by Bradley Parsons
Staff Writer
The congressional crack down on corporate practices known as the Sarbanes Oxley act has been a windfall for firms like Foley and Lardner with large corporate practices. Yet partner Gardner Davis points to a study produced in the firm’s Jacksonville office as evidence that the legislation is bad for business.
A pair of Foley and Lardner attorneys authored the study. Paul Broude and Richard Prebil presented their findings in March to a Chicago convention of corporate leaders. The reaction at that conference told the firm that its study was on the right track in its findings that Sarbanes-Oxley has outgrown its original intent and become a burden on business.
The legislation, sponsored in 2002 by Sen. Paul Sarbanes and Rep. Michael Oxley as a response to the corporate accounting scandals involving companies like Enron and WorldCom, represents one of the largest overhauls in the history of federal securities law. Sarbanes-Oxley increased requirements of publicly-held companies for auditing and accountability, introduced protection for corporate whistle-blowers and required independent advisory boards.
Those provisions have added layers of paperwork and exhaustive review of financial statements and accounting procedures. That’s meant big money for corporate law firms who have acted as guides through the new legislation. Despite the financial benefit to his firm, Davis said the Foley and Lardner study shows that the legislation needs to be pared back.
“When you look at this study you might ask, ‘Why are we crying all the way to the bank?” said Davis. “But that’s like saying doctors should be for cancer because it generates medical bills. In the long run, over regulation is bad for business. And what’s bad for business is bad for their law firms.”
The legislation has more than doubled the administrative cost to corporations to comply with the new guidelines, said Davis. Firms have been forced to add staff for accounting and oversight, institute internal controls and pay higher insurance premiums as a result of Sarbanes Oxley. Davis estimated that firms now spend about 250 percent more in those areas.
The study shows that the average corporation spent $138,000 to comply with Sarbanes Oxley so far in 2005 compared to $50,000 in 2004. As companies become more compliant, the bill goes up, said Davis. About 28 percent of the 9,000 respondents said the costs of the new legislation outweigh the benefits, although about 70 percent said the legislation was worth the cost or a bargain.
Davis said the costs of the legislation fell disproportionately on small businesses and non-profits. With smaller bankrolls, those operations can’t afford the same level of compliance as larger companies.
“I’m personally convinced that significant reforms were required to address the excesses, and even abuses, of the late 1990s. Unfortunately, Sarbanes Oxley applied a one-size-fits-all approach,” said Davis. “Whether the company was General Motors or a small public company in Jacksonville, the requirements are the same.”
Davis hopes the Foley Lardner study will help build a case for easing some of the legislation’s restrictions. He credited Sarbanes Oxley with increasing awareness of the need for greater financial transparency and accountability and now hopes the study will become part of a debate that produces appropriate levels of regulation.