WHY YOU SHOULD LEARN TO LOVE SARBOX
Increased scrutiny gives managers a better understanding of their company's business.
By Allen Blewitt

The Sarbanes-Oxley Act has been routinely derided as a typically American over-the-top response to a crisis. It is now being seen as a prescient response to the collapse in business ethics and corporate conduct, including the conduct of auditors.

At a recent seminar on corporate governance in Beijing, Chinese Securities Regulatory Commission chairman Wang Jianxi gave a robust view of Sarbanes-Oxley. Initially, he said, the Chinese saw the law as an over-reaction and over-emphasis on the external regulatory function. It seemed too costly, had uncertain operational feasibility, and had the potential to crush entrepreneurial spirit. Nevertheless, he acknowledged that gradually the Chinese were recognizing its benefits. He also pointed out that Sarbanes-Oxley must be seen as a political intervention rather than a professional one, meaning that it will be long lasting. It would be difficult to wind back Sarbanes-Oxley in the current global environment affecting accountants. The US Public Company Accounting Oversight Board, in particular, is becoming stronger, and has shown no sign of watering down its tough line.

How then should foreign companies view US accounting reform, and Sarbanes-Oxley in particular? The reforms should be seen simply as the revised cost of accessing the largest capital market in the world. In the future, obtaining or maintaining a US listing will present a higher hurdle, meaning companies will have to invest more in control systems and management reeducation.

Foreign registrants will also probably face increased audit costs, given the limits on independence and non-audit services that are being imposed. Companies better get used to it. Those of us who were looking for some pragmatic softening of SEC requirements must admit that the Parmalat case has made this unlikely. We must all learn to cope with Sarbanes-Oxley - it is a reality.

Probably the greatest impacts will be in terms of personal risk exposure for CFOs, and better integration of internal and financial controls. Indeed, quite recently, CFOs in the US have indicated that for them, monitoring the effectiveness of internal controls is the biggest challenge they face in implementing Section 404 of Sarbanes-Oxley. Better and more integrated technology solutions will have to be found - I am sure there will be no shortage of suppliers knocking on CFOs' doors. Section 404 requires a company's top management and its auditors to attest to the reliability of their company's internal controls on the gathering and reporting of financial data. CFOs will also have to deliver financial information more rapidly because cycle time requirements for delivering SEC filings have been substantially reduced. Other matters such as certifying data integrity, and providing more accurate and timely information to stakeholders will also pressure company systems.

Is there a silver lining in all this? In some cases, by grappling with compliance companies are overcoming inhibitions to open discussion and producing clearer lines of accountability. An acquaintance of mine is CFO at a listed company in the US. I asked him what were the most significant changes in ensuring sign-off under Sarbanes-Oxley. His company had developed a bottom-up sign-off process, with all layers of management attesting to the integrity of the numbers in the final accounts.

Work teams meet together with their unit financial results and interrogate each other as to the accuracy and appropriateness of the reporting. This is not a polite exercise, but quite a robust debate so that all issues are on the table. At the next level the key officers or division heads must debate their own results in front of their peers and in front of the CFO and CEO, again under robust interrogation. For the CEO and CFO, following this rigorous debate, the entire organization had become more committed to its results than it had ever been in the past. They are confident that the company is behind them when it comes to their sign-off of the results.

In addition, individual officers sign off in the presence of the external auditors, which adds an element of seriousness. The positive spin-off is that colleagues ask focused and analytical questions; there is a high degree of due diligence and professional scrutiny, and a much greater degree of understanding of the drivers of the business.

Allen Blewitt is chief executive of the Association of Chartered Certified Accountants based in London.