FDs in the many UK businesses that haven’t had to comply with the onerous
Sarbanes-Oxley rules are probably sitting there with an ever-so-slightly smug
expression, safe in the knowledge that they’ve probably been able to devote more
time to actually growing their business than have their Sarbox-compliant rivals.
Enjoy that feeling while it lasts, says a report from Henley Management
College, sponsored by Microsoft, because even businesses that don’t have a Wall
Street listing will find the burden of Sarbox creeping into their business via
the supply chain. Partners and suppliers of Sarbox-compliant businesses will
have to comply, according to the report.
Some 5,000 British companies already comply (or are in the process of
complying) with Sarbanes-Oxley. The Henley research team says there are 113
quoted companies with a dual UK-US listing, plus a further 5,000 or so UK
subsidiaries of US companies – all of which have to comply as well. So that’s
the first wave of Sarbox compliance rollout.
The second wave is expected to see a further 9,000 British companies fall
into line with the US legislation between 2009 and 2011, while the third wave,
between 2012 and 2017, could see a further 30,000-45,000 companies comply. This
would take the total number of British companies that meet the US standards up
to 45,000-60,000, in round figures.
Henley describes the Sarbanes-Oxley legislation as “an economic constraint… that
negatively impacts the management processes of the firm”. That’s one way of
putting it, though those who have had to jump through the Sarbox hoops
invariably seem to use other, more colourful descriptions for the regulations.
According to the research, the key to the continuing, non-compulsory rollout
of Sarbox compliance, however, is the fact that voluntary adoption of the rules
can deliver competitive advantage. “Any organisation looking to trade with the
US, for example, must consider Sarbanes-Oxley compliance as an essential part of
growing their business.” Conversely, the FD of a £300m-turnover healthcare
business said that, for the next three-to-five years, his company would not
operate in the US, nor enter into a strategic partnership with a US company, and
that while that decision will be re-examined at some future date, Sarbox and the
cost of compliance “will be one aspect of the strategic decision-making
The Henley research argues that Sarbox compliance needn’t be out of reach of
small startup or fast-growing businesses – the sort of enterprises that might be
regarded as too busy doing business to worry about the growth-restricting burden
of unnecessary regulation. But early adoption of Sarbox provides such companies
with “financial literacy in their business model, without compromising
The early bird…
They argue, too, that early compliance could help secure second- or third-round
financing, and could also make it possible to become a partner of, or a supplier
to, larger companies. Biotech, high-tech, IT, manufacturing and financial
services are the sectors where this phenomenon will be felt most.
‘Thought leaders’ in supply chain management are said to be taking an
opportunistic view of Sarbox, regarding it as a unique opportunity to achieve
supply management excellence. The report adds that “the more outsourced and
dispersed the supply chain, the more difficult it becomes to establish and audit
process controls. Therefore, working with trading partners that share a similar
commitment to security and financial integrity is imperative.”
Compliance could also be seen in future as a prerequisite of financial
reporting quality outside the US – making it a kind of parallel to the
international quality standard ISO-9000 for management transparency. This in
itself would make voluntarily-compliant companies preferred suppliers of
compulsorily-compliant large corporations. The report concludes that “the
implications of Sarbox on the supply chain, and as a more ubiquitous component
of doing business in the coming years, are significant for UK plc”.
Sarbox impact on supply chain
• Section 401a requires the listing of off-balance sheet transactions and
obligations, such as long-term purchase agreements or lease agreements,
including fees for early termination.
• Section 404 governs internal controls. Poor purchase commitments visibility
would be an example of an s404 breach, yet many companies are said to do an
inadequate job of maintaining open purchase commitments visibility, frustrating
efforts to forecast cash requirements. The report also highlights poor practices
regarding trading partner collaboration.
• Section 409 relates to timely reporting of material events – ‘timely’ having
been defined as two days. The report suggests that late supplier deliveries may
fall into this category where there is a major disruption of an item that forces
a company to notify its customers that it will fail to ship on time.
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