Publications
How It Began
Historically, our government reacts – many would say overreacts – to scandals by enacting laws and regulations. Elected officials understandably feel the need to do something – anything -- to convince the voters that they’ve taken quick action to address well-publicized concerns respecting, for instance, an environmental issue, a public health threat or a public or private corruption issue. But in the rush to appear concerned and responsive, they often fail to consider the real world consequences of the laws and rules they enact. Too often, legislators take a ham-handed, blunderbuss approach that makes the innocent majority pay for the perceived sins of a culpable minority. The cure becomes worse than the disease.
Enter Enron, WorldCom, Global Crossing, and all other “corporate greed” scandals of recent years, which begat Sarbanes-Oxley and related laws – the most far-reaching business regulatory controls since the 1930’s. Clearly, something had to be done, but in the eyes of many respected commentators, Sarbanes-Oxley has become the poster child for what happens when a legislature plays to the crowd, instead of focusing on solving the problem. An excerpt from a May 24, 2004 analysis in the The Washington Times makes the point:
No one denies there was a corporate governance problem that came to a head with the Enron scandal. But in the zeal to pass new legislation, no one in Congress stepped back to question the magnitude of the problem.
Some 12,000 companies are required to file public financial statements with the Securities and Exchange Commission. According to George Benston, accounting professor at Atlanta's Emory University, no more than a few dozen per year ever were implicated in dishonest bookkeeping.
But rather than simply step up SEC enforcement, all companies were treated as guilty until proven innocent and forced to comply with onerous new regulatory requirements.
The most onerous provision of the Sarbanes-Oxley legislation is section 404, requiring extensive new internal controls for financial reporting. A recent study by industry group Financial Executives International found the average compliance cost for large companies was $4.6 million, involving 35,000 hours of internal manpower, $1.3 million on external consulting and software, and additional audit fees of $1.5 million.
These numbers probably are very low. FEI admits the compliance cost jumped sharply between its 2003 and 2004 surveys, as companies became more aware of what they had to do. On May 19, Maurice Greenberg, chairman of AIG, the world's largest insurance company, told shareholders Sarbanes-Oxley was costing them $300 million yearly. General Electric recently said it was paying $30 million per year in compliance costs.
The regulatory push is not over. NASD Chairman Robert Glauber commented in a speech last October that “history teaches that in circumstances like these, Sarbanes-Oxley is very unlikely to be Congress's last word on the subject. And the risks of overreaction today are by no means limited to Washington.”
As explained below, he was right.
Counsel Consulting Group LLC helps companies throughout the United States avoid employment and HR-related claims and liabilities. CCG assesses existing policies, procedures and problem areas; it provides customized liability-avoidance training to managers and executives; and it designs and implements business techniques that reduce employment liability risks on a long term basis. CCG also offers specialized workshops for managers and HR executives, customized consulting in focused employment-related areas, and CD-ROM and web-based training alternatives. For more information, contact us at info@powelltrachtman.com and visit our website at www.counselconsulting.com.
Powell, Trachtman, Logan, Carrle & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.
