Sarbanes-Oxley/Bill 198 – Is there room for a
contra-view?

Many executives look at the US and Canadian security commission compliance rulings (SOX 404, in the United States and MI 52-111 in Canada) as a necessary evil pill that defocuses executives and their teams from driving their respective businesses forward. Ultimately it is feared that CFOs will be distracted from the financial strategy of the organization, under the weight of process administration and documentation. At the same time. Internal Control Certification has cost far more than anticipated and the benefits are yet to be quantified in any meaningful way.

Given the magnitude and importance of this exercise and the potential conflict with other business priorities of North American businesses, how can companies leverage this compliance task? According to William Donaldson in remarks made at the National Press Club in July 2003, “if companies view the new laws as opportunities – opportunities to improve internal controls, improve their performance of the Board and improve their public reporting – they will ultimately be better run, more transparent and therefore more attractive to investors.”

Although empirical data is still lacking, two years later, anecdotal evidence has emerged to suggest that this may be true. According to Massood Oroomchi of the FinEx Group, a Toronto based SOX 404/Bill 198 consultancy, the documentation and enhancement of disclosure and internal controls has assisted companies in identifying opportunities for resource realignment, outsourcing/insourcing, centralizing/decentralizing and process reengineering. Says Oroomchi: “more reliable reporting of financials has increased management’s insight into the operations of the business and resulted in more efficient quarterly and annual financial audit processes. In addition, comprehensive documentation of financial reporting processes has also assisted companies in staff training, reduced the dependency on the undocumented knowledge of key staff and has helped preserve business continuity, especially for those companies with high staff turnover.”

While Canadian companies are struggling with the cost side of the 52-111 exercise, Alec Moore of the FinEx Group urges them to also consider how to leverage the potential benefits of the certification process. This is particularly relevant to new companies considering IPOs and the cost/benefits of going public. He also encourages companies to link the timing of their compliance effort with ongoing or upcoming initiatives to minimize costly rework. He says, for example, “If a company has decided to purchase a new financial system, significant effort would be required to understand and map existing processes and system requirements. The design and implementation of this work should be done in conjunction with Sarbanes-Oxley compliance work. This will maximize the cost effectiveness of the combined initiatives and eliminate potential re-work.”

Although most of the information now available surrounding SOX 404 compliance relates to costs of the documentation process (FEI US 2005, FEI Canada 2005), it is clear that we are beginning to see tangible evidence to suggest that SOX 404, and hence, 52-111, may not only be an evil pill derailing business strategy, but in fact may have real benefits, if managed in the proper way.

Massood Oroomchi and Alec Moore are the founding partners of FinEx Group providing leadership, execution and training for both public and private firms in Sarbanes-Oxley/Bill 198 compliance. For further information, please fill out our contact form or contact Massood Oroomchi at (519) 574-8691 or Alec Moore at (519) 580-3690.

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