CFOs playing by the rules
Sarbanes-Oxley compliance takes time and money
February 10, 2003
By John T. Slania
When Lawrence Kenyon's co-workers ask him about the latest episode of "The Sopranos," he's clueless.
He has little time for any leisure activity because he's spending so much time working on his company's compliance with the Sarbanes-Oxley Act, passed by Congress in July to make it harder for publicly held companies to commit and conceal corporate fraud.
As chief financial officer of NeoPharm Inc., Mr. Kenyon is primarily responsible for the Bannockburn-based pharmaceutical company's compliance with the new regulations, which require disclosure of more financial information, certification of results by top management, restrictions on executive compensation and establishment of an independent audit committee.
The law is a challenge for all publicly held companies, but it's particularly difficult for smaller ones with limited resources.
"The more time I spend on this, the less work gets done helping grow the company," says Mr. Kenyon, who has three people to handle accounting in a company with only about 90 employees. The company is in the early stages of developing a cancer-fighting drug, and its stock trades on the Nasdaq Stock Market. It has yet to record any revenues.
Mr. Kenyon expects compliance to be costly. He plans to hire at least one more accountant, and he anticipates paying higher fees to NeoPharm's law firm and outside auditor because they're providing more advice.
"Each time there's a new issue — whether it's about the independence of the audit committee or if your auditor can also do your tax return — you have to get on the phone with your auditor, then your outside counsel. Then you have internal meetings with management and the board of directors," Mr. Kenyon says. "It all takes more time, and the outside advice costs by the hour."
"This is the most burdensome set of regulations I've had to deal with," adds Mr. Kenyon, who has been a corporate accountant for 15 years, and implemented other accounting rules changes, such as Financial Accounting Standard 133, which required more detailed information on derivative transactions, and the full-disclosure regulation, which banned selective disclosure of financial information.
Jeffrey Mistarz, CFO of Nasdaq-listed Electric City Corp. in Elk Grove Village, spends much of his long workdays meeting with the CEO, the company attorney, the audit committee or the outside auditor. The company makes lighting controls and has 90 employees and $9 million in annual sales.
"The audit committee is now much more involved, spending much more time questioning us and our auditors, looking over each line item," Mr. Mistarz says.
Michael Hall, managing partner of the Chicago office at accounting firm Grant Thornton LLP, says, "When you consider the time commitment and the cost of compliance, it wouldn't surprise me if some small companies aren't asking whether it's worth being public."
The Securities and Exchange Commission initially wanted to require companies to have a financial expert on their audit committees, but after heavy criticism, it is now proposing that companies disclose whether they have a financial expert on their audit panel and if they don' t, explain why. The deadline for that disclosure is January 2004, according to R. Scott Falk, a partner in the corporate department of Chicago law firm Kirkland & Ellis.
The SEC also expanded its initial definition of who qualifies as an expert, so that companies will have an easier time recruiting them. It is accepting public comment on the new definition and will decide on it by no later than April 26, Mr. Falk says.
Within a year of the final definition's approval, companies also must ensure that their audit committee consists of independent members whose only compensation is for time served on the board of directors.
Small public companies are scrambling to find qualified audit committee members with financial acumen, and may have to hire executive recruiters to help, says Mr. Falk. "There aren't enough of them to go around, and smaller companies don't have the panache of a big company and can't pay as much to attract the types of folks who like to sit on these boards," he says.
Before they recruit executives, some small companies are also talking with legal counsel about a Sarbanes-Oxley ban on making personal loans to management or board directors.
"It is not uncommon when recruiting a senior executive for a company to provide a low-interest loan to buy a new house. It's one less thing he has to worry about, so he can focus on the career change," says Lawrence Damron, CFO of Lincolnshire-based Aksys Ltd., which designs and manufactures kidney dialysis equipment and has 70 employees and less than $1 million in revenues.
"Now, we're exploring other options, like perhaps offering a signing bonus," Mr. Damron adds.
The SEC is requiring public companies to accelerate the filing times of annual and quarterly financial reports, causing some small-company CFOs to contemplate whether they will need more staff.
"I don't know how you improve the quality of the statements by shrinking the reporting time. That said, we're working to address the challenge without having to add staff," says Richard Baum, CFO of Ebix.com Inc. in Schaumburg, an insurance software designer with 70 employees and $12 million in annual revenues.
When Mr. Mistarz of Electric City considers the challenges of finding audit committee members and speeding up the filings, he is less than optimistic.
"I have a feeling the worst is yet to come," he says.
©2003 by Crain Communications Inc. |
