Report card on Sarbanes-Oxley: one year later.

Over one year has passed since President Bush signed the Sarbanes-Oxley Act into law, and its impact has been enormous.

First, the positives:

* Although it can be argued that there is nothing really new in Sarbanes-Oxley, it was a sorely needed initiative designed to focus senior management on corporate governance, transparency and doing the right thing. As such, FEI was an early supporter. Congress needed to take a decisive and unflinching stand against the ethical scandals that had rocked the corporate world. The Act did that. However, many of its explicit provisions were implicitly in place beforehand, such as executives taking responsibility for their company's financial statements.

* Visible legislation and ongoing prosecution have focused management and boards of directors on behavior that will restore investor confidence in our financial markets.

* Sarbanes-Oxley has enhanced the value and stature of the CFO, elevating the basic tenets of our profession, such as internal controls, to a new level of importance. The true weight of the CFO role on business strategy, investor confidence and, ultimately, the success of the entire company, is better understood.

* The code of ethics requirement is critical, and one FEI played a significant part in developing. All meaningful attempts at reform must begin with a sworn commitment to ethical values.

* Requiring a financial expert on boards has raised the bar, and will have a profound impact over time.

* Creation of the PCAOB is a welcome alternative to a self-regulatory structure, and its visibility helps restore investor confidence.

* The law's aggressive stance against ethical wrongdoing has helped restore U.S. leadership in the fight against corruption and making the American system a model for other countries. It was never the U.S. accounting system that was at fault, but rather individuals seeking to circumvent existing standards for their own ends. Sarbanes-Oxley helps ensure they can no longer do that.

We find, however, significant--and perhaps unintended--consequences of the law and its interpretation that may not be in the spirit of the original legislation.

* Costs for compliance are excessive. The compliance effort required is beyond what anyone expected, and creates a significant burden. Audit fees, legal fees and D&O insurance premiums are rising, affecting every public company's bottom line. When FEI surveyed our members last May relative only to Section 404, average expectations were that outside consultant fees would hit half a million dollars, external auditor attestation fees 35 percent of the regular audit fee and anticipated person-hours, an astounding 6,000! These high costs burden American companies.

Documentation of controls, for example, does not necessarily equate to improvement of controls, and may exact a substantial cost. Related to this issue is the market dominance by the Big 4 accounting firms and lawyers' greater involvement in financial reporting.

* Compliance demands steal the CFO's focus and leave less time and resources for strategic thinking. As financial executives, we need to be proactive innovators, but excessive compliance requirements may limit us to being simply reactive.

* The law may discourage companies looking to go public, hurting the growth of U.S. financial markets. While the costs of being public are increasing, it can be argued that benefits are decreasing. Foreign issuers considering listing on U.S. exchanges may reconsider, while those already listed may withdraw rather than submit to regulatory oversight. We can't lose sight of the fact that we are not the only capital market.

* Inhibited risk-taking may be sapping the spirit of innovation and creativity that makes the U.S. a dominant force.

I believe strongly that the best regulation accomplishes its objectives without placing an undue burden on businesses. Judging Sarbanes-Oxley by this one measurement, the Act--or its subsequent interpretation--is flawed.

* Integrity cannot be legislated. It exists within an individual or it does not. An organization's ethical culture begins with senior management, who are solely responsible for promoting a proper tone at the top. By this measurement, the law is superfluous.

* Having systemic checks and balances in place to ensure appropriate behavior and foster compliance is imperative. The accounting scandals that embarrassed our profession stemmed from a combination of overly aggressive financial targets and a tone at the top that made not reaching such targets unforgivable, as well as simple bad behavior and a lack of appropriate board governance. By this measurement, Sarbanes-Oxley is, in fact, both necessary and successful.

It would be a tragedy--to say nothing of a profound waste of time--if compliance turned into nothing more than box-checking. Congress wrote a law meant to reform the very basic practices of our capital markets and ensure that our citizens retain their faith in those markets. The spirit of that law demands we pay it due diligence.