Wednesday, February 16, 2005

Sarbanes-Oxley, or Why Accountants Are Happy


I went to a seminar about the Sarbanes-Oxley (SOX) legislation this morning. Interesting stuff, if you're into Risk Analysis, Congress, and Auditors Gone Wild.

Just after the new millenium began, certain executives at a place called Enron (it depends who you ask, which executives were at fault, or all) thought it would be cool to fly the corporation into the ground, as long as they could make tons of money doing it. Along the way, these executives talked Accounting Superpower Arthur Andersen into fluffing the financials for them, so shareholders only figured out there was a problem when the stock made crunchy noises from hitting the ground hard.

After a lot of yelling and demands to "do something!", Congress formed a committee, and produced a law which punishes every public company, but with the promise of improved business practices. If you've been following the noise, you're aware that Enron execs have been arrested, charged with all sorts of crimes against America, Nature, and the Supply-Side Economy, while for its part Arthur Andersen was allowed to die quietly, its thousands of honest, hard-working accountants watching their credibility shredded by an unscrupulous few. Sarbanes-Oxley is a bit hard on auditing firms, but not to the degree the law requires of the corporations. It's all about preventing another Enron, not another Andersen.

If you're an accountant, you love SOX. Especially if you are an auditor by profession, and love the intracacies of Forensic Accounting (like a coroner, except in this case the corpse is from a deceased corporation). Basically, three of the key tenets of SOX are that all publically traded companies must follow consistent policies, maintain full, truthful and timely documentation, and report honestly to audits. The way this is done, is for companies to listen to their Risk Managers, and to give them the control necessary to meet the law's demands.

Why are companies so worried about SOX? Because right after it was passed, the SEC began looking for a message to send. The arrest of three Ernst & Young auditors in 2003, one of them a former partner in the firm, was a clear shot across the bow. Since then, the word was out - the government is serious about enforcement. And believe it or not, this is good news for everybody involved.

The reason this is good news, is the same reason people always need exercise and vegetables more than they get. Risk Management is hated by sales people, who think it needlessly slows down bringing in clients. Executives hate it, because they don't see revenue produced by the Credit Managers and Analysts who reduce Risk and prevent loss. Customers hate it, because they don't like finding it difficult to get preferred rates and privileges. But it's the Credit guys, who serve to confirm the stability of prospective customers, who save companies millions (on average) each year by catching out fraud and insolvent applicants at the front door, and prices stay low because Credit lowers the amount of bad debt the company must pass on to the customers.

Boring? For most people, sure. But every once in a while, Congress gets it right. A law which makes corporations account for their activity, which makes them more stable and restores investor confidence, that's not bad. And as someone who works in the business of preventing Risk, I have to say I like it when Congress listens to us. Now if only we can get Congress to give full, truthful, and timely reports to the American people, we'll really have something.

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