Imagine you’ve been told you must go on a business trip every year or there will be severe personal consequences. You give the destination and dates to your travel planner and he provides you with an agenda, trip cost estimates and maps. Your planner tells you the first year’s trip should cost no more than $910, and assures you the trip shouldn’t be too onerous. Just before leaving he explains that although you’re not going to the destination you picked yourself, you will enjoy it once you understand the many “good things” his destination offers.
Skeptical but nonplussed, you embark on the trip. It quickly becomes an unimaginable nightmare. The maps your planner has provided are seriously flawed. You’re lost, confused and never actually reach the intended destination. Highways your maps instructed you to follow extort obscenely high toll charges. You are not allowed to turn back. The final bill for the first year’s mandatory trip: a whopping $300,000. Stunned, you return to the office and pay the bills. You have no choice. Outraged, you confront your travel planner, who casually shrugs and offers:
“I am the only travel planner in town and you have to get your trip plans and maps from me. While I have some sympathy, don’t expect next year’s trip to be any better. Forget what I said before about the $910 trip cost and get used to the new higher cost of travel.”
This story illustrates the reality of Sarbanes-Oxley (SOX) regulation 2002 to 2006. The final destination Congress defined was “more reliable auditor certified financial disclosures.” The travel planner is the SEC and its new subsidiary, the Public Company Accounting Oversight Board (PCAOB). In reality, the SEC estimated a cost of $91,000 per company to comply with section 404(a) when they issued section 404 Final Rule on June 5, 2003. For some companies, the final cost of SOX 404 reached as high as $40 million in the first year. While most agree changes were needed, the destination of “more reliable auditor certified financial statements” for the investing public may not have been the desired choice.
The key question asked by corporate America and all shareholders who have footed the bill for SOX to date:
“What caused the largest cost estimation error and business disruption in the history of securities regulation, and more importantly, will the SEC take bold and decisive action to get it right on SOX compliance?”
The SEC has an opportunity to fix an unprecedented series of wrong turns and put SOX regulation back on track. SOX – the law – is not the problem. Getting it wrong again would be.
The SEC appears to be taking this issue seriously and has asked for input on the current SOX rules in the form of the questions posed by its July 2006 Concept Release. The Institute of Management Accountants (IMA) has proposed to the SEC what we believe is a far more palatable and current risk and control assessment guidance, an approach that companies both big and small can use to cost effectively and efficiently get to the destination Congress wanted – more reliable auditor certified financial statements. IMA’s proposed assessment approach is “management centric” and offers what we believe is a truly “top-down/risk-based” approach.
If America’s global competitiveness and position as the world’s preeminent capital market is to be maintained, the time to make sweeping changes to the current SOX regulatory regime is now. If U.S. listed companies want change, the time to lobby for real change is now. IMA believes it has advanced a proposal that merits the support of all public companies. Let’s all tell the travel planner we want a new trip plan that costs less and gets us there quicker.
Written by Paul Sharman, president and CEO of the Institute of Management Accountants, the world’s leading organization for accounting and finance professionals.