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Lovell editorial: Sarbanes-Oxley’s unintended fallout


It’s been nearly a year since the passage of the so-called historic Sarbanes-Oxley Act of 2002, and some companies are already running afoul of the law of unintended consequences.

To find a case in point, you need look no further than West Des Moines. CE Software Inc., whose programs help users increase the productivity of their computers, said in April that it would deregister its common stock from the OTC Bulletin Board.

CE Software isn’t without its problems. Ten years ago, it had $8.64 million in annual sales and made Inc. magazine’s list of the fastest-growing small companies. More recent history hasn’t been as kind. It has had only one profitable quarter in the past two years, and its employee roster has fallen sharply from its high.

Some of CE’s problems are the result of management mistakes, and others arose from increasing competition. The company’s latest (unwanted) walk down the plank toward privatization resulted from the increased burden of government regulation in the form of Sarbanes-Oxley.

To comply, companies large and small have been forced to beat the bushes in search of anyone with a scrap of knowledge about the law. The result has been a bonanza for lawyers and accountants.

The regulation has been particularly good news for large consulting companies, which tend to do well when a single solution can be copied and applied dozens of times over for anyone willing to pay for it. They had been facing lean times since the technology bubble burst a few years back.

Setting up the compliance systems and figuring it all out could generate a bill somewhere in the low six figures, according to folks I’ve spoken with. For a large company such as Rockwell Collins Inc., it’s an annoyance. For CE Software, which had a profit of $2,000 in its fiscal fourth quarter, which ended Sept. 30, it’s a killer.

CE Software, according to President John Kirk, can’t afford the new costs of being publicly traded. The solution is to become a sort of semi-private company, where the same rules don’t apply.

Of course, the move restricts the liquidity of the company’s shares, limits its access to capital and generally makes life more difficult. Kirk is frustrated at Congress for not considering smaller companies when it enacted the legislation.

“It should have had an exemption for small companies and it didn’t,” he said.

CE Software isn’t alone. Nationwide, a survey by Grant Thornton LLP shows that the number of companies that have gone private since Sarbanes-Oxley was enacted is up 26 percent from the same period a year earlier.

The point of this column isn’t to belittle Sarbanes-Oxley, but to point out that even the best-intentioned laws have unforeseen results.

Markets need transparency to work correctly. They also require all of the players to do their jobs. In the excess of the late 1990s, investors fell asleep at the switch, neglecting their duty to hold corporate chieftains accountable.      Those shareholders are waking up now, and we’re seeing it in the form of lawsuits and more activism. These actions have nothing to do with Sarbanes-Oxley, and would have happened even if the law never passed.

What I question is how regulation that forces a company to cease providing the disclosures required of publicly traded companies is going to protect anyone.  

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