CFO Executive Board Releases Research; SOX 404 Legislation Threatens Hundreds of Thousands of US Jobs.

WASHINGTON -- The CFO Executive Board - a division of the Corporate Executive Board (NASDAQ: EXBD), a leading provider of best-practice research and quantitative analysis - today released a report to member CFOs outlining the true costs and benefits of the Sarbanes-Oxley Act and critical next steps they must take to protect their companies going forward. The report includes the predictions of a proprietary model the CFO Executive Board built to estimate the impact of Section 404 compliance activities on the US economy.

A key finding reveals that unless senior corporate executives take extraordinary measures to ensure that Section 404 compliance efforts do not crowd out key managerial activities and R&D investments, these requirements threaten both economic growth and job creation. More specifically, the report concludes that Section 404, as implemented, could retard job creation by more than 300,000 jobs and slow GDP growth by nearly 0.5 percent during the next three years.

"When you consider that Sarbanes-Oxley was drafted in only a few months, it's not surprising that companies have experienced serious, unexpected problems and high costs in complying with these new requirements," says Scott Bohannon, executive director of the CFO Executive Board

Of course, not all the news is bad.

"Sarbanes-Oxley played a critical role in restoring investor confidence in the wake of Enron, Worldcom, and other corporate scandals," notes Mr. Bohannon. "Indeed, there is widespread agreement among corporate executives and board directors that most of the Act's provisions are beneficial, promoting good corporate governance and encouraging greater care in the development of financial reports. But Section 404 has proven far more burdensome than anyone anticipated, imposing unnecessary costs on companies, reducing R&D investments, and forcing senior executives to spend far less time on key management activities."

The largest costs arising from the Sarbanes-Oxley Act do not stem from the design of Sarbanes-Oxley, rather from the implementation of its requirements. According to one industry participant, "Section 404 was never meant to be a separate audit or a separate set of activities; rather, it was meant to be an integrated part of the overall financial audit to better ensure the quality of the numbers."

Unfortunately, implementing the regulations has driven a largely independent work flow that has imposed far more substantial burdens on employees and senior executives than the traditional financial audit.

Commenting further on the findings of the report, Mr. Bohannon notes that, "SOX 404 requirements have not only doubled audit fees, they have consumed millions of hours in largely unproductive control documentation and testing exercises. They also continue to distract senior executives away from key business activities in a manner that could undermine their competitiveness." This loss of corporate productivity slows corporate growth, reduces U.S. economic growth, and increases overall unemployment.

Additional findings in the research include:

1. Fifteen percent of companies identified material weaknesses in their internal controls' processes, suggesting that Sarbanes-Oxley has promoted better financial reporting hygiene,

2. Small companies - those with less than $500 million in annual revenues - disproportionately account for the material weakness disclosures so far this year,

3. U.S. CFOs and Controllers of public companies expect to spend approximately 25 percent of their time in 2005 on Section 404 compliance, with other key executives anticipating that they will spend around six percent of their time on these efforts (These reflect a significant drop from their reported Year One compliance time spent, but they are still much higher than most practitioners and observers had hoped. CFO Executive Board survey data over the past two years also show that senior executives have consistently underestimated the amount of time and money that Section 404 would consume, so these predictions may be optimistic as well),

4. The top three CFO and Controller activities being crowded out by the Section 404 compliance efforts are internal business support, budgeting and planning, and internal performance assessment and reporting (IT projects have suffered a major blow as well),

5. With a 122 percent increase in the number of companies delaying their annual SEC filings, the flow of granular corporate performance information slowed considerably as companies and their external auditors struggled to meet Section 404 requirements,

6. Other emerging risks associated with Section 404 identified in the research include: (i) loss of senior executive talent; (ii) increased volatility in reported financial numbers; and (iii) an increasing fear on the part of employees that identifying problems with internal controls will compromise their performance ratings.

The research report also recommends steps that senior executives should pursue immediately to mitigate the negative effects of Section 404 absent regulatory relief, including:

1. Buy Back Senior Time for Critical Management Activities. De-emphasize cost savings targets for Sarbanes-Oxley compliance and instead focus on devoting resources and staff to "buy back" senior management time.

2. Protect Growth Bets. Work closely with board members to establish minimum thresholds for "riskier" growth investments, especially R&D, to ensure that the natural tendency in the current governance environment toward risk aversion does not compromise long term growth.

3. Build New Bridges to Investor Advocacy Groups. Help investors understand what elements of the Act are valuable, what actually hurts performance, and what should be changed.

4. Encourage Regulators to Adopt a "Principles-Based" Approach in Interpreting Section 404 Requirements. A principles-based approach will dramatically reduce the current "check-the-box" compliance activities that have consumed millions of executive hours and billions of dollars.

This work is the latest in the CFO Executive Board's research examining challenges that senior finance executives face in handling the increased regulatory burden of Sarbanes-Oxley. Detailed analysis of the types of material weaknesses being disclosed, and by whom, are available at www.cfo.executiveboard.com or by contacting the CFO Executive Board at [e-mail].

The CFO Executive Board's research is available exclusively to members.