Section 404 of the Sarbanes-Oxley Act of 2002 which passed as a reaction to the Enron scandal is only 168 words long. Please indulge me and take a read.
Now ask yourself: If it had been in place in 2001, would it have stopped Enron from happening? 4 years later, are we as individual or institutional investors any smarter about complex entities like GM or Exxon?
I think all we have done is push more responsibility for oversight and controls onto company management. But checks and balances to company management are why we have auditors and the SEC in the first place.
Corporate executives have been muted in their complaints the last couple of years. Nonetheless, the SEC has heard from several quarters. These letters - from the CFO of Ball Corporation, a $ 5 billion packaging company; from the Chairman of Blyth, a $ 1.5 billion home expression company; and the US Chamber of Commerce - are respectful but make the point about the burden imposed by 404.
I was trained as a CPA. I realize the importance of controls, but there is no free lunch. More and more companies like Ball will say their costs $ 7 million "far exceeds our realized benefits from Section 404".
Based on a recent survey Gartner says compliance may cost 15% of IT budgets in 2006. The way things are going each word in 404 may end up costing US corporations a billion $. Expect the corporate mutterings to grow much angrier in 2006.