Sarbanes-Oxley is onerous

CEOs of publicly traded companies are pulling their hair out these days trying to muddle through the laundry list of mandates included in the Sarbanes-Oxley Act, which regulates the accounting industry and aims to improve disclosure practices. President Bush signed the act into law on July 30 in the wake of corporate accounting scandals, most notably Enron and WorldCom. Since then, seminars explaining provisions of the act have been popping up around the country. Lawyers must be having a field day.

More than 60 typed pages in length, the act establishes new responsibilities for audit committees. It also requires increased business and financial disclosures, increased accountability of corporate officers, and addresses penalties for corporate fraud. The act also requires executives to certify the accuracy of periodic financial statements.

Utter the words “Sarbanes-Oxley” to any commercial real estate CEO and you'll get an earful. In short, executives believe the provisions are an over-reaction to a problem involving a few bad apples. And now all public companies are paying a steep price.

“The flaw with Sarbanes-Oxley, with all the certification requirements and other mandates, is that if you're going to commit a fraud, you're going to sign the documents anyway,” says Richard Kincaid, the newly appointed CEO of Equity Office Properties Trust. There are more than 11,000 publicly traded companies in the U.S., and Kincaid says most play by the rules. “If you're WorldCom and you're going to commit a $7 billion fraud, do you think a certification is going to stop you?”

Like many CEOs I've spoken with, Kincaid understands why government authorities feel a need to respond to the crisis in corporate governance. But he worries that Sarbanes-Oxley will make private companies think twice before going public because of the added time and administrative expenses involved in meeting the standards.

Thomas Bell, president and CEO of Cousins Properties, agrees with Kincaid and predicts a lot of public companies will go private because of Sarbanes-Oxley. He also points out another problem with the various corporate governance reforms. “This is a 44-year old company,” he says. “We have joint-venture partnerships that go back 25 years, and I'm certifying that they're correct. I believe that they are correct, but the lawyers who wrote the documents are dead or retired.”

Shareholders shortchanged

Ultimately, Bell argues that the significant amount of time that management spends addressing the provisions of the act means less time spent on creating shareholder value. I couldn't agree more. As a stockholder of several public companies — none contained in this column in the spirit of disclosure — I want senior management focusing on execution and performance in the marketplace. I don't want the executive team bogged down in examining accounting ledgers or attending an endless number of audit committee meetings. The goal of Sarbanes-Oxley may be noble, but many of the mandates are onerous. What Corporate America needs is more integrity, not more due diligence and documentation.

Besides, in the case of most publicly traded real estate companies, the provisions contained in Sarbanes-Oxley are not going to lead to greater transparency. “We were already transparent,” explains Bell. “It's not going to create different ethical behavior because ethical behavior comes from here,” he continues, holding his hand against his chest. “Ethical behavior doesn't come from somebody forcing you to be ethical.”

For another perspective on Sarbanes-Oxley, please turn to the Last Word on page 72.

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