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By David Adams,
Director of National Training & Development, Ajilon Finance, Office &
Legal
AN
EARLY ASSESSMENT
For some, the dust is starting
to settle on the Sarbanes-Oxley Act (Sarbox) that was passed in July of 2002 by
President Bush. Still, others may argue that the dust is still as thick as a sand
storm. No matter which camp you're in, there is no disputing that some of the
most significant changes required by the legislation have already been implemented.
From the investor standpoint, the talk on the street is mostly positive. However,
Sarbox has caused many CEOs, CFOs and executives to lose sleep. This should come
as no surprise. After all, not since the Great Depression has the world of corporate
governance seen such sweeping changes in such a short period of time. What follows
is a brief account of some early trends and outcomes of Sarbox, and a summary
of who this act is affecting and how.
THE GAIN
Investor Confidence
Since the primary purpose of this legislation was to protect and increase the
confidence of those who invest, this should be an obvious benefit. While the jury
is still out, the end result should be more transparent financial information
to help us decide whether or not to invest in an organization. Auditor "independence"
will also help facilitate an environment where truth in reporting doesn't jeopardize
other revenue streams for the External Auditor as those streams can no longer
exist (section 201). While Sarbox, in its current form, may not be the perfect
solution, it is viewed by many investors as a positive simply because it is now
a top priority! What investors may not know yet is how the gain in confidence
will impact the bottom line. Many predict the bottom line to be negatively impacted
in the foreseeable future due to the costs associated with Sarbox (see below).
The Accounting Profession
If you read any headline these days, you will find no shortage of information
on the importance of timely and accurate financial information. Companies who
are running very lean in the accounting area will pull the trigger on whatever
hires are necessary to meet the new demands. This increased demand for accountants
will be met by a decreased pool of accounting professionals in part due to projected
baby boomer retirements and a decreased number of students graduating with this
degree over the past few years*. Therefore, a simple supply and demand equation
favors someone who pursues accounting as a career. Even if the publicity of Sarbox
increases awareness of accounting as a viable career choice and turns the tide
on graduating accounting students, the odds still favor job security for someone
who pursues this path. A spring 2003 study by the National Association of Colleges
and Employers already shows that accounting graduate starting salaries faired
better than nearly all other majors (behind only business majors) in the down
economy when compared to the prior year.
*The AICPA reports
that the number of college graduates with accounting degrees has been on the decline
since at least 1995. For the years 2000-2001, the number of accounting graduates
showed a 21% decline in comparison to 1995-1996. However, recent trends indicate
that more students are enrolling in accounting throughout the country.
Revenge of the Auditor!
Auditors used to work "under the radar" and findings from an Audit Department
used to be upstaged in board meetings by new marketing strategies or innovative
technologies. With the changes Sarbox has created in reporting structure (section
202, 204, 301), including the addition of the Audit Committee to the Board of
Directors, this function now has much higher visibility. Historically, the auditor
has had to walk a very fine line and worry about jeopardizing their business relationship
if they disagreed and spoke out too often. With the passing of Sarbox, the auditor
will be encouraged to voice his or her opinion. Whether internal or external,
the spotlight is on them! The world is now looking to auditors to make a difference
in every organization and it is more important than ever to fill these positions!
Midsize/Regional Accounting
Firms
There is clearly much work to be done and far more requirements on who does it.
With the separation of the internal and external audit function and limited role
of the external audit firm (section 201-202), many companies will either hire
an internal audit department or turn to a separate firm to complete the internal
audit work. In addition, some of these firms may take up the slack on other projects
such as consulting, risk management or technology implementation.
Consultants (former Controllers
and CFOs)
Another outcome of the limited scope of the External Auditor's role is that there
will clearly be a demand for anyone with solid consulting, technology or SEC reporting
skills. As many reporting deadlines accelerate over the next few years (10Ks and
10Qs for example), companies will be squeezed to find ways to become more efficient.
Many former CFOs and Controllers will offer their consulting or operational expertise
and find a variety of buyers to choose from. Some may even decide to sit on an
Audit Committee due to the demand for someone with financial expertise (section
407).
Technology
Investing in ERP solutions and financial software that can help streamline reporting
information and capture internal controls has already become a hot topic. Sarbox
will put much more pressure on both the amount and speed of information needed
(section 409). Sections 302 and 404 (corporate responsibility and internal controls)
of Sarbox are getting much attention and companies are trying to identify ways
to make this work without re-inventing the wheel. Unfortunately, in many cases,
this will be unavoidable and technology and automation will be the driving force
behind this upgrading process. If a company has been considering an improvement,
many will decide that now is the time. Software vendors are already preparing
their products to meet these demands.
The Whistleblower
Sarbox (section 301) protects open communication and individuals who confront
issues. This is a significant step taken towards "doing what is right"
with the interests of the company and investor in mind. Steps are being put in
place to set up procedures for confidential information to be shared on an ongoing
basis.
THE PAIN
The CFO
So far, Sarbox has meant extra hours and extra risks for CFOs (sections 807, 906
and 302). In some cases, CFOs have even given up a portion of their jobs. The
impact on the CFO is tremendous and includes many examples of newly-created positions
such as the Chief Compliance Officer or Chief Accounting Officer to offset the
demands being put on the CFO. Many surveys highlight unhappy CFOs who feel Sarbox
came about too hastily and puts undue burden on some organizations that were running
a "tight ship" already.
The Bottom Line
In theory, Sarbox was designed to save investors' money, but it will cost many
companies a tremendous amount of money before (and hopefully if) any ROI is seen
from the changes. Smaller companies may be impacted most, but there will be no
shortage of money spent on compliance, technology, legal issues, consulting or
hiring as a result of Sarbox. Many finance department budgets have been increased
already and there is no end in sight. A recent study by the law firm, Foley and
Lardner (highlighted by Accountingweb.com)
indicates that the cost of being a publicly traded company nearly doubled due
to Sarbox.
Business Strategy
The time and energy usually set aside to develop sound business strategy is being
replaced by compliance issues, meeting with the Board, Audit Committees, Lawyers
and an External Auditor. Penalties associated with not meeting the requirements
are stiff and clearly put this at the top of the priority list.
Executive Hiring/Relocations
Executive hiring has become more difficult based on the inability to provide loans
to relocate someone. Buying and selling a home is usually a significant factor
in making a relocation work, but Section 402 of Sarbox limits what can be done
in these circumstances.
Hiring your Audit Manager
The "cooling-off" period in section 206 states that it is unlawful for
a public accounting firm to provide any audit services to a company whose CEO,
CFO, CAO or Controller was previously employed by the Auditor and participated
in any capacity in the audit during the one year period preceding the date of
the initiation of the audit. This was a common method of finding talent in the
past since they were so familiar with the organization's financial processes and
systems. This practice has been completely eliminated as a viable option due to
the potential conflict of interest.
THE COMPANIES TO WATCH
Privately Held Companies
There is already a growing trend among privately held companies to implement some
of the Sarbox requirements. On the surface it may seem strange, but if you factor
in that some of these companies might like to go public in the future or sell
to a public company, the due diligence involved will overlap with Sarbox requirements.
By default, the Sarbox requirements are becoming a "best practice" for
any company who may want to offer shares in the future or sell.
For more information on Sarbanes-Oxley, visit any or all of these helpful websites:
www.sarbanes-oxley.com
- The one-stop-shop for all information regarding Sarbox.
www.aicpa.org
- The AICPA home page provides valuable articles and information on Sarbox.
www.sec.gov
- The SEC home page.
www.theiia.org/iia/index.cfm
- Home page for The Institute of Internal Auditors.
www.cfo.com
- Surveys, articles and information related to Sarbox.
If you and your company have any staffing needs related to Sarbox, or would simply
like to discuss its impact further with an industry specialist, contact your local
Ajilon Finance branch office. Or, check them out on the web at www.ajilonfinance.com.
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