KUHN CAPITAL Tuesday, March 20, 2018
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SOX: The Tape That Keeps on Tangling


Law firm Foley and Lardner recently completed a survey of 114 public companies and a review of 850 proxy statements with alarming results: over one-fifth of the respondents claimed that because of the regulatory burdens imposed by Sarbanes Oxley, they were considering going private.

For the same reason, 10% were thinking about selling the business and 8% were looking at merging. Altogether about 27% said they were mulling over changes of control just to escape SOX tape.

You may expect us to applaud these sentiments: more SOX-driven deals mean more work for M&A boutiques like Kuhn Capital. But instead we’re concerned about the implications for American commercial competitiveness.

SOX is quite expensive. For the average S&P Small Cap company, it vaporizes $2.9 million in profit. At a 5% after-tax profit margin, that’s equivalent to $58 million in sales.

Many SOX apologists argued that after companies had installed the giant computerized systems necessary to track everything that moves, their regulatory costs would subside. But that was before bookkeepers began tallying up squandered employee productivity and the ever-escalating SOX-related fees levied by auditors and boards of directors.

In the period 2001 – 2005, auditor fees for S&P Small Cap companies exploded by 270%, or from an average of $332 thousand to $1.2 million. Auditor fees now account for about half of all SOX compliance costs. For the big boys -- the S&P 500 -- 2005’s auditing fees averaged about $8.5 million.

In addition to auditors, directors are charging more to compensate themselves for prospective SOX liability and to balance supply with demand: SOX has shrunk the pool of directors qualified and willing to put up with it. Among S&P Small Cap companies, annual director fees have risen 71% in the period 2001 – 2005 to an average of nearly $300 thousand.

Finally, productivity lost because of regulatory diversions cost the smaller public companies about $565 thousand, up more than 1,000% since 2001.

About a third of the Foley survey respondents reported that SOX costs had forced them to make cuts in “critical areas” of their business and 95% of these respondents believe that SOX compliance “has negatively impacted my organization’s earnings.”

As is true for many nanny state regulations, we’re sure SOX would be repealed in the same session that Congress itself was forced to live under it.

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