Sarbanes-Oxley and Why Did it

¶ … Sarbanes-Oxley and why did it become law? The Sarbanes-Oxley Act of 2002 (SOX) was put into law in 2002 as a result of the shocking financial scandals in the 20th century and early in the 21st century. The Enron collapse, caused by corruption, an egregious lack of oversight by auditors, and greed, along with the scandals at WorldCom, Peregrine Systems, Tyco International and Adelphia, all contributed to Congress creating legislation to beef up the credibility and the framework of publicly held companies.

The SOX was put together by Democrat Senator Paul Sarbanes of Maryland, and Republican Representative Michael G. Oxley of Ohio. The bill, signed into law by President George W. Bush on July 30, 2002, provides new or greatly enhanced standards for all U.S. public companies in terms of their boards, their management, their reporting and the public accounting firms that are linked to their management and services. There are 11 titles to the act, and the PDF that provides the entire specifics of the act is 66 pages long. It was obviously the work of lawyers meticulously working through many legal and corporate issues.

Meanwhile, do utility companies in New York spend less in certain departments as a result of compliance requirements vis-a-vis Sarbanes-Oxley?

To provide a definitive answer to that question would require specific questions directed to specific directors in units of Con-Ed, for example. But it is safe and reasonable to assume that spending in certain departments of publicly owned utility companies will be -- and has been -- altered and adjusted due to section #404 of SOX.

Section #404 of SOX is the portion of the legislation that appears to have the most relevant application to the questions at hand for utilities. The Sarbanes-Oxley Act's Web page (www.soxlaw.com) asserts that utility companies are required to publish information in their annual reports with reference to "the scope and adequacy of the internal control structure and procedures for financial reporting" (www.soxlaw.com). This assures that energy utility it organizations will "be under pressure to control costs and provide value to the business" (Gartner, 2004). Driven by "regulatory compliance," Gartner's narrative continues, SOX is expected to bring an "average increase" in it spending of 5% -- which could well result in cutbacks in other departments such as marketing and administration (Gartner, 2004). Indeed, the respondents to a Gartner survey on SOX indicated that compliance has cost them between $300,000 to $1.5 million annually to comply with the law. The increases in spending (resulting in less spending in marketing and administration) for many energy companies will be in "security, grid reliability, and wholesale market operations" (Gartner, 2004).

The cost of providing the Securities and Exchange Commission with "two declarations" regarding internal financial controls certainly is significant; and those dollars take away revenue from other departments of utility companies, unless, a utility expects to just absorb additional costs. PriceWaterhouseCoopers' (www.pwc.com p. 4) "Sustainable From the Start" document points to a company's duty under SOX to one, "state its responsibility for creating and maintaining adequate internal controls over financial reporting"; and two, issue an independent report as to whether the auditor agrees with management's conclusion (www.pwc.com p. 9) or not. Moreover, PWC asserts that for some companies SOX has "tipped the emphasis the wrong way and forced companies to get stuck in process as the expense of productivity and profit"; indeed, the cost of paying auditors and consultants to do the work required by SOX certainly is draining revenue from some departments -- and those drained departments could well be administration and marketing.