In the aftermath of Enron‘s demise, Congressmen fell over themselves in self-righteous indignation proposing legislation that would ensure that such a debacle would never occur again. Not only does the nature of man ensure that another Enron debacle will occur, Congressional laws enacted in a misguided attempt to overwrite man’s nature often have unintended (and in this case, quite costly) consequences.
The Wall Street Journal reports today (subscription required) that U.S. companies are complaining that new Enron-resultant rules regarding corporate accountability are costing extraordinary amounts of money and management time.
The rules stem primarily from the 2002 Sarbanes-Oxley Act, which Congress enacted for the purpose of enhancing corporate governance on the heels of the Enron, Tyco, and WorldCom accounting scandals. The regulations were intended to strengthen corporate accountability and thus, restore investor confidence. Proponents of the statute contended that the new regs will help companies save money because they will avoid costly problems that would occur but for the additional regs.
However, reality is often far different than theory. As the WSJ article points out:
While there is agreement that governance rules are needed, some companies cited the increased cost of complying. “The real cost isn’t the incremental dollars, it is having people that should be focused on the business focused instead on complying with the details of the rules,” said Peter Bible, chief accounting officer at General Motors Corp. “Everybody feels they have to do something to react to the corporate scandals, [but] you really have to scratch your head and say, ‘How is this really benefiting our shareholders?’ ”
The rules are coming into effect at a time when corporations already are battling other increasing costs, including health-care expenses. Even before the most expensive Sarbanes-Oxley rules take effect, companies say their audit costs are increasing by as much as 30% or more this year due to tougher audit and accounting standards, including complex rules to bring more off-balance-sheet items onto the books. Companies also are paying steep fees to fund a new accounting-oversight board — as much as $2 million apiece annually for some large businesses.
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A survey of 321 companies released Tuesday shows that businesses with more than $5 billion in revenue expect to spend an average of $4.7 million each implementing the new 404 rule this year, according to Financial Executives International, which represents top corporate officials. Much of the money is being spent on consultants, lawyers, auditors and new software.
One of my sage clients summed it up in this manner: “The lawyers win again.”
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