WASHINGTON – Maryland’s retiring senior Sen. Paul Sarbanes recently has found himself defending his landmark corporate responsibility legislation – with some of the strongest arguments against it coming from his own backyard.
A number of Maryland businesses, many of them in Rockville and Bethesda, say they are concerned about the effects of the Sarbanes-Oxley Act — which requires publicly-traded companies to hire third-party auditors. Those businesses argue the law should exempt some smaller businesses, who they say can’t afford the costs to comply.
After Congress passed the act in 2002, most of the business community praised Sarbanes-Oxley, which was crafted with the help of Ohio Republican Michael Oxley, as a necessity to restore public confidence in corporations — the business world had been rocked by the Enron, WorldCom and other scandals. More recently, Congress has considered changes in response to allegations that it was approved hastily and is costly to companies.
“I would certainly welcome an exemption, we are a very small business,” said Lawrence Pemble, executive vice president of Bethesda-based Chindex International. Chindex, which has 20 U.S. employees and supplies medical equipment to China, reported revenue of $77.8 million last year.
A Securities and Exchange Commission advisory panel agreed — last month it recommended companies with less than $750 million in market capitalization receive some sort of exemption from the audits.
Small publicly traded businesses, many Maryland businessmen argue, deserve the treatment because it takes time and resources, even additional employees, to fill in required paperwork, with total costs estimated at about $1 million.
“It should be a little easier for small companies. We’re smaller operations. The cost of complying is very significant for us,” said J.J. Finkelstein, president of RegeneRX, a $120 million research and development company in Bethesda with seven full-time employees.
Some executives find fault in the “structure” the law put in place, saying they believe it was not well thought out.
“It was a positive thing, but it’s just asked a bit too much too quickly,” said Mike McDevitt, president of Medifast in Owings Mills, which produces weight loss products.
Sarbanes has dismissed critics who say it was passed too quickly without enough investigation, citing 10 congressional hearings with more than 50 witnesses.
“We had an extremely, through and careful set of hearings,” he told the Consumer Federation of America last month. “We tried to do this right and cover all the bases.”
Larger companies have said the law is part of the risk of going public.
The compliance costs are standard business practice, said Randall Griffin, president and chief executive of Corporate Office Properties Trust in Columbia, a real estate investment firm whose value is estimated at more than $3 billion.
“It costs a company a million dollars extra; you have to be able to handle that,” Griffin said. “It forces the smaller companies to either grow, to merge or to go private. You can’t stay small and absorb those costs.”
Pemble and others say the law assumed too much — that all businesses will commit the same crimes absent government monitoring.
“Not everyone who operates a public company is involved in accounting issues,” Pemble said. “To impose this level of requirement on everyone, for some people it’s not such a huge issue, but for us it is a huge issue. We have no option but to comply.”
Some smaller companies, however, said Sarbanes-Oxley has little effect because its requirements overlap oversight from their own industries or from established company policy.
As a result, the compliance costs are not as burdensome, said Ed Jaehne, chief strategy officer of Essex Corp., which is based in Columbia.
“I don’t think it’s a one-size-fits-all solution,” he said. “We’re used to people looking at our structures and control processes and accounting for more than just the auditors auditing our financial system.”
Essex, which makes intelligence equipment and works often with the federal government, has the comfort of being a rapidly growing company. In 2002, the company had about 50 employees and $4.5 million in revenue. Last year, they reported $159.8 million and 761 employees.
“It’s less work for us to do than for someone who’s not exposed to that,” he said. “The bigger challenge for us is that we’ve been growing very rapidly.”
Some analysts hope the law changes because it stifles free markets.
Last month, The Free-Enterprise Fund, a D.C.-based lobbying group, joined Beckstead and Watts, a Nevada-based accounting firm, in suing the Public Company Accounting Oversight Board, the five-member panel created through the law, calling the legislation unconstitutional because it sets excessive financial demands that hurt U.S. markets.
Mallory Factor, fund director, said the law’s benefits, such as transparency, are outweighed by things like the compliance requirements which he said are bad for free markets.
“It hurts the United States,” he said in an interview last month. “Those (laws) which have the most costs are the least important. Those with the least benefits are the most costly.”
A spokesman for the Maryland Department of Business and Economic Development said Sarbanes-Oxley does not place “unnecessary burdens” on businesses and it should not be changed.
“No one here knows a whole heck of a lot of the impact of the law,” said Dyer Bell, who added, “Were all about business here but . . . we want what’s fair and good.”
Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, College Park, called Sarbanes-Oxley a “typical legislative response” from Congress following any kind of scandal.
“It’s not going to go away. Once a government makes a law, bureaucracy goes into place and it’s hard to go away,” he said.
The “onerous” law was misdirected with “perverse incentives” and the new problem, Morici says, are companies which adjusted to the costs by raising their share price.
“Frankly, a CEO can walk away a billionaire if he can jack up the share price and that’s a very bad way to do business,” he said. “The symptom has been addressed but not the disease.” – 30 – CNS-4-14-06