Eye on business

Pop the corks, it’s party time: Sarbanes-Oxley is five years old. Excuse me if I don’t join in the celebrations. Call me an old party-pooper, but five years of SOX is quite enough as far as I’m concerned.

I’m not alone in feeling this way. A recent survey conducted by Duke University’s Fuqua School of Business and RSM Erasmus University found that three-quarters of American CFOs believe the act should be reformed or repealed, and nearly as many believe the costs have outweighed the benefits. Of course, they would say that (after all, it’s they who’ve had to foot the bill); however, there’s no denying the hefty financial cost we’ve all had to pay in terms of added compliance initiatives, technology upgrades and endless auditors’ paychecks. SOX has cost us, big time.

Sure, there’ve been plus points. Thanks to SOX, corporate accounting has finally been dragged out of the shadows, exposing wrongdoers and casting light onto the financial reporting process in a way that few, including me, thought possible. This improved transparency has clearly been a positive step; anything that alerts companies to the fact that Enron-like misdemeanors will not be tolerated has to be a step in the right direction.

But the bottom-line is that SOX is crippling the US economy. AMR Research reports that spending on SOX compliance is now more than $6 billion annually. Large companies have cleaned up their accounting, but at great cost. Foreign businesses are dropping out of US stock exchanges to avoid SOX requirements at an alarming rate. And many small public companies are still scrambling to meet a crucial compliance deadline in December. Even more damaging, the onerous burden of compliance is stifling the creative, risk-taking and entrepreneurial approach essential to success in an innovation economy.

So are we in danger of becoming obsessed with compliance? The answer, unfortunately, is yes. Thanks to SOX we take it for granted that public corporations must publish a financial audit, and to complicate matters still further many are now calling for companies to publish additional audits on everything from environmental practices to corporate social responsibility initiatives. It means more work for under-fire executives – and less time spent on developing fresh ideas.

Don’t get me wrong. I’m not against the idea of ethical audits themselves; in fact, I think they’re a great idea. They offer a view into the bowels of prior years’ operations and encourage good practice in the current year. They’re also predictive, helping investors answer the question that matters most: is this company a good bet for the future? Just as they now use sophisticated strategies to foresee financial risks, companies must also develop methodologies to look over the horizon and foresee ethical, social and environmental risks that have not yet arisen.

My fear is that with little or no guidelines in place to help companies navigate the process, we’ll see the same confused approach that turned SOX compliance into such a massive headache for companies of all sizes. The accounting firms are no doubt already rubbing their hands with glee.