WASHINGTON, Dec. 30 (UPI) -- The past year has seen U.S. corporate culture come full-circle from the dark days of Enron out into the Sarbanes-Oxley sunshine, but not without some of the growing pains that come with such a dramatic metamorphosis.
The 2002 Sarbanes-Oxley Act was set up to pull down the last buffers between corporate executives and corporate financial responsibility. Now, CEOs and CFOs have to sign off on all company quarterly and yearly financial statements, the audit committee of the board of directors must be made up of independent outside directors, and companies have to do not only a comprehensive audit of their internal financial controls against fraud and other financial skullduggery, but must also have outside auditors evaluate the internal audit.
Although only public companies had to tighten up their financial controls, in the post-Enron environment, even private companies adopted SOX standards to shore up their reputations. But other private firms saw the cost of compliance as an obstacle to ever going public, while some public companies said that they were strongly considering "going dark" or delisting, a survey by Chicago-based law firm Foley and Lardner LLP showed.
With much grousing, companies tightened their belts, shifting money and manpower toward SOX compliance. In January, a survey by Financial Executives International showed that companies estimated they would have to spend about $2 million to comply, whereas in July, companies ramped up their estimates to more than $3 million. In the end, compliance costs ended up being on average $5.1 million, a study by Los Angeles-based recruitment firm Korn/Ferry showed.
Some companies complained that the laws already in place weren't enforced. Others said that the new laws wouldn't have any effect. Yet others called for establishing a new, more ethical corporate culture from the MBA degree up.
And at least one study showed that one of the biggest threats to corporate financial control was poor internal communication. "Corporate security exists in three different worlds: the realms of cops, geeks and bean counters. Simply getting them to communicate with one another, without a translator, can be difficult," said Tom Cavanagh, the Conference Board's corporate security specialist, about a Board study released in October.
The key to improving corporate security is getting all three areas to cooperate to assure that security is an integral part of the company's overall mission, the Board said.
Companies spent their SOX money on things like compliance software, accountants, and raises for directors and audit committee members who demanded a better cash cushion against their newly risky jobs. This year's Korn/Ferry study showed that on average directors of Fortune 1000 companies received average retainers and per-meeting fees of $56,970, 22 percent more than last year's $46,640 and 32 percent more than the $43,306 reported in 2002, when the Sarbanes-Oxley Act was passed.
Some companies, fearful of Wall Street's reaction to any fiscal-control loopholes, hired several auditors. Others protested the outside director rule, on grounds that their companies were family-owned and operated. Others just quietly delisted and went into the SOX sunset, at least for now.
But others, namely auditors, software makers, and creative problem-solvers had a field day. The Big Four accounting firms have made record profits. Software companies developed whole new divisions to meet companies' SOX software needs. And, SOX support groups gave frustrated workers a place to vent and look for answers to whatever frustrated or simply baffled them.
In related developments on the SOX sidelines, stock ratings company Morningstar came out with fiduciary statement ratings to help investors choose solid companies, rating fund companies based not only on their financial statements but also other elements of their fiduciary conduct. Research by another company, New York-based Criterion Research Group LLC, shows which companies are most likely to experience earnings restatements and SEC enforcement proceedings by measuring accrual levels in earnings statements. Under accrual-based accounting, a company is allowed to book revenue as soon as goods or services reach a buyer, even if cash has not changed hands.
Others have come up with even more creative backups to Sarbanes-Oxley. Some companies are trying new interview techniques to gauge the morality of potential employees. Now many of those who screen candidates for executive-level hire or promotion are conducting more rigorous background checks and interviewing candidates with their spouses.
For instance, many of the executives involved in recent scandals also betrayed their wives. A book about Enron said several of its executives were openly pursuing or dating co-workers. And, more large firms started adopting stock ownership guidelines for executives and directors, so they had a bigger stake in the companies for which they worked, compensation consultant Frederic Cook & Co. of New York said in October.
But even with all that has been done, there is still more to do, apparently. RateFinancials said in May that most financial statements still didn't reflect public companies' true financial state; and as of November, many companies still engaged in related-party transactions, where executives conduct business deals with family or friends -- legal but questionable moves, and prevalent at Enron and WorldCom.
Most interesting, though, is that worldwide, compliance costs for corporate reform, and not just that connected to SOX, has jumped -- a sign perhaps that corporate controls worldwide are getting a much-needed overhaul as the globalization of business continues, according to the Korn/Ferry study results.
