Weighing the benefits of Sarbanes-Oxley.

With Sarbanes-Oxley (SOX) deadlines quickly approaching, many companies struggling with compliance and maintenance issues are now asking themselves: is SOX worth it? While compliance with Section 404 of the law (requiring companies and auditors to attest to the quality of internal financial controls) took effect for fiscal years ending after November 15, 2004 for U.S. businesses (note accelerated filers are what these companies are called; generally large U.S. companies), foreign companies (and small U.S. companies) have to comply for fiscal years ending after July 2005 to comply.

The results of the SEC's reports on U.S. companies will likely determine the willingness of international businesses to implement SOX controls. In the meantime, current reports show that rather than investing the time and money required to comply with SOX, some foreign corporations are considering not doing business in the U.S. stock market. By not listing with the U.S. exchange, foreign companies avoid the "hassle" of SOX.

This trend is also spilling over to U.S. businesses that are debating a move into the public sector--many are weighing the costs of SOX versus the benefits of becoming a publicly traded company, and the results aren't always in favor of going public.

In Support of SOX

Certainly, the benefits of SOX are difficult to dispute. In what is essentially a system of "checks and balances," SOX requires companies to have financial reporting discipline and behave ethically--in their reporting and otherwise. A major proponent of the corporate watchdog, SOX regulations, though an initially expensive and time-consuming process, are going a long way towards helping corporate America regain the trust of the people--and their investors. And, while the cost of SOX compliance can be easily measured in terms of lost time and extra expense, the benefits are of a less tangible nature.

Among its many benefits, SOX supporters point to the increased accuracy of the information on public companies available to investors, as well as an improved corporate culture thanks to strong whistleblower policies and higher ethical standards. For better or worse, SOX is restoring faith in corporate America and the business world in general--even if the changes are required by law and failure to comply carries the threat of jail time.

The Anti-SOX Argument

For businesses opposed to SOX, economics often play a critical role in their opinion. The cost of adhering to SOX can be staggering--especially for smaller companies. But for U.S. public companies, there is no other option. Loss of revenue due to SOX compliance is twofold thanks to the lack of productivity from workers whose attention is now being diverted from their real role with the company in order to focus on SOX. That, coupled with the cost of adapting to new reporting systems and the creation, testing and documentation of internal controls, has already been enough to discourage some foreign companies from trading on the U.S. market and cause many U.S. companies currently listed as private to reconsider going public. In fact, in the past six months alone, the total average cost for Section 404 compliance increased 60% to $3.1 million. While this is creating jobs and project opportunities, it is also a tangible cost companies must absorb.

And, although SOX supporters are quick to point out the positive impact SOX regulations have had on ethical standards, opponents counter that not all issues are addressed. For instance, businesses are largely left on their own to determine what equals a "significant" vs. "material" loss--an important question that can have a significant influence on a company's results. And many executives point to tighter SOX regulations as a main factor in managers being less likely to take risks. According to these professionals, SOX is stifling managers and corporate leaders--a development that isn't good for any business, foreign or domestic.

Is SOX worth the time, money and manpower that companies must invest to ensure they adhere to the new standards? While arguments can be made for either side, it's clear that SOX is a necessity for some companies while others (nonpublic and foreign businesses) have the luxury of evaluating if or how they will comply in the future.

This article was provided by Ajilon Finance, the fastest-growing staffing service in the world, specializing in the temporary and permanent placement of premier accounting and finance professionals. Visit their website at www.ajilonfinance.com for more helpful career advice or to check out our job postings.

If you are specifically interested in learning more about Sarbanes-Oxley or other issues impacting your business, contact David Sprinkle, Area Manager of Ajilon Finance in Woodland Hills 818-992-7676. He has a strong pulse on the economic trends affecting your business--and the San Fernando Valley market in general--and can help you build or maintain/our team as a competitive force in your industry.