Is there a silver lining Sarbanes Oxley?

Executives at Alvarez & Marsal Asia, a global firm specialising in turnaround management and restructuring, argue that companies are finding upsides in Sarbanes Oxley regulations.
Do just the words Sarbanes Oxley make you sigh and moan that these regulations are costly exercises in bureaucracy? Or could this US law be a useful tool for upper management trying to streamline operations?

Neill Poole, managing director and head of the dispute analysis and forensics' Asia practice at Alvarez & Marsal Asia, argues that the worries of corporate executives have been overplayed. Alvarez & Marsal is a global firm specialising in operational and financial turnaround management and restructuring.

He says that if 2004 was the year of compliance, 2005 and 2006 are the years when companies leverage their Sarbanes Oxley spend to achieve greater process effectiveness and efficiency. And this applies to more than just the US companies, which must comply.

Let us look at the US spending trends first. For most American public companies with average revenues of $5 billion, the total costs for their first year of Sarbanes Oxley compliance averaged $4.36 million, according to a recently released survey by the Financial Executives Institute.

Indeed that was costly, but many companies are now seeing some unexpected benefits, argues Poole. For example, Sarbanes Oxley exposes areas for process improvement, creates opportunities to critique legacy-technology systems, and prompts companies to implant finance controls closer to where problems initially develop.

It also allowed companies to revamp practices that were hitherto sacred cows û but with the help of a nagging law, management is now armed with the right to go in and make changes. It is harder to track how such decisions impact the bottom line, which is why the negative cloud still hangs over Sarbanes Oxley, but he expects the skies will clear soon.

ôThe key concern you hear time and time again is the cost,ö says Poole. But he points out that good controls may end up saving companies money in the long haul.

ôItÆs not just saving money. Complying with Sarbanes Oxley can also improve the way businesses can build their market share. Companies are finding that if they follow the procedures and improve their systems they can become more competitive and efficient.ö

And this is driving companies that may not be required to follow the Sarbanes Oxley regulations to adopt them anyway. Also, as European companies increasingly utilise the structure, Asian companies that are invested in or doing business with either US or European companies often find they are compelled to follow the same rules as well.

Poole estimates it will take about five years for most of Asia to catch up û with the obvious problem of a different corporate culture resisting change. For example, even if a company is listed on the Hong Kong stock exchange, its main shareholders may still be family founders who prefer to keep as much information closely guarded as possible.

Volunteering to follow non-required regulations is not an attractive step just yet. But if their competitors follow Sarbanes Oxley rules and find their processes lead to more efficient supply-chain and management control, other companies are bound to follow suit to remain competitive.

As a result, the Asian regions that are keeping pace are probably the ones you would have guessed: Hong Kong, Singapore and Japan lead the pack (albeit slowly) while it may take a tad more time for say Indonesia, Malaysia and the Philippines to catch up, notes Poole, who is well positioned to see the changes.

Alvarez & Marsal was founded in New York in 1983, but last July opened offices in Hong Kong and Singapore after an 80-strong team from RSM Nelson Wheeler Corporate Advisory Services Hong Kong and Singapore office joined the firm. With 100 staff in Asia, the firm does not audit companies, but rather offers insolvency, restructuring and investigations services to professional and corporate bodies across the Asia Pacific region.

This includes financial advice, business and supply-chain consulting, dispute analysis and forensics advice. Alvarez will also go in with staff as restructuring, operational and financial turnaround specialists. Essentially, the firm sees what happens to companies that do not comply, which is why it may also see the silver lining to compliance.

Perhaps you only see the bottom line costs for now, but it is interesting to at least consider a potential upside to bureaucracy. And it is worth revisiting this issue in five yearÆs time to see if Asia has indeed kept up with the American JonesÆ and made some changes.
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