It's appropriate that the Supreme Court decision preserving Sarbanes-Oxley came down concurrently with the struggle to pass FinReg. Why? Because FinReg is likely to be SOX squared.
In my book, The Complete Guide to Sarbanes-Oxley
Sarbanes-Oxley also imposes a much higher regulatory burden on U.S. public corporations than the law’s sponsors ever imagined. According to the Wall Street Journal, for example, publicly traded U.S. corporations routinely report that their audit costs have gone up as much as 30%, or even more, due to the tougher audit and accounting standards imposed by SOX. Indeed, just paying the fees now required to fund the Public Company Accounting Oversight Board (PCAOB) can run as much as $2 million a year for the largest firms.
Professional surveys of U.S. corporations confirm the Journal’s report. Foley & Lardner, a law firm that has conducted a number of empirical analyses of SOX and its impact on American business, found that senior managers of public middle market companies expect costs directly associated with being public to increase by almost 100% as a result of corporate governance compliance and increased disclosure as a result of SOX, new Securities and Exchange Commission (SEC) regulations, and changes to stock exchange listing requirements.
The chief regulatory culprit is SOX § 404, which requires inclusion of internal control disclosures in each public corporation’s annual report. This disclosure statement must include: (1) a written confirmation by which firm management acknowledges its responsibility for establishing and maintaining a system of internal controls and procedures for financial reporting; (2) an assessment, as of the end of the most recent fiscal year, of the effectiveness of the firm’s internal controls; and (3) a written attestation by the firm’s outside auditor confirming the adequacy and accuracy of those controls and procedures.
The SEC initially estimated § 404 compliance would require only 383 staff hours per company per year. According to a Financial Executives International survey of 321 companies, however, firms with greater than $5 billion in revenues spend an average of $4.7 million per year to comply with § 404. The survey also projected expenditures of 35,000 staff hours—almost 100 times the SEC’s estimate. Finally, the survey estimated that firms will spend $1.3 million on external consultants and software and an extra $1.5 million (a jump of 35%) in audit fees.
In fairness, some of these costs were one-time expenses incurred to bring firms’ internal controls up to snuff. Yet, many other SOX compliance costs recur year after year. For example, the internal control process required by § 404 relies heavily on on-going documentation. As a result, firms must constantly ensure that they are creating the requisite paper trail.
Now FinReg is getting set to do to small banks what Section 404 did to microcaps. Indeed, an op-ed in today's WSJ argues that FinReg with sound the death knell of community banking:
Here is the problem as I see it. First Federal lends to creditworthy folks who for decades have been well-served by bankers who understand their market and can think creatively to structure credit appropriately. It is what community bankers do. Going forward, we will no longer be able to evaluate loan applications based solely on the creditworthiness of the borrower. We will be making regulation compliance decisions instead of credit decisions. This is not in the best interest of the consumer.
Recently, a couple came to us wanting to refinance their home. They were paying a relatively high interest rate (by today's standards) to a competing institution. They had reasonably good equity in their residence and owned a couple of rental properties, also with good equity. One borrower worked in the construction field and had experienced a reduction in income over the past couple of years, causing some recent slow payments on their credit report. After verifying the income and assets of the borrowers, an idea not new to us, we decided to deny the loan.
An argument could have been made to grant the loan because of the good equity position and due to the fact that we would have been lowering their monthly payment. However, fear of regulatory criticism through the federal examination process and potential money penalties associated with noncompliance were the overriding factors, causing the loan to be denied. ...
... In order to comply with the volumes of new regulation—and small banks are required to comply with the same consumer regulations that apply to the Wall Street banks—we will need to have a proportionately higher number of employees working day after day to interpret and implement all the new federal rules. This in itself, because of the sheer volume, has the potential to destroy community banking. Large banks have entire departments devoted to regulation compliance on a full-time basis; we have one employee, like most institutions our size.
More time and money on regulatory compliance, less time and money doing business. Sounds just like SOX.
It's well established that Section 404 is a major drag on the competitiveness of American corporations and a major deterrent to foreign firms considering raising capital on US stock markets. The betting here at PB.com is that FinReg will make 404 look like small potatoes.
Huh. Maybe I do have a dog in this fight, after all.
