Editor’s note: This is the first of a special five-part series from Local Tech Wire that focuses on how business has changed in these days of corporate scandals. Parts one and two focus on corporate CEOs and the changes they face in a tougher regulatory environment. Parts three, four and five will focus on how stock scandals have changed the way companies and analysts report on financials and trends.. The series was written by Catherine L. Traugot, a veteran reporter whose work has appeared in numerous national and regional magazines. She also is a regular contributor to LTW.Sarbanes-Oxley is not the name of a law firm, but the new federal requirements might provoke a rush to the lawyer’s office if you’re the CEO of publicly-traded company — particularly a small publicly traded company.
Thanks to financial meltdown of companies like Enron and WorldCom, Congress earlier this summer passed the Sarbanes-Oxley corporate governance bill which adds additional criminal penalties for financial reporting fraud and requires more qualifications for outside directors, among several changes.
To CEOS, one of the most crucial aspects of the law is the certification requirement — kind of taking an oath that you believe the financial statements are true to the best of your knowledge. The certification forms the basis for a criminal charge of perjury in the event of a bookkeeping scandal.
It also outlaws certain perks — like loans to CEOS from company coffers.
“There will be a lot more scrutiny of all the awards a CEO receives. I guess you could ask if it is worth it to be a CEO as the awards are less and the penalties are greater,” says Billy Parker, a partner in the information, communications and entertainment practice at KPMG in Atlanta.
While the problems of a few large companies sparked the legislation, most large companies have the accounting processes in place that a CEO can feel confident about it, experts say. They can also set up processes to make those reporting to the top people know how serious the new legislation is. “A lot of companies will be down streaming the certification process,” says Jeff Schulte, a senior partner in the securities group at Morris, Manning & Martin in Atlanta. Essentially, these firms will be asking their staff to certify so that they understand they’ll also be held accountable in the event fraud is discovered.
But with smaller companies, particularly those that are growing fast or struggling to survive, they will have issues they have never had to consider before.
“Small companies are less likely to have spent much time pondering governance issues before, so the learning curve is steeper,” Schulte says. “They are likelier to have boards or board committees in need of modification, . . . and they are less able to bear the expense of compliance.”
Shortened reporting times
While Triangle Pharmaceuticals in Durham doesn’t need to make drastic changes to meet the requirements, it is the little changes — like shortened reporting times – that are worrying Treasurer Tom Staab. “We have 115-120 people. Most are in the sciences. Not in administration.” Because the reporting periods shrinking over the next 2 years (35 days to file a 10-Q rather than 45/60 days for a 10-K vs. 90 days, 48 hours to file an insider stock transaction report), Staab needs the equivalent of an extra third of a person. Since “you can’t outsource the discussion of your finances. This will put added demands on the people I have.”
“I think they needed to take into account the reality of what honest executives are telling you,” Staab said. Triangle, which is working on bringing drugs to treat HIV and Hepatitis to the market, $had 5.7 million in revenues last year.
Some small firms don’t think it will be that big of a burden. Greg Mossinghoff is president of Inspire Pharmaceuticals, a Durham based firm with $34 million in annual revenues. But Mossinghoff isn’t worried about Sarbanes-Oxley, he says, because Inspire always adhered to a very conservative accounting style. “Ninety-five percent of what they’re looking for we are already doing.”
Mossinghoff also doesn’t have to worry about paying back loans — something now forbidden, because Inspire never let executives do that. “It didn’t make sense (to allow loans). A lot of corporate governance issues are common sense.”
Thursday: Who Wants To Be a CEO?