RSS feedsIf anyone doubted the value-creating effect of regulatory compliance, new research reveals that the rigours of Sarbanes-Oxley can have a real impact on company share prices. Companies that are forced by Sarbox section 404 to disclose shortcomings in their internal controls will underperform the rest of the stock market.
A breakfast briefing on ‘The governance value chain’, hosted by Oracle in association with Financial Director and sponsored by Deloitte, heard Bruce Weber (pictured bottom right) of the London Business School explain how the share prices of companies with IT system failings drop substantially on the day their section 404 reports are published and continue to underperform the market until the next report a year later.
Weber said, “If there are weaknesses in your financial systems, it will be punished.”
He analysed 47 companies that disclosed in their 2005 regulatory filings that their internal controls were ineffective because of inadequate computer systems or staff skills, and found that they underperformed the market by 1.5% immediately following the announcement and by 22% over the course of the year.
Those that reported in their next annual filing that they had fixed their internal control problems would see their share prices regain some of the lost ground, but those that still had to disclose problems saw their shares continue to slump.
Among the other speakers at the briefing was Eric Anstee, former chief executive of the ICAEW and a non-executive director of the Financial Reporting Council. “Everyone knows there should be a sensible system of internal controls, but is it really happening?” he said. “The problem is that there are issues about how those internal control problems are being identified.”
