A Tough Act to Follow

Last November, a small group of Unica Corp.'s senior executives, lawyers, and auditors gathered over dinner in downtown Boston to celebrate the launch of the company's initial public offering. Overall, they were pleased; the August IPO had raised more than $55 million in a tough market. But over drinks, the group began to engage in some good-natured bantering about the events of the previous year.

The road to the successful IPO had been challenging. Unica's managers had raced through a road show in 12 cities in two weeks. Getting material ready for the filing registration process with the Securities and Exchange Commission had been almost as exhausting. The reason: Rick Darer, the company's CFO at the time, says auditors had grown unwilling to draft disclosures responding to SEC comment letters in the run-up to the offering. Darer (who left the company earlier this year) thinks the auditors wanted to make sure the issuer — not the auditors — took responsibility for all disclosures, even though the audit firm signed off on the final prospectus.

Such wariness did not go unnoticed. At the dinner party, someone asked what kind of gift would be appropriate for the company's external auditors. What present, they wondered, would best symbolize the accountants' work on the project? Without hesitation, Darer piped up: "a set of invisible-ink pens."

Grousing about external auditors is nothing new. Since the passage of the Public Company Accounting Reform and Investor Protection Act (aka, the Sarbanes-Oxley Act) nearly four years ago, finance managers have done a whole lot of complaining about their suddenly soured relationship with engagement partners. They have also grumbled about the massive amount of work needed to comply with Sarbanes-Oxley. And they have questioned whether the law will prevent another Enron or another WorldCom.

It appears those complaints are not going away, either. According to a poll of 237 finance executives conducted in early January by CFO magazine, widespread dissatisfaction with Sarbox has led to a real desire to change the law. A fair number of surveyed executives would be pleased if several parts of the act were jettisoned. Some managers, particularly those at smaller companies, would like to gut many of the measure's provisions. Even those who said they believe Sarbox is beneficial would revise the statute in some fashion. And while 19 percent of the respondents said they're happy with the law as it stands, Don Barger, the CFO of YRC Worldwide Inc., is more typical of how finance executives view Sarbox. "There have been benefits," says the finance chief at the Overland Park, Kansas-based trucking company. "But the cost is not worth the benefit."

Control Freaks
The costs are indeed substantial. AMR Research estimates that, by year-end, U.S. businesses will have spent $20 billion on Sarbox compliance since the law was enacted. On average, AMR estimates that companies are laying out about $1 million on Sarbox compliance for every $1 billion in revenues.

CFO's survey shows an even greater hit to income. Finance managers at companies with annual revenues of $500 million or more indicated that Sarbox compliance had taken an average yearly earnings bite of more than 2 percent. Smaller companies were worse off. Respondents at businesses with sales of under $500 million said Sarbox compliance was devouring 4.5 percent of their earnings each year.

Much of that spending appears to be going for increased manpower — things like added internal auditors and extra accountants. Many of those employees are being used to document, test, and certify internal controls, as mandated by Sections 404 and 302 of Sarbox. The latter requires CEOs and CFOs to certify, based on their "knowledge," the accuracy of all annual and quarterly reports, as well as the adequacy of internal controls over financial reports. Section 906 establishes criminal penalties for violators, with prison sentences running up to 20 years.

It's fair to say the prospect of going to jail is hugely unpopular. "Nobody wants to take on any more legal liability," says Eric Bur, CFO of NIC Inc., a government Website builder based in Olathe, Kansas. Not surprisingly, more than half of the respondents believe the certification threshold should be lowered to from "knowledge" to "best of knowledge and belief." About one in four would like to see the quarterly certification limited solely to changes in disclosure controls and procedures.

Those results suggest finance executives have real questions about the value of identifying and monitoring hundreds, if not thousands, of internal controls. Even regulators have commented on the massive documenting. In a speech given in December, SEC commissioner Paul Atkins noted that "people seem to be driven by the impulse to document virtually every process in an effort to be thorough and to avoid being second-guessed by regulators and litigators."

Without a doubt, Section 404 wins as the most hated provision of Sarbox. Nearly three-quarters of those surveyed want to see it revised or repealed. Respondents at some smaller companies don't think there's any fixing it: 20 percent want the provision ditched entirely. Only 5 percent of all respondents believe Section 404 should be left as is.

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