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Sarbanes Pain Becomes Politics

Like hundreds of other companies, Manhattan Associates (MANH - Get Report) restated its earnings last year. Between 1999 and 2004, the supply-chain software maker overstated its net profit by $7 million, or more than $1 million a year, because of how it accounted for a tax credit.

You might think that's another piece of evidence that Sarbanes-Oxley, the corporate compliance and financial transparency act passed nearly four years ago, is doing its job. But Manhattan Associates CEO Pete Sinisgalli says you'd be wrong: The restatement surfaced through internal controls the company had already set up, independent of Sarbanes-Oxley.

For Sinisgalli and others, the situation illustrates what is misguided about Sarbanes-Oxley. The law may have restored investor confidence, but Section 404 -- the controversial provision requiring reports on and testing of internal controls -- "adds a duplicate step to what you've already done," says Sinisgalli, who joined Manhattan Associates as CEO in 2004.

"We're just re-documenting and re-testing what we had in place," he says. "The redundancy is not just unnecessary, it's costing real money," noting that the $1 million Manhattan Associates spent on 404 compliance could have benefited investors. "In our case, that money frankly would have gone to increased earnings per share."

The Securities and Exchange Commission has started to take complaints like Sinisgalli's to heart -- at least enough to appoint a small business advisory panel to look into Section 404's impact on start-ups. That panel, largely comprising executives at companies like Bluefly (BFLY), Tennant (TNC - Get Report) and MidSouth Bancorp (MSL - Get Report), as well as financial and law firms that are often their clients, issued their recommendation last month: Roll back Section 404 for companies with market caps below $787 million. Following a comment period, the final report is expected on April 23.

In describing Section 404, people often compare it to using a meat cleaver when a scalpel will do. The thrust of the recommendations is that the SEC should put aside the cleaver until the right scalpel can be found. "Regulators and members of Congress never anticipated many of the challenges that Section 404 compliance has presented," the panel's report said.
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