Sarbanes-Oxley law shows surprising benefits

OK. Try to stay awake for this. It's technical accounting stuff, and worse, it's about the expense of internal auditing to try to avoid future Enrons.

After Enron collapsed in 2001 the Congress passed what is called the "Sarbanes-Okley" law requiring that the CEO's and CFO's of public corporations be personally responsible for the accuracy of the financial statements each company publishes. They have to sign a statement that the financial statements published actually do fairly represent the financial status of the company, and they can be fined and sent to prison for lying.

The big complaint was that this was going to require a lot of expensive internal auditing that was not necessary, thus raising prices of their goods and services. From the Christian Science Monitor:

The bad news is high costs and bureaucracy. Companies now have people dedicated solely to compliance with the law's internal auditing rules. Micros, which employs 3,000 around the world, relies on a staff of four for the job.

In a recent survey of chief financial officers by CFO magazine, two-thirds said it had affected profitability - with earnings dropping by an estimated average of 3 percent at companies that felt an earnings impact.

The good news is strengthened accounting, which may also mean higher investor confidence and greater stability of stock-market prices.

"Investors are actually willing to pay a premium for stocks of companies that have a governance framework in place," says Brian Cleary, marketing chief at OpenPages, a vendor of software that helps firms comply with regulations.

The new controls can give management a sharper spotlight on operations and potential problems, he says. "Some companies are actually realizing tangible benefits."

In short, the higher costs and increased complexity and bureaucracy of internal accounting are generally more than offset by the advantages given to managers who more quickly and accurately identify problems and have the opportunity to correct them. The advantages also extend to better knowledge of how effective attempts to correct problems are. There is less guessing, and more decisions made based on reliable and accurate information.

[Addendum April 15, 2006:] Another point is that the better internal information should assist companies to produce and sell new and improved products. This adds to revenue, rather than lowering costs. But it is also something that financial records don't predict well. This is speculation on my part, but I am willing to bet that it will be shown to be true over time. [/Addendum]

This is good news for American businesses.

Alright. For those of you who slept through this subject, you may now wake up and move on.