Jim Clark talks about SOX

Jim Clark resigned his position as chairman of Shutterfly three months after the IPO in a letter that was attached to the required SEC filing.  Jim didn’t realize the letter, revealing his frustrated and frank attitude, would be released publicly.  Now that it has he sat down with Nanette Byrnes from Business Week for a detailed conversation detailed in the article, “Jim Clark - Clipped Wings at Shutterfly.”

Jim suggested, “When I wrote that I had no idea it had to be attached to the document that went to SEC [the Securities & Exchange Commission]. That was a genuine statement.  I basically kept that company alive. I became its bank. I hired the current CEO and had been involved in every step. I made a $30 million investment. I had been on the compensation committee, which seems like a rational committee for the largest shareholder to be on. Then suddenly I start realizing all these constraints on me.”
Jim continued by explaining that SOX is biased against board members who actually own the company.  He explains, “Jeff [Housenbold, Shutterfly’s CEO] brought in some excellent board members. They just don’t own much of the company. Sarbanes-Oxley seems to take the point of view that if you own part of a company that’s a bad thing. I read all the time about the problems of a CEO having stock in the company. I wouldn’t want it any other way. What do we want to do, go back to days of Henry Ford, when 10 people owned the company?”

Nanette asked Jim what he thought about SOX and he responded, “If it did anything for you it would be O.K., but I’ve seen absolutely nothing except at least a doubling of the legal and audit bills. It’s very bad for small companies. The current notion of exempting smaller companies from Sarbanes-Oxley is stupid. Every small company wants to be a big company. It’s a continuum [so they’ll have to comply anyway]. It needs to just be flushed down the drain.”

Check out the full interview here. Hat tip to Inside SOX for the pointer.

Goodbye Sarbanes-Oxley

The SOX blog pointed out that both Senator Sarbanes and Representative Oxley retired this year.  Will their departure spell the end of the Sarbanes-Oxley Act of 2002.  The SOX blog suggests, “The act, which was passed hastily in the wake of the Enron scandal, was surely well-intentioned. But it has proven counterproductive in the extreme, and Congress would best honor the departing lawmakers by repealing it.”

Sarbanes-Oxley is good?

If you caught the April issue of the Harvard Business Review you might have stumbled across an aticle titled, “The Unexpected Benefits of Sarbanes-Oxley.“  Turns out SOX is helping companies:

• strengthened control environment
• more reliable documentation
• better, less burdensome compliance with other statutory regimes
• more standardized processes for IT and other functions
• reduced complexity of organizational processes
• better internal controls within partner companies
• more effective use of both automated and manual controls
• increased audit committee involvement

Who knew; via John Walz at Sarbanes-Oxley Blog.

Sometimes more is less!

Frank Buytendijk at Gartner reminds us that sometimes more corporate regulations lead to less (not more) corporate transparency:

Royal Dutch/Shell Oil yesterday announced its annual results. It also decided not to report predictions anymore on future oil production and on anticipated return on average capital employed. Although that’s valuable information, the company decided to stop the practice because while the predictions come true in the long term (or so they claim), on an annual basis, they were too “volatile.”

I think there have been many examples the last six months of CEOs, accompanied by their chief corporate counsel, disclosing less nonfinancial information instead of more. I’m currently in a fact-finding mode to see a pattern exists. According to this article in CFO magazine, a survey of 600 investor-relations executives revealed that nearly a third said their employers are considering ending the practice of offering profit projections to Wall Street analysts. Stay tuned …

Sarbanes-Oxley = increased directors fees

Sarbanes-Oxley (SOX) has turned corporate governance on its head, changing the way companies select auditing firms, assess internal controls and conflicts of interest.  More and more board members are saying no to new board appointments.  When they do agree to join the fees they demand are significantly higher.

Recent studies are confirming this trend.  Typical compensation ranges from $20,000 to $200,000 per year depending on size of the company and the members responsibilities.  Compensation is also getting more complex including aspects such as:

• Basic retainer (plus per-meeting fees, telephonic meeting fees and committee fees)
• Life insurance, health plans, stock option plans and D&O insurance

Cost of SOC implementation

There is considerable debate over the specific requirements of the Sarbanes-Oxley act, as written. Some people in the business community have acknowledged that, as John Thain, CEO of the New York Stock Exchange states, “There is no question that, broadly speaking, Sarbanes-Oxley was necessary” [1]. However, the cost of implementing the new requirements has led some to widespread questioning of how effective or necessary the specific provisions of the law truly are.

For companies, a key concern is cost of updating information systems to comply with the control and reporting requirements. Systems which provide document management, access to financial data, or long-term storage of information must now provide auditing capabilities. In most cases this requires significant changes, or even complete replacement, of existing systems which were designed without the needed level of auditing details.

Costs associated with SOX 404 compliance have proven to be significant. According to the Financial Executives International (FEI), in a survey of 217 companies with average revenue above $5 billion, the cost of compliance was an average of $4.36 million. The high cost of compliance throughout the first year can be attributed to the sharp increase in hours charged per audit engagement. This has been a boon for the auditing profession, more than offsetting the reduced revenues arising from the Act’s restriction against those firms conducting various non-audit services for audit clients.

As more companies and auditors gain experience with SOX 404, audit costs have been falling. Audit firm revenues are still higher than they were prior to the Act, although audit fees were rising prior to the Act, partly as a result of the accounting scandals that prompted the Act.

[via Wikipedia]

SOX Code of Ethics - Ignored by more than 25%

John Bace, VP of Research at Gartner, reported that only 83% of companies had met the “letter” of the SOX requirement of establishing a code of ethics; but 25% of those companies say they won’t enforce those standards.  John suggests that we need to get companies focused on the spirt instead of the letter of SOX,

Meeting the letter of the Sarbanes-Oxley law –- whatever that finally turns out to be –- is only the first step. Adhering to the spirit of the law is the only thing that will accomplish its ultimate goal. Too many enterprises are consumed with minutia and trivia in their chase of the compliance holy grail, and as this survey points out, most are failing to take seriously what caused all of this in the first place.