VideoBob Ross used to love his job as controller of clothing and housewares retailer Urban Outfitters. Today, he says, "I have no passion for this at all. If something doesn't change soon, I'll have to throw in the towel."
Ross says he now spends his days "documenting countless procedures and processes, which to most employees of this company are second nature." Section 404 of the Sarbanes-Oxley Act, which requires companies to document their controls, cost his company at least a penny per share in 2004, he says, and turned his job into "a struggle to explain common sense."
"I implore our lawmakers to repeal the internal-control requirements of 404," wrote Ross in a recent, heartfelt comment letter sent to the Securities and Exchange Commission.
Wrong crowd, right address. If companies get any relief from 404, it will come not from Capitol Hill, but from the SEC.
Last month saw a veritable orgy of regulatory navel gazing—including an oversight hearing by Rep. Michael G. Oxley's (R-Ohio) Financial Services Committee scheduled for April 21. But the main event was an SEC roundtable in which businesses vented their frustration with 404. (Ross, ironically, couldn't make it, because he was putting in 18-hour days to prepare his company's 10-K). Any changes to 404 rules that result will depend heavily on SEC chairman William H. Donaldson and, to a lesser extent, his counterpart at the Public Company Accounting Oversight Board (PCAOB), William McDonough.
Strong Supporters?
Chalk up this concentration of power in part to the government's unified front just as the first big wave of 404 certifications began rolling in. The normally business-friendly White House has been noticeably silent on the issue. And Oxley and Sen. Paul Sarbanes (D-Md.) shut down any suggestion of legislative changes during a joint appearance at Georgetown University on March 10. "Most CFOs I talk to can quote [the act's] cost down to the dollar," said Oxley. "Actually, they'll quote it down to the dime." But, he argued, that cost "is an investment in the strength of the United States capital markets."
"The voices calling for a rollback of portions of Sarbanes-Oxley, citing Section 404 as the poster child for overregulation, are shortsighted," Donaldson wrote in a Wall Street Journal op-ed piece on March 29. On the facing page, Oxley himself also took issue with "the pro-business voices now loudly calling for rollback."
But exactly whose voices are these? Certainly, Ross begged for a repeal of 404 in his comment letter (which, he says, was originally intended for his senator). And a survey released March 22 by executive search firm Christian & Timbers claims a third of 186 executives at Fortune 1,000 companies favor repeal of Sarbox.
Yet, in the week before Donaldson's and Oxley's comments appeared in the Journal, not a single major business or finance association contacted by CFO would admit to any legislative effort to repeal or even change the act. Quite the contrary, most were quick to describe themselves as strong supporters.
"We were one of the few business groups to support the act," says Financial Executives International (FEI) president and CEO Colleen Cunningham. "[Sarbox] itself doesn't require any change."
"The Business Roundtable supported [the act]," echoes Thomas J. Lehner, director of public policy. "There is no desire to open up the legislative process."
Observers who point to the Financial Services Roundtable as aggressively supporting a rollback are mistaken, says president Steve Bartlett. "We supported the act's creation, and we support it today."
Maybe Donaldson's and Oxley's references were aimed primarily at U.S. Chamber of Commerce president and CEO Thomas J. Donohue, who publicly fulminated about both 404 and the SEC's aggressive enforcement practices earlier in the month. "The pendulum has swung too far," intoned Donohue — 10 times — while speaking about 404 to the Securities Industry Association on March 3.
Wishing Carefully
Yet, even Donohue professed the Chamber's support for "many provisions" of Sarbox, and stopped short of calling for repeal, even of 404. Those who claim the Chamber is agitating for congressional repeal or changes are "incorrect," insists David Chavern, director of the Chamber's Corporate Governance Initiative.
What's this? Has the business lobby rolled over? After all, it continued to find plenty to complain about in the past two months. According to a March survey of 106 large-company CEOs who belong to the Business Roundtable, nearly half said Sarbox and other new compliance requirements would cost in excess of $10 million annually. An FEI survey the same month of 217 public companies with average revenues of $5 billion pegged the average 404-compliance cost alone at $4.36 million. Almost all — 94 percent — said the cost of compliance exceeded the benefits.
Investors don't necessarily agree. "Obviously, to the extent 404 impacts earnings negatively, it's a concern," says Cynthia L. Richson, corporate governance officer for the $64.5 billion Ohio Public Employees Retirement System (OPERS). "On the other hand, who is measuring the cost of corruption and accounting scandals we've been through? Some cite that as contributing to a $7 trillion, even as high as $9 trillion, collapse in the capital markets."
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