SOX Congressional Testomonies of effectiveness this week 1768

  • Early this morning while watching CNBC, I saw a report that the effectiveness of SOX is going to be investigated this week by congress. These discussions and any ensuing developments might be worthwhile to track this week. While we might desire improvements (e.g., more clarity and streamlining) and reductions in SOX costs – heated political discussions might be more of what we’ll see instead 😞
    Below is an interesting article related to SOX and while there are indeed benefits to stockholders, it was interesting to note an opposite effect in some cases as well. It should be an interesting week ahead.
    Unintended Consequences of Sarbanes-Oxley
    Please add ‘www’ and paste into browser
    Tomorrow, the chairman of the Securities and Exchange Commission, Chris Cox, will testify on the Sarbanes-Oxley securities law before the House Financial Services Committee. That committee is chaired by none other than Michael Oxley, co-author of the now controversial law under review.
    All of these costs might plausibly be worthwhile if investors and corporations had increased confidence in securities traded in American markets. Positive signs for the law would include increased registration of international corporations and their securities in America, a shift from private equity to public equity, and a shift from private debt to public debt.
    We find just the opposite. To avoid Sarbanes-Oxley, many public corporations have been taken private in recent years, and many private corporations that previously would have considered public offerings have decided against them.
    Initial public offerings and other securities by international corporations are increasingly going offshore in large part because underwriters and investors are frightened by Sarbanes-Oxley. Of course, American financial markets remain strong, but that strength appears as much despite and not because of Sarbanes-Oxley.

  • There is another interesting trend.
    Companies (and countries.) that do not have to comply with SOX, want to comply.
    There are a lot of reasons.
    Just one is enough:
    For the Credit Rating Agencies (CRAs).
    A credit rating is an assessment of how likely an issuer is to make timely payments on a financial obligation.
    Credit rating agencies issue opinions on the future creditworthiness of a particular company, security or obligation.
    These agencies are more powerful than most governments.
    Investors and lenders typically insist on being compensated for uncertainty and, when taking on debt, issuers pay for this uncertainty through higher interest rates.
    Rating analysts rely upon audited, financial statements as a primary information source in making rating determinations.
    In simple words: No matter if you are a public or a private company or a country, if you are listed or not: If you do not have the SOX / COSO framework in place, you will possibly have a lower rating. And, banks will have to allocate more capital for your risk (Basel ii), if they lend you money and you will need to pay more interest for any debt.
    Hard to believe?
    Moody’s Investors Service (one of the 3 most influential CRAs) issued a paper titled Section 404 Reports on Internal Control: Impact on Ratings Will Depend on Nature of Material Weaknesses Reported.
    For certain control weaknesses related to company level controls, Moody’s anticipates bringing the company to the rating committee to reassess the company’s credit rating
    The implications of Moody’s special comment paper are enormous. A lot of companies today want to comply with Sarbanes Oxley only for the Credit Rating Agencies
    Private firms do the same.
    (CRAs provide credit ratings for different types of debts and financial obligations including, for example, private loans and debt securities that are not publicly tradable, as well as zero-coupon bonds, preferred shares and other securities that offer a fixed rate of return)
    Also: In many secured or structured financial agreements, counterparties and lenders are given the right to accelerate repayment of an outstanding loan, or have the borrower post collateral, if the rating of the borrower’s fixed-income securities falls below a certain level.
    Governments do the same.
    Financial regulators in many jurisdictions use credit ratings for a variety of purposes, from setting capital requirements for banks and other financial institutions to rules governing money markets funds, pension funds and collective investment schemes, and in regulating asset-backed securities.

  • George - Thanks for adding some great perspective and particularly highlighting potential benefits associated with a proper implementation of SOX 🙂 I think SOX compliancy can be looked at as a glass being either half full or empty.
    Some companies simply goes through the motions because ‘they have to’. They fail to research requirments, get needed training, and sometimes do a half-hearted job in implementation. This can add extra costs and resources beyond what’s truly required. This is why we often see improper implementations of controls shared here.
    On the other hand, a well planned and research effort might actually help a company. For example, they might gain better insight on their financials, address tough longstanding issues and streamline work flows. Trying to gain the most out of the required SOX effort should be theme, and there could be some intangible benefits despite the added work, costs, and resource commitments 🙂

  • I absolutely agree with you, Harry%0AIn January of 2005, Foley and Lardner LLP distributed a survey to approximately 9,000 CEOs, CFOs, General Counsel, Chief Compliance Officers, Board Members, Directors and other corporate executives of public companies and private organizations. %0A A total of 68 surveys were returned from private organizations. %0AThe results below reflect the input of 29 non-profit organizations and 39 for-profit private companies %0AThe Sarbanes-Oxley Act continues to have a significant impact on private organizations, as 87% of survey respondents felt that SOX or other corporate governance reform requirements have impacted their organizations compared to 77% in 2004%0AThe impact of corporate governance reform on non-profit organizations was even more apparent, as 97% of non-profits responding to the survey felt that corporate governance reform had impacted their organizations compared to 80% of for-profit organizations.%0AMore than three-quarters (78%) of the private organizations surveyed have self-imposed corporate governance reforms, compared to 60% of respondents in 2004.%0AI know that when Sarbanes-Oxley Act was adopted, the Congressional record indicated that it was not intended to apply to any organization other than public companies. %0AAt that time, many claimed that regardless of the intent of Congress, these guidelines would eventually permeate all businesses under the guide of best practices %0A Although an unintended consequence, this is in fact happening.

  • In my view credit ratings are only relevant if you have to comply with SOX and fail, I do not believe it has a material impact on a company who has no SOX considerations eg those outside US. I also know of a few large European companies who examined SOX requirements and investigated the merits of adopting its requirements to then throw out any further work when they realised the costs involved.
    That being said these companies already operate within a governance framework albeit one that is self regulated rather than heavily audited. This is probably the main focus of the debate in my mind, the regulatory costs of section 404. Were that not to exist then SOX would not be much different to a number of other regularted markets but with it I believe it is a deterant.
    This is shown by Europe announcing that they do not intend to introduce anything as far reaching as SOX (didn’t Canada also do the same?) and is also the reason why stock markets outside the US have been able to steal a march on new filers over the past year. That being said a lot of these are from the old Soviet Union and Asia - both growth markets but possibly with a greater level of risk. However, until another Enron happens that significantly impacts investor confidence outside the US I do not believe that there will be the same level of commitment to these draconian measures.

  • The impact of corporate governance reform on non-profit organizations was even more apparent, as 97% of non-profits responding to the survey felt that corporate governance reform had impacted their organizations compared to 80% of for-profit organizations %0AThis is an interesting concept as it somewhat deals with my research and could be part of a federal inquiry. Is there any sources you have of the non-profits which have heeded interest in Sarbanes-Oxley complaince?%0AI know that my brother who has worked with ‘special’ kids and other emh children for over 20 years says he would have volunteered his services to special olympics free as he has in the past. He would be no less competant than senator’s son who was paid several hundreds of thousands of dollars to do this for bringing the national special olympics to Anchorage. Perhaps his consulting only involved fielding a few dozen phone calls which he was paid an average middle calss retirement for. Maybe a public appearance or two and off to the bank he went.%0AThe idea that politico’s would use something like special olympics as a slush fund is frightening and I wonder how much could go on.%0AAny information on those non-profits attempting to comply or of those avoiding transparency?

  • Sorry, I travel and I can not send an answer… please have a look at:
    Foley and Lardner LLP’s annual national studies, The Impact of Sarbanes-Oxley on Private and Nonprofit Companies
    Presented by:
    Paul D. Broude
    Foley and Lardner LLP
    Chicago, Illinois
    March 9, 2006 2006 private study.pdf#search=“Foley & Lardner LLP survey sarbanes oxley non profit”

  • Roger the travel. A Shelf/foot or two of paperwork gets heavy doesn’t it?
    Thanks for the link.

  • For Immediate Release:
    September 22, 2006
    Naomi Seligman Steiner / 202.408.5565

    IRS’s New Political Activity Compliance Initiative Created to Investigate 501 ©(3) Non-Profit Organizations
    Citizens for Responsibility and Ethics in Washington (CREW) has sent a Freedom of Information Act (FOIA) request to the Internal Revenue Service to better understand the development and implementation of its new Political Activity Compliance Initiative (PACI) project created during the 2004 election cycle to promote compliance with the prohibition against political campaign intervention by IRC 501©(3) organizations. CREW seeks documents related to the 132 organizations that the IRS identified for investigation by its PACI project.

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