Raises, Restatements, Reparations: The Effects of Sarbanes-Oxley

Part I: Raises

An article in the December 12 Wall Street Journal relates that “total compensation for CEOs at 1,522 big U.S. companies rose a median of 30% last year,” compared to a 15% rise in 2003. The most cited reason for the jump is to either retain or attract top-notch executives. Shareholders and regulators are now scrutinizing compensation packages and some workers are screaming as the bosses pay is going up while their’s is going down (see Delphi). In the same edition of the Journal, another article relates that compensation for CFOs is rising even faster than that for CEOs. The article states that this is due to the CFO’s “key role in implementing the Sarbanes-Oxley (SOX) corporate-overhaul law.” While this reason is not stated in regard to CEOs, it seems reasonable that CEOs should be offered more now that SOX regulation is in effect since it shifts more reporting responsibility onto the CEO and exposes them to more risk and liability. Although the SEC has long required certain disclosures pertaining to CEO and executive compensation, there is some talk that the requirements are lax (1). It seems the tradition has been to establish some sort of link between executive compensation and company performance. However, as companies struggle to compete (and sometimes to stay afloat) and as new regulations are rapidly changing the conduct of business, the competition for CEOs with just the right mix of ‘character and competence’ is bound to heat up, as well. These days, having a CEO who can avoid exposing the company to shareholder lawsuits and SEC scrutiny is worth its weight in gold.

(1) Executive Compensation Not Disclosed Correctly, Even After Sarbanes-Oxley

Part II: Restatements

Restatements run rampant!

Oh…Okay, maybe I’m exaggerating.

But… enter the search term effects+of+restatements into Google and you may get way more than you bargained for.

Here are just a few interesting trends I’ve come across in regard to restatements.

Even before the Sarbanes-Oxley Act of 2002 became effective on July 30 of the same year, a Government Accountability Office (GAO) report discloses that financial statement restatements increased 145 percent during the study period, which dates from January 1, 1997 to June 30, 2002. The restatements that were studied in the report were due to “accounting irregularities.” From my own experience, I am aware that irregularities can (and do) arise from misinterpretation and misapplication of GAAP rules or SEC regulations and guidelines. They are, for the most part, unintentional and could be attributed to confusing or unclear guidelines. However, in some instances, there are those who fully understand the regulations but will take advantage of any loopholes they can find when regulations are not clearly defined. Seems to me that these are the folks who invite stricter regulation to curtail their ‘creative accounting’ activities. More to come...