SOX Center

Investors who got a midsummer haircut last week during the Dow’s 735-point drop from 14,000 probably aren’t singing Happy Birthday for the Sarbanes-Oxley Act, which is 5 years old today. But maybe they should be.

If you think last week’s sell-off was bad, recall the summer of 2002. Enron had imploded, WorldCom admitted to fabricating billions of dollars in earnings, and prosecutors were swirling around Tyco and Adelphia. From May 24 of that year to July 23, the Dow dropped from 10,104 to 7,702, a plunge of 24%.

That wasn’t a haircut, or a correction. It was a full-blown crisis. The public, and even the White House, demanded action.

In response, Congress passed the Sarbanes-Oxley Act on July 30, 2002. The law forced public companies to spend much more money having their books thoroughly audited, and it increased the penalties for executives who defrauded investors. Since the bill’s passage and implementation, nervous investors who had yanked trillions of dollars from the market have returned.

USA Today: Sarbanes-Oxley law has been a pretty clean sweep

Says Sarbanes-Oxley creates fear of litigation

A study of 4,000 U.S. companies shows the Sarbanes-Oxley corporate reform law has had a chilling effect on risk-taking as many companies seek to conserve cash instead of developing new products or services, a University of Pittsburgh researcher said yesterday.

U.S. companies significantly cut research and development spending and capital expenditures, while at the same time increasing cash holdings compared with their U.K. counterparts in the period after the 2002 law, the study found.

“I think there is a cause and effect relationship and it runs through the newly empowered independent majorities on the boards of directors of public companies,” said Peter Wallison, a senior fellow at the American Enterprise Institute, a think-tank with close ties to the administration of George W. Bush.

Some members of an AEI discussion panel suggested Sarbanes-Oxley, or SOX, had the effect of introducing independent but risk-adverse directors, as well as creating a fear of litigation.

The Star.com: Reform law chills U.S. risk-taking, study finds

With the SEC holding to its Dec. 15 deadline for compliance, companies will be scrambling.

Time’s up!

That’s the message for small public companies from the Securities and Exchange Commission, which met recently to give final approval to new guidelines and amendments to the Sarbanes-Oxley corporate reform law.

The five-member commission didn’t include a hoped-for extension of the Dec. 15 deadline for small public companies to comply with provisions that critics say are too costly and time-consuming. That means small public companies will have to follow the complex Sarbanes-Oxley rules, which require an annual evaluation of the effectiveness of internal controls, for fiscal years that end after that date.

“We feel at this point it’s full throttle ahead to get us fully compliant by the end of the year,” said Wayne Lipschitz, chief financial officer and vice president of finance for Brentwood-based Grill Concepts Inc., which owns and manages the Daily Grill and Grill on the Alley restaurants.

Small public companies are defined as those whose market value — the price of their stock multiplied by the number of their shares outstanding — is less than $75 million. Grill Concepts has a market value of about $45 million.

latimes.com: Sarbanes-Oxley: No more delays

Senators John Kerry (D- Mass.) and Olympia J. Snowe (R-Maine) outlined specific steps the Securities and Exchange Commission (SEC) should take to provide more time and assistance to small public companies to comply with Sarbanes Oxley internal control regulations. Kerry and Snowe, as Chairman and Ranking Member of the Committee on Small Business and Entrepreneurship, have been closely following the impact of Sarbanes Oxley compliance on small public companies worth less than $75 million.

“Small public companies still face higher costs than large firms and deserve more time to comply with the recent changes to Sarbanes-Oxley. The regulations issued by the SEC last month are an important step, but I again strongly urge the SEC to give small public companies additional time to comply with Sarbanes-Oxley and to find additional ways to reduce their regulatory burden” said Kerry.

Yahoo: Kerry, Snowe Call on SEC to Give Small Firms More Time, Assistance to Comply With Sarbanes Oxley

Challenging optimism about the efficiency of new auditing standards, the House Small Business Committee’s chairwoman called on federal regulators to give thousands of small public companies even more time to comply with a controversial section of the 2002 Sarbanes-Oxley law.

Rep. Nydia Velazquez, D-NY, said on Tuesday that the Securities and Exchange Commission and the Public Company Accounting Oversight Board must implement the internal-controls section of the law in a way that “does not hamper America’s competitiveness.” She said that “postponing the compliance deadlines for at least an additional year would allow us to make this determination.”

The 2002 law requires company management to evaluate internal controls over financial reporting, subject to review by outside auditors. The SEC has delayed applying the rules to more than 6,000 small companies at least four times, most recently citing a need to make the rules more efficient. Under current policy, small public companies will begin submitting management reports in 2008, and the auditor reports in 2009.

Nasdaq: House Lawmaker Calls On SEC To Delay Internal-Controls Rules

The financial burden of Sarbanes-Oxley Act (SOX) compliance is slowly, but surely starting to ease.

The cost of compliance with Section 404 of the SOX declined by 23% in fiscal 2006, according to a survey by Financial Executives International.

The Florham Park, New Jersey-based organization found the average company spent $2.9 million on SOX compliance in 2006, versus $3.8 million in 2005 and $4.5 million in 2004.

“Technology has a lot to do with the cost reduction,” said Sanjay Anand, chair of the Sarbanes-Oxley Institute. Public companies “are actually automating their controls. A good 20 to 30%, even as much 40%, of the cost reduction is actually coming from automated controls rather than manual controls.”

These cost reductions have come despite the fact that auditors’ fees have remained relatively steady, the research revealed. External auditor fees dropped by just 11% in 2006, from $1.35 million to $1.2 million.

ComputerWeekly: Sarbanes-Oxley compliance costs drop, better processes credited

The US Treasury has welcomed a statement released by the Securities and Exchange Commission and the Public Company Accounting Oversight Board regarding their votes to address the implementation of Section 404 of the Sarbanes-Oxley Act:

“The SEC and the PCAOB, after carefully considering the effects of Section 404, moved this week to strike the right balance in enhancing financial reporting quality and eliminating unintended costs,” announced Under Secretary for Domestic Finance Robert K. Steel. “These key reforms should ensure that Section 404 is implemented in a risk-based and appropriately-scalable fashion, without sacrificing investor protection or diminishing the value of sound internal controls over financial reporting. Now that the regulators have acted, it is critical that public companies and the auditing profession respond to this call.”

Steel added: “Treasury congratulates the SEC, the PCAOB and their chairmen, Chris Cox and Mark Olson, for their cooperation in working to uphold investors’ confidence in and the competitiveness of America’s capital markets.”

Investorsoffshore: Treasury Welcomes Sarbanes Oxley Reforms

In ‘06, public companies benefited from earlier efforts to comply with the governance measure.

Public companies spent 23 percent less adhering to the Sarbanes-Oxley Act’s accounting rules in 2006, as they benefited from work done in earlier years to comply with the landmark federal corporate-governance law, a new survey found.

Complying with the 2002 Sarbanes-Oxley Act cost companies $2.92 million on average last year, compared with $3.8 million in 2005, Financial Executives International said in a statement yesterday. Costs have fallen 35 percent from 2004, the first year companies were required to adhere to the law’s accounting requirements.

The Philadelphia Inquirer: Sarbanes-Oxley costs 23% lower

The Corporate Directors Club, with nearly 600 members nationwide, today announced the first program for Professional Director Certification. Directors of public companies are under increased pressure and scrutiny since Sarbanes-Oxley and there is a growing need for well educated, skilled and experienced professional directors. The Corporate Directors Club, whose membership is open to all directors and CEOs of public companies, free of charge, sponsors a full schedule of educational and social events across the country for its members.

Yahoo!Finance: Professional Director Certification Announced for Public Company Directors

The Public Company Accounting Oversight Board on Friday concluded its first International Auditor Regulatory Institute.

Representatives from auditor regulators and government agencies from more than 40 countries convened on Wed., May 2, in Washington, D.C., to learn more about the PCAOB’s programs and how it carries out its mandate under the Sarbanes-Oxley Act of 2002.

The institute took place over two and a half days, with one full day devoted to discussions about the PCAOB’s inspections program. The institute also covered other activities of the PCAOB, including standard-setting, the enforcement process and international cooperation.

The Sarbanes Oxley Act directs the PCAOB to oversee and periodically inspect all accounting firms that regularly audit U.S. public companies. More than 780 audit firms currently registered with the PCAOB are located outside of the United States, spanning 80 countries.

SmartPros: PCAOB Concludes First International Auditor Regulatory Institute