The Regulatory Disaster That Isnt

Cox and the media spin a tale of government red tape that should be killing American companiesbut isnt

It sounds terrible, but are the new accounting and disclosure laws truly crushing business?

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Even before Cox's ascension to the SEC, corporate lobbyists had quietly launched a national media campaign against Sarbanes reforms. Like the Register's piece, many articles relied on fuzzy anecdotal evidence. Several articles relied on a college professor's assertion that the two-year-old reforms had already "wiped out" $1 trillion in corporate profits. Oddly, few—if any—reporters checked the most obvious source for evidence of Sarbanes damage: corporate financial disclosure made to the SEC.

Before we began reviewing the reports of more than two dozen prominent Orange County-based corporations, we thought we'd find horror stories about the devastation Sarbanes has caused: massive layoffs, axed employee health care and benefits, sweeping salary reductions, eliminated management bonuses, emergency sales of corporate jets, dire cries of imminent bankruptcies, and skyrocketing increases in general and administrative costs for Sarbanes compliance.

But the overwhelming majority of companies we inspected showed—drum roll, please—zero signs that the reforms threaten their businesses. In fact, these corporations reported that many other issues have had a more significant impact on their bottom lines: competition, expansion, insurance, executive pay, legal woes and bonehead management decisions.

For example:

• Quest Software of Irvine reported that administrative costs were "unchanged" in the first six months of 2005 compared to last year.

• Filenet Corporation of Costa Mesa reported a 6.4 percent decline in administrative costs in the first six months of the year and said it doesn't foresee any significant increase in those costs.

• Anaheim-based Pacific Sunwear of California claimed a 0.2 percent increase in the first quarter but said the jump was "primarily due to higher corporate payroll."

• QLogic of Aliso Viejo reported record revenue levels and a 5 percent decrease in administrative costs in its most recent disclosure.

• Irvine's Dyntek, Inc., claimed that during the past nine months there had been an increase in administrative expenses, but that was "primarily due to increased selling costs." The company did not complain about Sarbanes in the report.

• Cardiac Science of Irvine showed a 2.5 percent decrease in administrative costs for the quarter ending June 30.

• I-Flow Corporation of Lake Forest reported a $2.1 million or 28 percent increase through the first six months compared to last year, but attributed the leap to compensation costs.

• Anaheim-based Bridgeford Foods Corporation reported a third-quarter decline in administrative expenses of 7.7 percent.

• For the 36 weeks ending in March, Diedrich Coffee of Irvine reported an 11.1 percent increase in administrative costs but blamed franchise development, field supervision, construction, recruiting and management information systems.

• Cherokee International reported a decrease of 1.6 percent in administrative costs for the first six months compared to 2004, but said even that little amount was offset by increased income.

• For the first six months, and in the face of tremendous legal trouble related to finances, Apria Healthcare in Lake Forest said its administrative costs were up just 1.9 percent.

• Newport Beach's Conexant Systems said its administrative expenses for the nine months ending June 30 "stayed relatively flat."

You get the picture.

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But the reports also show something critical that Cox, Moore and the Register won't tell you. If the goal of Sarbanes is to increase investor confidence in the market, it's succeeding. The reforms are forcing corporations that had been giving investors erroneous financial details—sometimes for years, sometimes with no correlation to reality—to expose themselves and clean up their acts.

For example, Biolase Technology reported that it spent $1.3 million on Sarbanes-related fees during the last six months of 2004. But the San Clemente-based firm, which has about $61 million in annual revenue, admits that the company's audit staff wasn't sufficiently experienced, failed to maintain effective controls over its accounting, didn't accurately disclose corporate moves, and couldn't measure its own inventory, expenses or liabilities. In all, Biolase conceded "11 material weaknesses" in its accounting and was forced to re-file accurate reports going back to 2003.

Thanks also to Sarbanes, United Pan Am Financial Corporation of Newport Beach reported in July that its financial reports had been inaccurate. "While we believe that our disclosure controls and procedures have improved due to [Sarbanes], our management, including the chief executive officer and chief financial officer, have concluded that the design and operation of our disclosure controls and procedures were not effective at June 30, 2005." The company says it will re-file accurate disclosure reports back to 2003.

Corinthian Colleges, Inc., of Santa Ana reported higher administrative fees, in part because of Sarbanes. But the company acknowledged that compliance with the reform law revealed "incorrect" information in financial statements for four years, from 2001 to 2004. The company said it will re-file the disclosure reports showing multimillion-dollar changes. It's in litigation over the inaccuracies and has attracted the attention of the California attorney general.

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But these are facts, and facts aren't likely to play a factor in the campaign to kill Sarbanes. Three days after the Register's new story on Cox's move to "relieve" companies of the "burdens" of the reform law, the conservative Washington Times applauded. It is "increasingly clear . . . from startling evidence," the Times editorialized, that Cox must "bring reason back" by aiding "aggrieved executives." Cox, the paper said, is the man to do the job. "We look forward to the SEC's moves under his stewardship to correct the problem."


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