Sarbanes-Oxley 2005: reality and relief.

• Author: Gazzaway, Trent
• Position: FinancialREPORTING

Compliance with provisions of the Sarbanes-Oxley Act of 2002 continues to claim huge amounts of time and resources of companies, auditors and regulators. And, as the first full reporting season under Sarbanes-Oxley concludes, signs are beginning to indicate that a move towards a more stable and rational environment is pending.

A few reasons for this reality and some relief that is in sight are high-lighted here.

Real or perceived drastic events result in drastic measures, and the nine-month period that ended with the passage of Sarbanes-Oxley was no exception. Those events, from November 2001 to June 2002, include: Enron Corp. restated earnings for the past five years, reporting $586 million in losses; Adelphia Communications Corp. stated that $2.3 billion borrowed by the Rigas family was not on its books; Tyco International Ltd.'s CEO was indicted on tax evasion charges; ImClone Systems Inc. CEO Samuel Waksal was arrested on insider trading charges; and WorldCom Inc. admitted to inflating earnings by $3.8 billion.

It should come as no surprise that U.S. elected officials and the Securities and Exchange Commission (SEC) aggressively pursued correction of the problem. In the aftermath, however, many have claimed that the resulting regulation is overly burdensome, especially for smaller companies. Yet, we are hard-pressed to find a truly legitimate argument against a single one of the Act's goals or its chosen methods of reaching those goals.

Management should take ownership of the processes that create its public financial statements, and it should be able to demonstrate why it believes its financial statements are correct. Auditors should be independent of the financial statements that they audit, and investors should be able to see evidence that all of the above is happening correctly.

The real problem isn't Sarbanes-Oxley, but rather a lack of recognition from the beginning that real and comprehensive changes would be required in the ways public companies execute their financial reporting processes. That lack of recognition has led to a misunderstanding about the amount of time and expense that would be required to affect those changes--which is where we are today.

In June 2003, the SEC estimated that the total cost of implementing Section 404 (excluding the cost of having to obtain a related auditor's opinion) would be approximately $91,000 per company. This estimate was based, at least in part, on a partially correct assumption that...