Monday, April 24, 2006

Onerous Sarbanes-Oxley To Allow Exemptions

Following from my earlier blogs on Sarbanes-Oxley, now we have the SEC advisory committee with their recommendations on Sarbanes-Oxley. The restrictive and prohibitive Sarbanes-Oxley has diminished the number of foreign companies wanting to list on US exchanges. Inadvertently leading to a boom 24 months period for London Stock Exchange, and the Luxembourg Exchange to a certain extent. The recent negative opinions given by Alan Greenspan, Bob Greifeld (CEO Nasdaq) and The Economist on SOX basically were three additional long nails into SOX's coffin.

These are still recommendations, and it will take a good amount of political and intellectual will to begin implementing the proposals, the most controversial of which exempts many smaller companies from doing full-blown audits of their books and records. The SEC panel is planning to make two broad recommendations. First, companies with a market value of less than US$128 million will be completely free of the SOX law’s auditing requirements (currently the cut off is US$75 million). In addition, the panel will propose that companies with a market cap of US$128 million and US$787 million be freed from some, but not all, of these mandates.

What is so onerous about SOX? First, its the qualitative aspect, when it is qualitative, its like an unending task. Company's board and execs have to certify the quality of firm's reports. Improving the independence, hiring and firing rules with regards to external auditors. Another, and this is cumbersome, is the disclosure of internal controls structure. SOX was rushed out of the gates owing to public dismay and outcry over the demise of Enron and WorldCom, but this has not cure the correct problems, but rather brought on more inconvenience. What SOX has missed out on is that the GAAP available is already sufficient for auditor and accounting firms to do their reviews properly. Enron and WorldCom were allowed to get away for as long as they did because the auditors were asleep, or unquestioningly accept reasons given by clients too readily. First things first, get the accounting bodies to reprimand and think of ways to put in more prohibitive charges should an auditing firm messes up its work. More onus and impairment charges should be leveled on the partners of accounting firms - that way, no one will be taking a dive, and I bet you "real auditing work" will be carried out.

As a percentage of overall compliance cost, it makes sense to exempt the smaller companies. Small companies happen to be the engine of the country’s economic growth. They’re getting killed by a law that doesn’t differentiate between a Fortune 500 company and one with a market value of US$200 million. As a result, this law has become a free lunch for the auditors. Plus the new US$128 million figure is "low enough" to attract mid-sized foreign companies back to list on US exchanges.

The SOX is broadly supported by Democrats and unions, and it will take some political will to implement the recommendations in full as it could lead to politcal suicide for those pushing the buttons. SOX is the straw that kinda breaks the camel's back in terms of management having to spend too much time with compliance stuff rather than doing proper managerial stuff.

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