Corporate reform: can Utah's small public companies survive Sarbanes-Oxley?

• Author: Holyoak, William D.
• Position: Egal Briefs - Sarbanes-Oxley Act of 2002

IT HAS BEEN ALMOST A YEAR since Congress passed the Sarbanes-Oxley Act of 2002. SOX, as it is popularly known, imposed sweeping accounting and corporate governance changes on public companies. During the past year, the Securities and Exchange Commission has adopted significant and numerous new regulations.

SOX, which would have been unimaginable only a couple of years ago, was adopted in a legislative nanosecond. The election of a Republican president in 2000 seemed to herald further loosening, rather than tightening, of securities laws. Indeed, one of former SEC Chairman Harvey Pitt's earliest quotes was to the effect that the accounting profession deserved a "kinder, gender" SEC. And then came Enron, WorldCom and Tyco. In came SOX and out went Pitt. The pendulum of securities regulation swung quickly.

But did Congress overreact? Did it act with a blunt tool that inflicted collateral damage? It is too soon to tell, but we can look at the early returns.

A recent survey by the law firm Foley & Lardner, of mostly midsize companies, found that since SOX's passage, the average price of being public has almost doubled, from $1.3 million to almost $2.5 million annually Almost two-thirds of the increase is attributable to directors' and officers' (D&O) liability insurance. The Foley & Lardner survey also discovered that accounting and legal costs have almost doubled.

John Morrison, vice president, general counsel and secretary of SOS Staffing Services, Inc., and Alan Flake, TenFold Corporation's senior vice president, general counsel and secretary confirm the increased costs resulting from SOX compliance on local public companies. One of the biggest impacts of SOX on SOS Staffing Services is the allocation of internal resources to assure compliance, Morrison notes. SOS now has a vice president of compliance, who spends approximately 50 percent of his time dealing with SOX compliance. Morrison and Flake agree that D&O premiums have increased, but both indicate that significant increases were likely even without SOX. Nonetheless, the increased exposure that corporate executives face under SOX has no doubt exacerbated the D&O problem.

Flake and Morrison also confirm increased costs for accountants and lawyers. Flake refers to SOX's "fear factor" and notes, "Given the complexity of the various new requirements and...