Fraud law spurs backlash, then buy-in

When Carmen Requena's employer asked her to lead internal audits, she quickly learned that the job made her as popular as a meter maid.

Such audits had never been done at her midsize software company, and her team was formed in response to the demands of a stringent federal antifraud law known as the Sarbanes-Oxley Act.

"The very first meetings that I started to attend, people were sort of dragging their feet and not tremendously thrilled at what they had to do," she says.

But during the past 18 months, grudging reluctance has given way to acceptance and even the view that the rigorous new accounting standards entail benefits as well as costs for the company, Micros Systems in Columbia, Md.

It's a story that's been repeated in many corporations in the wake of the scandal at Enron Corp., which symbolized American dynamism until hidden losses forced it into sudden bankruptcy - and prompted Congress to enact the Sarbanes-Oxley legislation of 2002.

Now, nearly four years later, as the trial of two former Enron executives unfolds in a Texas courtroom, Enron's legislative offspring is very much alive and is reshaping the culture of American business.

Even though some business leaders remain harshly critical of the complex compliance and high costs the law imposes and hope features of the law will be rescinded or scaled back, few expect the core provisions will be rolled back outright. Others say the law is enhancing the quality of corporate financial statements and clarifying the distinct financial duties of top executives, directors, and outside auditors.

"Fundamentally, Sarbanes-Oxley is correct and is here to stay," says Charles Elson, an expert on corporate governance at the University of Delaware. "It changed the course of business in this country."

The law feeds into a broader trend of tighter scrutiny of corporate governance.

The US Securities and Exchange Commission (SEC) is moving to require stricter disclosures of soaring executive pay. And in coming weeks, corporate annual meetings will include rising pressure from shareholders for more say in the choice of the directors who act on their behalf.

For better or worse, Sarbanes-Oxley has had sweeping effects, making it one of the most significant bills ever signed by President Bush.

The bad news is high costs and bureaucracy. Companies now have people dedicated solely to compliance with the law's internal auditing rules. Micros, which employs 3,000 around the world, relies on a staff of four for the job.

In a recent survey of chief financial officers by CFO magazine, two-thirds said it had affected profitability - with earnings dropping by an estimated average of 3 percent at companies that felt an earnings impact.

The good news is strengthened accounting, which may also mean higher investor confidence and greater stability of stock-market prices.

"Investors are actually willing to pay a premium for stocks of companies that have a governance framework in place," says Brian Cleary, marketing chief at OpenPages, a vendor of software that helps firms comply with regulations.

The new controls can give management a sharper spotlight on operations and potential problems, he says. "Some companies are actually realizing tangible benefits."

Still, foes say the costs - money and red tape - outweigh the benefits.

"In the Sarb-Ox economy, it seems that everybody audits everybody else," Alex Pollock of the conservative American Enterprise Institute wrote recently in The American Spectator.

The tab for compliance may be $6 billion for North American companies this year, according to a recent survey by AMR Research. And that's just part of an overall compliance bill, ranging from SEC regulations to Food and Drug Administration rules, that may reach $27 billion.

Lawmakers have begun hearings that may pave the way for revisions of the law, named for its architects, Sen. Paul Sarbanes (D) of Maryland and Rep. Michael Oxley (R) of Ohio. Opponents are also challenging the law in court.

Even the law's supporters concede that it won't prevent all future Enron-style debacles. But they say the costs aren't as burdensome as critics suggest. For one thing, the price tag may fall this year as companies automate compliance.

Moreover, the spinoff benefits may be significant. Of 325 executives polled by AMR Research, 75 percent said their investments in compliance procedures would support other activities.

Investor advocates, meanwhile, haven't generally climbed on the rollback bandwagon.

While the law may deter some private companies from going public, the initial public offering (IPO) is hardly dead. "If someone needs to raise capital, an IPO is still a good way to do it," says Ken Janke, chairman of the National Association of Investors Corp., which publishes BetterInvesting magazine.

In the end, compliance for many companies takes a certain toll in mere paperwork.

Ms. Requena says her team has to carry binders of reports around, gathering signatures from Micros officials. And it has to keep refining internal audit procedures.

But she says the chief financial officer led the way by deciding to embrace the changes rather than fight them. "The fact that we want to have a positive audit is a mutual goal," she says. "Now I haven't heard anybody complaining."

• CEOs & CFOs certify financial reports.

• A new regulatory body monitors the accounting industry.

• Public companies disclose more about internal controls for financial reports, insider trading, and compensation.

• Stiffer punishment for fraud.

• Executives can't get personal loans.

• Audit committees are independent of management.