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Companies grumbing at regulatory reforms and costs, so maybe they're working

Posted: Friday, May 28, 2004

NEW YORK (AP) With the next wave of regulatory reforms due to hit later this year, many companies are bristling at the burdens of the sweeping changes brought on by scandal.

While many are grumbling about rising costs, a legitimate worry at smaller companies, some of the complaints sound downright encouraging.

''There are signs that our relationship 1/8with our auditor 3/8 is becoming more adversarial, and we are no longer thinking of our auditors as valued business partners.''

That unattributed quote was emblematic of the sentiments expressed by many corporate executives who responded to a recent survey by Foley & Lardner LLP.

According to the Chicago-based law firm, two-thirds of the executives said the new accounting and public disclosure rules adopted under the Sarbanes-Oxley Act in 2002 were ''too strict,'' up from 55 percent among those surveyed a year earlier.

Without the immediacy of a scandal-filled environment, it's easy to forget why stricter rules were needed, even if some ultimately prove ineffective as critics assert.

Back in the days when there was still an accounting firm named Arthur Andersen, the relationship between auditor and the company being audited grew so cozy and co-dependent that a crucial mechanism of corporate oversight was compromised.

It can only be heartening, then, to hear an executive tell Foley & Lardner that, ''Outside auditing firms are less willing to provide guidance, assistance or insight into accounting or regulatory issues.''

Another major complaint is the soaring cost of complying with all the new rules, a development some contend may smother innovation by smaller businesses who need to raise money by selling stock to the public.

The law firm's survey, conducted in tandem with a study of 800 recent proxy statements, estimated that the cost of being a public company has more than doubled for many corporations since the Sarbanes-Oxley Act was passed in mid-2002 to toughen corporate oversight.

In 2003, corporations with less than $1 billion in annual revenue paid an average of $2.9 million to cover an array of rising expenses led by outside auditing fees and liability insurance for directors and officers. At companies with more than $1 billion in sales, the average was $7.4 million, the study said.

The biggest costs may be yet to hit. Starting later this year companies will be required to implement a new type of audit that determines whether there are adequate organizational controls to prevent mistakes and misbehavior.

It's unclear exactly how much these new processes and computer systems will cost at smaller companies, but they could exceed $4.6 million in the first year for a major corporation, according to an estimate by Financial Executives International.

''It may not seem like a lot of money in this world of billion-dollar deals, but as someone who has represented a company in an IPO, that's a real hit when you're taking that money off the bottom line,'' said Thomas E. Hartner, a partner at Foley & Lardner who directed the study.

The Public Company Accounting Oversight Board, the private-sectory regulatory body which approved the new auditing standard, was sensitive to this potential burden to smaller businesses.

''The board made it absolutely clear that accounting firms are to keep in mind that small and medium size companies may not need all the bells and whistles of the bigger companies,'' said Christi Harlan, director of public affairs for the PCAOB.

For some critics, of course, any new burden is unnecessary.

As one executive complained to Foley & Lardner, ''Because of the sins of the few, all public companies are paying the price.''

True enough. In fact, all public companies paid an even heftier price when the sins of the few were exposed at companies like Enron and Tyco.

Though it's far more difficult to quantify than a year's worth of auditing fees, that betrayal of investors undermined the entire stock market and the overall economy. The loss of wealth and the loss of confidence in corporate cut deeply into the psyche of consumers and investors, sapping demand for a company's products and its stock.

Even if the fees for regulatory compliance continue to escalate, or some of the new rules fail to prevent future fraud, it's a price that must be paid to restore investor confidence.

Bruce Meyerson can be contacted at bmeyerson(at)ap.org



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