Sarbanes-Oxley has been one hellish nightmare for the free market. I work for a very large public company, in the auto industry, in the corporate finance group, and we concentrate on North America, Mexico, and (formerly) Singapore. With our 4Q financials and year-end, financial reporting wrap-up, the SarbOx nightmare is at the forefront of my mind.
The auditors (public accounting firms) are having boom times, thanks to government’s Sarbanes-Oxley, and so are the consultants. (All large companies employ a host of outside consultants to run the actual compliance projects, because it could never be done completely in-house.) The Financial Times reports that KPMG is reaping huge rewards with its SarbOx coup. Of course, midsize companies are heading to the bottom of the pool under the weight of SarbOx.
In short, I’ve lived in the trenches of the effects of SarbOx. We came to the end of our SarbOx compliance as of the end of 2004; at least the initial compliance to get us through the year-end audit (Round One; 14 to go). Perhaps the most important issue pertaining to the SarbOx mess is the coerced diversion of resources from their best use to a most useless use. As usual, government decree has caused the diversion of resources from that which was desired and necessary to that which was forced upon us. The auditors are SarbOx Nazis to the hilt. This massive body of rules and regulations touches every aspect of my job, including that which is immaterial in accordance with revenues or corporate net worth, and barely stops short of making me keep excel spreadsheets of my daily toilet paper use at the office, and having the CFO sign off on the roll.For a company of our size ($6+ billion), it takes a very long time to streamline the SarbOx needs, and then fix it all. Therefore, in the corporate finance environment, important projects have been negated, stopped, slowed, or put on the back burner indefinitely, due to the immediacy of SarbOx compliance, which has been going on for over a year. These neglected projects are those that are essential to external financial reporting; internal analysis; projects for improving management decisions; and process improvement (cost-cutting measures). It all goes on hold because available resources are limited, and internal management focus is quickly switched at the behest of government edict.
SarbOx has also caused the abandonment of potential and profitable acquisitions, due to the fact that large companies have to comply with what they already have before they toss another SarbOx target into the mix. Overall, SarbOx has caused top-end managers and corporate financial people (incl. me) to abandon value-added analysis, decision-making, and process improvement for the sake of compliance. The network of planning and tasking involved in compliance of SarbOx is a monster to behold.
Also, I work closely with our corporate IT (Information Technology) group, and their technology support of the Finance group, especially concerning financial statement reporting and accuracy. Indeed, even corporate IT groups get heavily audited for SarbOx compliance, separately from the financial group.
Throughout the SarbOx process, as only free-market economists will realize and address, government coercion skews the processes of an entire, multi-billion dollar company, all the way from individual employee/stress issues, to the production of first-rate information, to the end process of making profits. This is the worst piece of legislation to ever put the bite on corporate America.
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As an accountant with a “Big 4″ firm, I can attest (pardon the really bad pun) to the effects of Sarbanes. The crux of the legislation serves to create mandatory substantive inquiries into a company’s internal control. Whereas before Sarbanes, auditors simply had to obtain a general understanding of internal control, they are now called upon to provide (albeit limited) assurance on the matter through attest engagements. This makes it necessary to analyze, evaluate, compute, and summarize the most minute minutia of the internal operations of a business, which is why businesses hate the legislation so much (all those auditors poking their noses their files and such)
It’s quite a conflict to be in the “hey day” of accountancy, yet hold firm to free market beliefs. Can one reconcile being an accountant while at the same time adhering to Austrian principles?
Michael, I think the conflict between “Austrian or accountant?” is non-existent. Accountants are victims of the rules in the same way taxpayers are victims of taxation, and medical doctors/lawyers/etc. are victims of oppressive licensing schemes.
Funny, I have found that my colleagues (CPAs, MBAs, financial types, etc.) have forever held this standard view of massive government intervention in our industry: “it’s probably necessary, and it’s a good thing.” So simplistic and brainwashed! However, those that have experienced SarbOx from the trenches have turned that complacent viewpoint on its ear: they are now enraged, baffled, and really sound like evangelistic libertarians on that particular issue.
Karen, I think you’re right about accountants. As an accounting major, I have an obvious bias towards accountants. But I also have a much greater insight into accounting, accountants, who we are, what we do, how we do it, and why it needs to be done. There’s such a pervasive misconception among the general populous that accountants are these boring, uptight, spiteful people who facilitate the government’s unduly harsh taxation of the working man. Heck, before I myself entered the accounting world, this is what I thought as well. Damn the entire profession for being the middlemen between the government and my money!
In so many ways is this thinking wrongheaded. Firstly, it must be noted that not all accountants are tax accountants. This is *such* an important point it’s worth repeating – NOT ALL ACCOUNTANTS ARE TAX ACCOUNTANTS. Accounting, being a concentration of business major, entails performing many other perfectly legitimate business functions, predominantly in the auditing arena. Indeed, there is a sort of dichotomy in accounting between taxation and auditing.
Unfortunately, many outside the accounting world attach equally negative connotations to auditing. Auditors are seen as snakes, who delight in scrutinizing over the smallest details of our 1040s and accompanying forms. However, just as not all accountants specialize in tax, not all, or even most, auditors audit individual tax forms. Auditing, in its purest definition, means providing assurance (in fact, accountants often use the terms “audit” and “assurance” interchangeably). The vast majority of this assurance is in regard to business (rather than individual taxpayer) assertions. This means auditors are often called on to analyze business financial statements (prepared by other accountants, incidentally) and then perform analytical (and other) procedures in order to verify the information contained in these statements. This is such a basic necessity of any market economy because it provides assurance as to the accuracy of the data provided to the general public by private businesses. This is because individuals such as company shareholders and others interested in investing in a particular business are the principal parties for whom financial statements are constructed. Just like the magazine “Consumer Reports” tells the general public what, say, refrigerators are the crème de la crème of refrigerators, so do auditors allow consumers confidence in the content of financial statements. Without auditors, perhaps there would be a whole parade of Enrons and Worldcoms, only with no one to expose them.
Ok, you might be saying, even if auditors are good, then at least half the accounting profession, the tax half, are a bunch of blood-thirsty nogoodniks. To such nay-sayers I ask them to consider the following. In today’s age, with computers and internet and such thing, just about anyone can file their tax returns by themselves. Why is it then that despite the fact all people have ready access to tax forms, that they hire accountants? Do people just like to spend money for no good reason on a scorned professional? Of course not. People pay accountants because accountants are trained to pinpoint all deductions and exemptions possible. In other words, tax accountants are trained to *save you money*. It is the pervading goal of their work. It’s how they get their jollies (and as an insider, trust me on this one). Accountants live to find ways to keep more money in your pocket and then tell their accounting friends about it. Not because they care how thick your wallet is, but more for personal pride reasons. Finding new and inventive ways to chip away at your taxes inflates their egoes.
To sum up, accountants get a bad rap for the same reason so many others do – they’re misunderstood; them, their profession, and their motivations. Of course, there is one breed of accountant I have neglected to mention – The IRS agent. In their regard, I’m afraid I’m with the consensus.
My professor in economics tried to convince the class that Sarbanes-Oxley was good for the economy because it increased the demand for accountants. Needless to say, my presence in this class makes it rather difficult for such ideas to get much farther. I love mainstream education if for no other reason than the entertainment value.
at the university of denver the accounting firms are recruiting the acct. majors more than ever and the work loads are tremendous. All the accounting majors are getting guaranteed jobs-look at the billions and billions of dollars going toward enforcement, and it is a huge burden on small firms wishing to go public. How this will affect access to capital markets and efficiency is yet to be seen but I am sure the costs will great.
From the article blurb:
“As usual, government decree has caused the diversion of resources from that which was desired and necessary to that which was forced upon us.”
Well, since Sarbanes-Oxley only (to my knowledge) applies to the public corporations that exist thanks to special government-endowed rights and privileges, I can’t say that I feel too sorry for them. Not to mention all the corruption that goes on in giving these same US corporations an advantage over foreign companies.
But you know, two wrongs don’t make a right. It just drags the economy down further than it already has been.
“It all goes on hold because available resources are limited, and internal management focus is quickly switched at the behest of government edict.”
In order to stop government control, all one needs to do is do nothing. If businesses started to simply ignore government edicts, the edicts would soon be merely pieces of paper with official looking symbols on them.
Is there any chance that these strict new rules
will apply to government books?
Heh, is there any chance the Pope will convert to Atheism?
One good thing about accountants (correct me if I’m wrong), they have private certification: Certified Public Accountants.
The accountants and law firms are making lots of money out of this and US firms (or those listed on the US Stock exhange) are paying the price making them less competitive in the world.
I suppose it pays to be an accountant in these times.
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