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December 5th, 2008
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Finding the real numbers

Sarbanes-Oxley requires companies to act more responsibly toward investors

By By S. Adam Cardais
 Staff Writer, The Prague Post



A U.S. law requiring companies listed on U.S. exchanges to be more accountable and transparent to their investors is having repercussions in Europe and has resulted in a boost in business for financial-consulting firms.

The U.S. Congress passed the Sarbanes-Oxley Act (SOX) in 2002 to increase business transparency and restore investor trust following the corporate accounting scandals of the late '90s. SOX requires all companies publicly traded on U.S. exchanges to implement, monitor and sustain a system of internal controls to ensure the accuracy of financial reporting, said Jitka Rombova, a financial consultant and former CFO of HBO Europe.

The law has a global reach, affecting not only companies traded on U.S exchanges but also their subsidiaries in foreign countries. In this country that includes HBO Central Europe, Coca-Cola, Procter & Gamble and others. Czech electricity giant CEZ, which owns U.S. bonds, also has to be in line with SOX because foreign companies with equity securities are also subject to the act.

Large U.S. companies with market capitalization above $75 million (1.7 billion Kc) have until around the middle of March to comply with the 130-page law. Foreign companies traded on U.S. exchanges still have another year.

The law is still new, and companies don't have the expertise in house to deal with its complexities, said Marcus Holzer, head of Sarbanes-Oxley services in Central Europe at Deloitte. So financial consulting is in high demand.

The cost of complying with SOX is substantial. Depending on a company's size and level of preparedness -- whether it already has strong internal controls in place or is starting from scratch -- the cost can be as high as tens of millions of dollars.

And that means higher revenues for consultancies. KPMG announced Jan. 25 that its global revenues January to September 2004 were up 7.3 percent to $13.4 billion. Mike Rake, KPMG's chairman and a senior partner of the British business, estimated that a third of the company's 2.3 billion risk advisory services are attributable to SOX.

Antonin Hamrik, senior manager of advisory services at PricewaterhouseCoopers, said demand for SOX advising was higher than expected. "It has had a huge impact on our business, that's for sure. It is definitely one of the biggest changes in our business in the last couple of years. It has impacted companies I wouldn't have thought of."

Cost vs. benefits

The high costs of implementing SOX may be more than some companies are willing to spend. Grumbling has come out of Europe about the cost of compliance, and a number of European companies have threatened to take themselves off U.S. exchanges, despite the enormous complexity involved with delisting.

"In terms of corporate governance and
control, it certainly strengthens the level of controls."

Brad Agle, University of Pittsburgh's Executive MBA program, Prague
But avoiding SOX is only delaying the inevitable, according to many observers. Corporate governance, business ethics and transparency are in the public spotlight. Companies are under increased scrutiny by the government and even by other members of the business community, so it's risky not to comply. Even private companies in America are getting in line with SOX because it lends credibility.

"In terms of the ethics aspect, people are paying attention like they never have before," said Brad Agle, a professor of business ethics at the University of Pittsburgh's Executive MBA program in Prague. "What you're seeing is most private companies are saying it doesn't matter, we'd better comply. They don't want to have to look people in the face and say, 'We weren't required to do it, so we didn't do it.'"

Rombova also noted that in the process of becoming more compliant, a company can identify existing shortcomings. "In implementing Sarbanes-Oxley, a company will identify areas that need improvement, and therefore the effectiveness of the company will increase," she said.

Agle, however, said that skeptics are wary of the high price of compliance. "In terms of corporate governance and control, it certainly strengthens the level of controls," he said. "Critics say it's done at too large a price; it's too burdensome."

Companies throughout Europe, including those with no connection to U.S. exchanges, will also have to face many of the issues the law addresses, primarily because the EU is working on its own version of SOX that is likely to be just as strong as its U.S. counterpart, Holzer said.

"The European regulators will want to be seen as being as tough as the U.S. regulators," he said. "[If] I'm a Euro-zone company, [compliance] is a question of when, not if."

It isn't clear what the repercussions will be for companies not in compliance by the deadline. Hamrik said fines could be handed down, and the market could react negatively to companies that haven't gotten in line.

It's possible, however, that investors won't care, that the market could be unresponsive. But Hamrik said he doubts the market will be apathetic. It will probably be in a company's best interest to spend the time and money to become compliant.

"Something will happen. The question is: How will the market react to SOX compliance or noncompliance?" he said. "In the long run, these [financial scandals] proved that investors want companies that are under control, so that probably justifies the costs."



S. Adam Cardais can be reached at acardais@praguepost.com
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