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Sarbanes-Oxley has defender on panel
By Dave Beal, Business Columnist
St. Paul Pioneer Press
Wednesday, March 22, 2006

Top executives at many small publicly held companies don't like the Sarbanes-Oxley Act.  They complain that it costs too much to comply with the new law.

But plenty of investors have a far different take.  They say it makes the kinds of corporate scandals that led to the act less likely.

One of their champions is Kurt Schacht, who is managing director of the CFA Centre for Financial Market Integrity, a think tank that promulgates ethical standards in the investment community.

As the chief legal officer at the State of Wisconsin Investment Board in the 1990s, Schacht monitored the governance of corporations whose stocks were held by Wisconsin's public pension funds.

This spring, the chasm that so often separates corporations and their investors could grow a little wider.  Part of the debate is about risk:  Have companies gotten too risk-averse after millions of investors got burned in the bull markets of the past decade?  Or do we need more controls to avoid future scandals?

And it's all part of the unending tension between investors and the top managers who run many publicly held companies.  Twin Cities business leader Janet Dolan calls this clash "range wars" running battles over efforts to ease the impact of Sarbanes-Oxley on small and midsize companies.

Dolan is the recently retired CEO at Tennant Corp. in Golden Valley.  She heads a key unit of a panel that's expected to urge the Securities and Exchange Commission this spring to exempt thousands of companies from what many of them regard as the most rigorous and costly part of the act.

I wrote about her views on Sunday.  She strongly supports the exemption, saying it is needed to help companies compete globally.

Schacht, a minority voice on the panel, staunchly disagrees.

"Sarbanes-Oxley is doing precisely what it was set up to do," Schacht says.

The meat of the act, he and many others say, is Section 404, which requires companies to install internal controls to guard against accounting irregularities.  That has stirred outcries from smaller businesses.  Many of their executives, directors and representatives from their service providers are crying foul.

Complying with the law is costing larger companies big bucks, they note.  Regulators have put off enforcing Section 404 against smaller companies.  If and when they do enforce it, exemption backers argue, these lesser-sized enterprises will be unfairly penalized because they lack the resources the big boys have to comply with the law.

The costs of complying just don't justify the benefits, the 404 critics argue.

Schacht is just about 180 degrees away from that perspective.

In his view, it's the smaller companies that need the controls most.  In a minority report attached to the 21-member SEC advisory committee's final draft, he says this:

"It is impossible to measure the value of a financial/accounting fraud avoided.  In 2005, there were approximately 1,300 restatements and weaknesses in financial reporting revealed and fixed by a Section 404-inspired process, more than double the number in 2004."

Schacht says the committee's proposals would exempt nearly four of every five public companies from Section 404.  That, he suggests, would effectively gut much of the law.

What's more, he thinks the SEC might not be able to bring off the exemption, because of legal questions about such a move.

He concedes that some small businesses, much smaller than most of those covered by the proposed exemption, need relief but shouldn't be flatly exempted from Section 404.  Dolan's panel wrestled with how to do that, but concluded there was no way to grant businesses relief short of an outright exemption.

"I think Janet did a wonderful job of trying to corral all the different viewpoints," he says.

But for Schacht, not quite wonderful enough.

Schacht says he was the sole dissenter when the overall advisory committee voted on its report in December.  Last month, when it voted again, he was joined by the committee's two Big Fouraccounting firm members.

But Schacht's center is affiliated with more than 80,000 securities analysts and portfolio managers who are members of the CFA Institute.  That, plus millions of investors, amounts to a huge constituency.

Dave Beal can be reached at or 651-228-5429.