Like it or not, the Sarbanes-Oxley Act is here to stay. It is still unclear what unforeseen consequences the hastily constructed law will have, but any regulation that affects so many corporate roles – from senior executives to board members to auditors to legal counsel to front-line employees – is sure to shake things up. Some early effects are now coming to light.
Obviously, CEOs and CFOs carry increased liabilities under Sarbanes-Oxley. These executives now have to personally certify the veracity of their companies’ financial disclosures and they have to do so within tight deadlines. Furthermore, they have to report any deficiencies in internal controls to their independent auditors and audit committees. If they fail to do so, they’ll take the fall personally and with much fanfare.
This process will undoubtedly slow down disclosure during a time when companies are expected to speed up disclosure. Essentially, Sarbanes-Oxley asks companies to do more in less time. As a result we can expect to see a disclosure bottleneck right at the deadline as companies struggle to get everything filed on time. The cynical observer may suggest the US market will soon resemble that of Japan where nearly all companies hold their shareholder meetings on the same day.
In its haste to pass legislation, Washington may have inadvertently cast its net over a large group of issuers which are perhaps most challenged by Sarbanes-Oxley: non-US companies. While the act may have caused US companies to grumble, it caused their overseas counterparts to howl. In Europe several business groups have strongly criticized Sarbanes-Oxley, calling it redundant regulatory baggage for issuers whose activities are already well regulated. In particular, the German industry association, BDI, has objected to the Sarbanes-Oxley provision for CEO/CFO certification. It believes responsibility for certifying disclosures lies with the whole board, not individual board members.
Should companies react to the Sarbanes-Oxley Act by reconsidering their potential listings in the US market, this could be one of the most regrettable consequences. After all, the new rules saddle companies with more costs, more hassles and more liabilities. Fundamentally, different companies from different parts of the world disagree about what constitutes good corporate governance.
That said, many non-US companies have chosen to put disagreement aside, to treat the controversial law as an opportunity to boastfully embrace best practices, and thus to portray themselves as transparent, forthcoming and open.
Whether companies resent the US for playing world cop or not, they know that if they want to tap into the US capital market they have to play by US rules. And that means accepting the Sarbanes-Oxley Act. Like it or not, it’s the law.
