Sarbanes-Oxley: Good or Bad?
Corporate scandals of the 1990s that sent companies like Enron and WorldCom to early graves also led to the passage of the American Competitiveness and Corporate Accountability Act of 2002, better known as Sarbanes-Oxley (SOX) after its main Congressional sponsors. As enacted, the law was designed to prevent corporate fraud by forcing top-level executives at public companies to be accountable for financial performance and to ensure that proper procedures are in place for making sound and transparent business decisions.
“It was created to eliminate excesses,” says Josh Grimes of Grimes Law Offices in Philadelphia, who has presented SOX updates at MPI chapter meetings. Sarbanes-Oxley applies to for-profit companies, with a few provisions also governing the nonprofit sector. But the best practices standards have broader application. Association backers expect SOX compliance even though the law doesn’t apply to associations. And those who fund nonprofits don’t want to give money to a group that doesn’t spend wisely.
That’s an indication of how the law’s provisions ave trickled down from the corporate boardroom to the meetings, conventions and incentives levels, according to Tim Brown, managing partner of Meeting Sites Resource in Irvine, Calif. “It has become in our face and changed the way planners plan and execute meetings,” he says.
As we watched the economy collapse around us in late 2008, it became increasingly difficult to believe SOX has done much good. A new round if questionable risk assessments, a lack of government oversight in some sectors and an economy increasingly built on credit have contributed to more business failures than this country has seen
in several decades. Whether current conditions inspire more SOX-style legislation remains to be seen, but there’s little doubt that it will be a topic in upcoming legislative sessions.
Last November, former Speaker of the House of Representatives Newt Gingrich called for repeal of the landmark legislation because it has stymied venture capital and didn’t prevent the collapse of companies like Bear Stearns, Lehman Bros., Merrill Lynch or American International Group. Others believe recent events show the law didn’t go far enough and might advocate for even more regulation.
Those could be fighting words for meeting planners already up to their eyeballs in SOX duties. As companies are publicly critiqued for every meetings decision, more regulation could hamper the meetings business. So serious are the potential consequences that the Financial & Insurance Conference Planners recently issued a statement saying it “does not support irresponsible and excessive corporate spending” and emphasizing that “meetings get results.”
The statement cites a study in which Fortune 1000 chief marketing officers said meetings and events have the highest ROI of any marketing channel or initiative. It also calls meetings, sales conferences, events and incentive programs “vital functions to a corporation’s success.”
So far, SOX has broadly applied only to public companies worth $75 million or more. That will change at the end of 2009—unless another extension is granted by the SEC. Some say the cost of ompliance is too onerous for small companies to bear, but parties on all sides are still trying to sort out exactly what that cost is.
For now—whether you think the law applies to you or not—it’s important to know at least the basics so you’re not caught off-guard when you’re asked to produce receipts for the room you used on a fam trip or the proposals that led to choosing a particular venue.
Scope of the Law
You could download the entire law and use it for bedtime reading…but we’ll be kind and share the basic scoop right here.
Sarbanes-Oxley was designed to tighten standards of conduct and financial transparency for public companies, boards of directors and auditors. Like most legislation, Sarbanes-Oxley is full of legalese sure to cure insomnia. But it isn’t the evil empire. Simply stated, it aims to protect corporate investors by requiring company executives to be accurate, reliable and accountable for corporate information, including financial data. CEOs and CFOs now have to certify their financial statements and internal controls quarterly, ostensibly to show they know what’s happening in the company. And they need to understand what internal controls are in place and whether they work.
The law also requires companies to retain information that explains how decisions were made and easily be able to answer questions like “why was provider A chosen over provider B?” All companies also need to have a system for storing documents and easily retrieving them. That doesn’t mean you can’t ever throw anything away—it just means there has to be a clearly defined, uniform policy for document handling that applies to everything.
A couple of provisions also apply to private companies and nonprofits. One is protection for whistle-blowers who report possible corporate wrongdoing; the other provision assesses criminal penalties for those convicted of falsifying, altering or destroying company documents in order to prevent them from being used in an official investigation. Before SOX, such convictions resulted in civil penalties or monetary damages. Now they’re crimes.
Companies also need to be up front about things like whistle-blower protection policies rather than burying them in 6-point white type at the back of the employee handbook. Hanging a banner in the break room is closer to what’s
required. All companies need to make sure their employees know that whistle-blowers are protected, and be told how to make a confidential report of suspected wrongdoing.
This Means YOU
Meetings and meetings management are included in the requirements to track and maintain data. You may not work directly for a public company, but if you manage their meetings you’ll need to abide by their document management system—or devise one of your own. Compliance officers and others want accountability by planners to make sure you’re playing by the rules,” Brown says.
If you don’t think it’s important to keep note about a hotel’s services for a meeting two years ago, think again. What if a new executive wants details of a meeting that no current employee at the hotel can provide? Can you provide it? And what if you need to defer a meeting for which there’s already a contract in place? Under Sarbanes- Oxley, hotels have to treat contracted business as revenue, so they’re often reluctant to cancel a contract without penalties. But if you have all your notes in place, you may be able to find common ground that will keep your business on their books and still let you postpone your event.
What’s Changed
Sarbanes-Oxley changes to meetings and convention planning begin with procurement of the meeting space, hotel rooms, airline tickets and food and beverage, and with internal controls often outlined in a company’s meetings policy. It sounds simple, but often adds to the lead time needed to plan a meeting—a precious commodity in today’s economic climate.
“The number of people needed to sign (contracts) is the biggest delay,” says David Sachs, director of sourcing services for Meetings & Incentives in Cleveland, which works on behalf of nationwide clients in pharmaceutical, food, distribution and manufacturing industries. “Every contract is being signed off by multiple people.” Meetings & Incentives did a two-year study of its RFP lead time and found that the average lead time now is 34 days—and that already takes into account extra time for addendum approvals.
In addition, each meeting must have set goals, a means to measure results and a means to communicate the results in terms of return on investment to justify the business reason for the meeting. Phelps Hope, vice president of meetings and conventions for Atlanta-based Kellen Company, says everything related to the meeting is evaluated under a microscope, including sponsorship dollars, hospitality and off-site events. “A general evening event of dinner and a reception is fairly benign, but if you’re giving out golf clubs, it starts to cross the line (of
what’s acceptable),” Hope says.
That makes impeccable record-keeping a must, including details of every expense, a copy of the budget and an itemized copy of the hotel bill. Even if the planner can save money by purchasing package price at a hotel, some companies may require specific costs to be broken out in the interest of transparency.
Gray Areas
One gray area involves the definition of a “gift.” To some, a free hotel room during a legitimate site inspection is perceived as a gift that could influence the venue choice, so many planners no longer accept free rooms. In response, hotels have developed special rates for site inspections. Gary Schirmacher, senior vice president of strategic sourcing for Experient in Denver, says some hotels even say they can no longer give planners earned comps (a room at no charge for every so many booked) because of SOX rules.
“There are lots of gray areas,” he says. “Companies need to structure their meetings departments in a way that accounts for fam trips, use of resorts and other things that can be justified.” Schirmacher says that could be accomplished by making certain the board of directors and other stakeholders understand the ROI for those decisions.
Grimes simply calls it accountability. Sarbanes-Oxley has made everyone doing business with companies and nonprofits more accountable, and that’s not a bad thing, he says. “We could see more regulation for nonprofits and associations and more use for best practices,” he says.
Unintended Consequences
Legislation always seems to bring unintended consequences, and Sarbanes-Oxley is no exception in the meetings industry. “Part of the problem in the meeting industry is those in charge of SOX don’t understand the meetings
business,” Grimes says.
Some Issues That Have Arisen
Because companies are advised to avoid any appearance of a conflict of interest, independent planners are sometimes told they shouldn’t work on commission. “I don’t think most fiance people understood they’d have to find another way to pay the planner (in that case),” Grimes says. Some end up having the commission paid to the client and then to the planner. Others simply disclose the mark-up.
There are few pure incentive programs now. Instead, they’re combined with educational sessions. Tim Brown says that even going to a local resort for a legitimate all-day meeting has the image of a boondoggle now. “There’s an image disorder about the words resort, spa or golf (that raise) a red-flag,” he says. That sometimes costs a company more money if the resort proposal was a better deal than the one ultimately chosen, he says.
International meetings can be more problematic to arrange. Tipping and payment procedures common in some countries may be contrary to SOX regulations.
Some nonprofits already are implementing rules used by public companies, though only a few provisions currently apply to them. “It could change the culture of some organizations,” Schirmacher says.
Meetings & Incentives’ Sachs says pharmaceutical codes—some of which pre-date Sarbanes-Oxley—are not directly related to SOX, but reflect the same concerns. “Pharma code is more difficult to work with because
there are more gray areas,” he says. For one thing, pharma code prohibits using a resort for a meeting, but unless someone reports a violation, it goes unnoticed. That easily can be the case with an unbranded or new resort. Planners even need to take care in hiring speakers if they’re getting any money from a pharmaceutical company,
according to John Graham, president and CEO of the American Society of Association Executives. But associations also benefit from being able to hire their own thirdparty production companies for pharma events because the companies no longer do so, Graham says.
Current events and corporate bailouts may lead to additional unintended consequences. It wouldn’t surprise me if some bailout oney has conditions attached,” Grimes says. Though that’s not directly related to Sarbanes-Oxley, the same thinking that make “resort” a bad word in some circles could come into play in other areas.
The Future of SOX
When former Speaker of the House Newt Gingrich called for a repeal of Sarbanes-Oxley last fall, even the law’s co-sponsor, Representative Michael G. Oxley (R-Ohio), said in an interview with the International Herald Tribune that it was passed in haste and that he would have written it differently. This may have gone unnoticed except for the U.S. financial collapse that revealed continuing weaknesses in some corporate judgment. It obviously had little to no impact if all these companies had all these bad deals,” Sachs says.
Th at perception bolsters other arguments against the regulations:
- Estimates from the Financial Executives International suggest it takes twice as long for new companies to issue an initial public off ering because of the yearly compliance costs.
- A survey by the London Stock Exchange suggested that 90 percent of international companies that considered issuing stock in the U.S. rejected the idea due to the demands of Sarbanes-Oxley.
- Gingrich said the criminal liabilities for board members have made it harder to find qualified people willing to join corporate boards.
Given the current economic climate, Grimes thinks SOX is here to stay and may even be expanded because the public sees scrutiny of corporate behavior as a good thing.
“Things like golden parachutes, union (issues) and executive compensation are all coming to the table,” Brown says. That adds importance to the accounting and transparency demands of the law. “It’s the perfect storm from every angle,” he says.
Sandi Cain, a regular contributor to Smart Meetings, is a freelance journalist who has covered the meetings, hospitality and tourism industries for more than a decade.
Wiggle Room?
With the value of many publicly traded companies dropping by the day, some are wondering whether they’re still subject to Sarbanes-Oxley if the company’s value goes below the current $75-million threshold. As with many government-mandated things, the answer is...it depends on a lot of factors best determined by legal and financial counsel and not by meeting planners! And even if a company gets an exemption, it won’t last. Companies valued at less than $75 million will be subject to the law by the end of 2009.
Getting Started
Those new to the industry may be paralyzed by fear of doing the wrong things when it comes to SOX. No need. Below are a few tips to get you started.
- Keep documentation concerning your planning decisions to illustrate how they fit with company goals.
- Keep all records concerning meetings and events you’ve planned in accordance with your own or your client’s recordretention policy.
- Avoid situations and/or gifts that may be perceived as a confl ict of interest.
- Know your company’s (or your client’s) policy on whistle-blowers.
- Know who needs to sign off on various contracts for meetings and events.
Smart Resources
There are now myriad resources for help with Sarbanes-Oxley compliance. The ones below will get you started.
- Sarbanes-Oxley-forum.com for real-world questions and answers about the law, as well as condensed descriptions of some provisions
- A primer can be found at soxtoolkit.com
- Soxlaw.com provides an overview and the basics (in plain English)
- The full text of the law is here.
- All related SEC rulemaking and reports related to the act can be found here.