Although many view the Sarbanes-Oxley Act as a positive step toward corporate reform, smaller, public companies are expressing concern about the rising cost of compliance,
according to a recently released study conducted by PricewaterhouseCoopers.
The study, part of PricewaterhouseCoopers' Trendsetter Barometer studies, took the pulse of 403 product and service companies identified in the media as the fastest growing
U.S. businesses in the last five years. The surveyed companies ranged in size from approximately $5 million in revenues/sales to $100 million in revenues/sales.
Although the companies polled are some of the fastest growing companies in the country, executives who participated in the survey and were queried by PR NEWS say they have no
plans to hire in-house communications executives to deal with the onslaught of new regulations and will instead turn to their attorneys and accountants to get up to speed.
"I have trouble justifying bringing in someone for PR," says Luke Schmeider, president-CFO of MESA Laboratories Inc., a small, public company that manufacturers specialty
measurement equipment for the pharmaceutical and food industries. "I'll rely on my attorneys to make sure we're in compliance." Schmeider adds that he'll have to put on the PR
hat more often because "I'm the one who is signing" the various documentations the Securities and Exchange Commission now requires as part of Sarbanes-Oxley.
Terry Jacobs, chairman-CEO of Regent Inc., which owns 76 radio stations nationwide, says he'll look to his outside investor relations firm to help him manage the new
regulations. Right now, he's not considering hiring a PR specialist. "With big companies it might be necessary, but we don't have the budget to bring in somebody on a full-time
basis," he says.
The Sarbanes-Oxley Act, passed last year, requires public company executives, boards of directors and independent auditors to take specific actions to achieve greater corporate
accountability and transparency. The intent of the law is to help restore public trust in U.S. business and corporate reporting.
In total, 40% of fast growth CEOs say they and their key people have an understanding of the Sarbanes-Oxley legislation and its requirements, including 18% claiming to
understand it "very well," and 22% "somewhat well, according to the study. This group includes virtually all the enterprises that are publicly held (92%) and a considerably
smaller share (30%) that are private. (See tables).
Reed Byrum, president-CEO of the PRSA, says the results of the PricewaterhouseCoopers study are encouraging. "It shows the value of showing the public and future investors that
your company is transparent," he says, adding, however, that if companies continue to balk at compliance Congress "will pass another law" aimed at corporate reform.
Steve Hamm, managing partner of PricewaterhouseCoopers' middle market advisory services, says: "Most CEOs of small public companies are fairly evenly divided in their views,
with both positives and negatives expected. Some of this latter group may include companies that see themselves as eventual IPO candidates, or candidates for acquisition by a
public company -- but a number may simply have an interest in improving their internal governance policies."
Hamm says companies impacted by Sarbanes-Oxley are in a "we're finding out" mode and are attempting to get their arms around the legislation. For Schneider, from MESA Labs,
however, compliance is already a bear.
"There are a lot of extra layers and more and more checking," he says, referring to Sarbanes-Oxley rules requiring companies' boards of directors to review all press releases.
Previously, auditors would reviews companies' financials and attendant press release and then both would be distributed to investors and members of the press. Schmeider says
another rule requiring insider transactions to be posted on the company Web site within three days - previously companies had a month - is also burdensome. Asked if he would ever
consider going private because of Sarbanes-Oxley, Schmeider responded: "It might get to the point where the minuses outweigh the pluses."
Alan Edrick, senior vp and CFO of North American Scientific Inc., a small firm that manufacturers medical devices, cautions: "The last thing companies need is to be in non-
compliance. That'll just lead to more provisions in the future."
But it's not just smaller companies that are grappling with new corporate governance rules. Among the Fortune 500 companies, for example, the Securities and Exchange Commission
sent 350 comment letters about annual reports published in 2002 because it found disclosure in several key areas was lacking.
Sarbanes-Oxley: Tale of the Tape
Overall, CEOs of 15% of fast growth companies--6% public, and 9% private--expect that Sarbanes-Oxley will lead to change in their corporate governance practices. Half or more
of these anticipate that their company will change in five ways:
|
All
|
Public Firms
|
Private Firms
|
|
| Certification of quarterly reports |
64%
|
72%
|
47%
|
| Re-examination of ethics policies or codes of conduct |
58%
|
56%
|
63%
|
| Enhanced financial and non-financial disclosures |
55%
|
56%
|
53%
|
| More-effective internal controls |
53%
|
47%
|
63%
|
| Reassessment of audit committee composition |
53%
|
58%
|
42%
|
Long-Term Cost Implications
The study shows a split on the related long-term administrative costs companies can expect due to complying with Sarbanes-Oxley
- Among the public growth companies, 81% anticipate that, going forward, the costs of compliance will go up; only 17% predict no change; and 2% are not sure.
- For private businesses, only 22% expect escalating costs; 41% anticipate no change; and 37% are not certain.
Influence In Long-Term Value Creation
CEOs knowledgeable about Sarbanes-Oxley are split about the long-term impact it will have on their company's ability to create increased value for shareholders:
- In public companies, 21% expect it will have a positive impact; 47% a neutral one--that is, a balance of both positives and negatives; 28% a negative one; and four percent
aren't sure. - Among private businesses, 14% foresee a positive impact; 28% a neutral one; only 2% a negative one; and 56% aren't sure.
Source: PriceWaterhouse Coopers
Contacts: Reed Byrum, 512.732.2304; [email protected]; Alan Edrick 818.734.8600 X223; [email protected]; Steve Hamm, [email protected]; Terry Jacobs, 859.292.0030; [email protected]; Luke Schmeider, 303.987.8000; [email protected]