typically receive only around 16 percent of votes, the discussion helps promote “transparency and accountability,” Freed said.
More than 100 companies are reportedly under investigation for backdating stock options for senior executives, a practice characterized as “disgusting and repulsive” by Senate Finance Committee Chairman Chuck Grassley (R- IO). Here are some excerpts from prepared testimony before the committee.
Nell Minow, Editor, The Corporate Library, noted that “When the tax code was changed to prevent executive compensation of over $1 million to be deducted unless it was tied to performance, two things happened. First, everyone got a raise to $1 million. Second, everyone got boat-loads of options. The very definition of a “mega-grant” had to be changed, so it now can be as much as eight times the CEO’s base pay and bonus. Option grants only work when: 1) The executives make money based on how the company does, not on overall market gains; 2) The number of options is not so excessive that there is a mountain of pay-out for a molehill of performance; and 3) All information relating to the options is promptly, clearly, accessibly, and comprehensibly disclosed…CEOs are the only ones who pick the people who set their pay, indeed they pay the people who set their pay.
The Committee on Capital Markets Regulation, a newly-formed private-sector initiative with close ties to the Bush administration, says it will have an interim report to policy makers by the end of November regarding proposed changes to the 2002 Sarbanes-Oxley Act and other regulations affecting the “competitiveness of the U.S. capital markets.”
The committee is co-chaired by former White House economic advisor Glenn Hubbard, now Dean of the Columbia Business School, and John L. Thornton, former president of Goldman Sachs. Hal S. Scott, a Harvard Law professor, is Executive Director. Members include the CEOs of DuPont Co., Office Depot Inc., Deloitte & Touche and PricewaterhouseCoopers.
Treasury Secretary Henry Paulson signaled support for the committee’s work, saying, “This issue is important to the future of the American economy and a priority for me.”
The committee says it will focus on “liability issues affecting public companies and gatekeepers” with a focus on securities class action litigation, criminal enforcement and federal versus state authority; Sarbanes-Oxley, “with major emphasis on Section 404, which requires auditors and senior managers to certify the adequacy of internal controls”; “overall regulatory processes to allow the United States to do a better job of evaluating changes of law and regulation”; and shareholder rights.
While acknowledging that “the time may come when revisions are needed,” a senior Justice Department official told the Senate Judiciary Committee that tactics used to obtain cooperation in federal cases of corporate wrongdoing were no different than in other criminal cases.
“We ask cooperating drug dealers, bank robbers and gun-toting felons to waive their Fifth Amendment privilege against self-incrimination all the time—and the vast majority of them do not have access to the high-priced legal talent corporations do,” said Deputy Attorney General Paul J. McNulty.
The Senate committee heard from critics who argue that government prosecutors are often coercive in demanding waivers of attorney-client privilege, thereby harming internal compliance programs. (See “Corporate Corruption Cases: Justice Department Tactics Challenged,” Business Ethics, Summer 2006).
Karen J. Mathis, President of the American Bar Association, said that “because the effectiveness of these internal mechanisms depends in large part on the ability of the individuals with knowledge to speak candidly and confidentially with lawyers, any attempt to require routine waiver of attorney-client and work product protections will seriously undermine systems that are crucial to compliance and have worked well.
Emboldened states and cities are taking action on a range of issues.
In an unlikely alliance between a foreign country and a U.S. state, U.K. Prime Minister Tony Blair aligned with California Governor Arnold Schwarzenegger in late July to develop an international system for purchasing and selling carbon dioxide emissions.
The two politicians shared a stage in Long Beach, CA, for a high-profile announcement of their agreement. “California will not wait for our federal government to take strong action on global warming,” said Schwarzenegger, a Republican. “International partnerships are needed in the fight against global warming.”
Only a few weeks later, Schwarzenegger signed a law to reduce greenhouse gas (GHG) emissions 25 percent by 2020, making California the first state to enforce a limit on greenhouse gas emissions. Frances Beinecke, President of the Washington, DC-based Natural Resources Defense Council (NRDC), said, “The whole world has been watching to see whether California passes this bill, and now the whole world will watch as California takes the lead in developing a clean energy market.
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