Sarbanes Roundtable: Sound and Fury

Two years after the law took effect, an SEC forum about it offers little hope for the dissatisfied.
Author:
Publish date:

It's all the accountants' fault.

On Wednesday, the

Securities and Exchange Commission

held a roundtable at its spiffy new meeting room in Washington, D.C., to hear how things went during the second year of compliance with the controversial Sarbanes-Oxley Act.

It should have been a heated forum to spot and solve the problems in the rickety but necessary legislation, but it wasn't. And it's all because the accountants were, well ... accountants.

Nearly four years after it was passed, the law aimed at improving corporate governance and curbing financial fraud can drive otherwise sober professionals into a lather: Either they steam about the onerous costs and burden of a law they feel isn't making enough of a difference, or they bristle at the idea of defanging what they regard as one of the few successful attempts to make company managers more accountable to investors.

During the past year, the debate grew more heated as a serious effort was mounted to exempt small businesses from Section 404 -- the heart of the Sarbanes-Oxley Act -- which requires audits from outside firms.

But then it began to appear that if the SEC had the will to pass that exemption -- its intent was unclear -- it probably didn't have the power to do so.

So the stage was set for an outpouring of passion, bent on driving the debate to a clear resolution. Then the accountants showed up. In fact, with a notable exception or two, even the securities attorneys, company executives and big investors all acted like accountants. They wore drab suits. They had unglamorous haircuts. You could imagine them puttering to the roundtable in their Volvos.

More to the point, their comments during eight tedious hours of discussion were cautious and dry to the point of feckless. Alex Davern, the CFO of

National Instruments

(NATI) - Get Report

and a representative of the American Electronics Association, was one of the few to dare to be forthright. "I've been quite disappointed with the tenor of discussions today," he said once he got the floor.

"There's been a lot of polite discussion, and we've been patting ourselves on the back that in year two things got a bit better," Davern added.

Davern blasted what he called the elephant in the room: the anticompetitive nature of the oligopoly known as the Big Four accounting firms, which audit 99% of the revenue of public companies.

That cozy arrangement coincides with numbers showing that costs of external audits by the Big Four haven't fallen anywhere near as fast in year two as the costs companies paid to set up internal controls. (Also on Davern's panel were a current and a former executive of Big Four firms -- both stayed oddly silent during his provocative comments.)

Davern then turned his ire to the commission itself. "The commission deserves a failing grade for implementation of Section 404," he said. "I've never been asked by an investor about Section 404 other than to know how much it's costing us."

Another rare participant willing to stir up the pot was Stanford University Professor Joseph Grundfest, who brought up the controversial point of what constitutes a significant or material weakness that prompts a financial restatement.

Grundfest argued that under the current understanding, a discrepancy of 1/20th of a percent of revenue could trigger a restatement. Such a revenue discrepancy might mean tens of millions of dollars for a giant like

General Electric

(GE) - Get Report

, but for small companies, the amount would be inconsequential to investors.

For the most part, the rest of the 48 esteemed panelists covered a wide array of viewpoints, but all ultimately revolved faithfully around the same old consensus.

Small companies are feeling the worst pinch. As a report by the General Accounting Office points out, for every $100 in revenue at a small company, the company pays $1.14 in compliance costs. Big companies pay only 13 cents.

The law never intended for the burden to be heavier on small companies, and a fix -- one that isn't as draconian as an exemption of all small companies -- must be found fast.

Most people also agreed that companies are still struggling for better guidance from regulators, feeling they have to play mind reader when it comes to understanding how to follow the law.

Accounting firms need to have the freedom to not second-guess themselves. Many of them fear becoming the next Arthur Andersen. In fact, the ghost of Arthur Andersen was a more menacing presence throughout the roundtable than that of Enron or WorldCom.

All these points were made repeatedly Wednesday, but hardly any were fresh. And there wasn't enough assurance that they won't simply be repeated again a year from now with little change.

There weren't a lot of original arguments or ideas floated at the roundtable that hadn't been aired out in previous meetings or in the reports, position papers and op-eds that must surely account for half of the PDF documents available for download on the Web.

At the end of the day, SEC Chairman Christopher Cox read from prepared statements that summarized the main points brought up by the panelists. It's a little scary to think that he could have written -- and quite possibly did write -- his summary well before the roundtable even took place.

Really, if the SEC wants any serious action to be taken to make Sarbanes-Oxley both more effective and less costly, it shouldn't invite the accountants back next year. It should fly in soccer hooligans -- whose skills in making their opinions heard more than make up for their lack of accounting acumen -- and hold the roundtable on the sticky barroom floor at McSorley's Old Ale House.