The Future of Sarbanes-Oxley

This week we have a post by a guest author:

Scott A. McPherson, CPA, CFE, CVA

Ah, Sarbanes-Oxley. It’s that albatross that has hung around so many business owners’ necks since it was unfurled in 2002. No wonder one of the top questions I’m asked is, “Scott… what do you think the future of SOX will be?”

Since I’m not gifted with the powers of 100% accurate prognostication, I can only speculate as to where the Sarbanes-Oxley Act will head in the coming years. However, based on the current economic climate, the intense debate surrounding the regulations and the media it’s been getting, I’ve put together a few predictions:

1. Small Businesses Will Continue to “Rage against the Machine”

For small businesses that are publicly owned, Sarbanes-Oxley has brought larger financial ramifications than it has for monolithic corporations. Thanks to the fixed costs associated with SOX compliance, those smaller businesses are forced to spend a larger percentage of their revenues on SOX-related measures.

Of course, the SEC has granted several SOX extensions to small public companies, namely those dealing with Section 404. The next is scheduled for June 15, 2010. However, no one is jumping for joy at the news. This constant pushing back of SOX deadlines is akin to being on death row and receiving a stay of execution. Sure, you’re glad that you’re not going to the electric chair right away, but you’re still on death row.

Fortunately, unlike a prisoner, small businesses are free to fight back politically and legally. I think you’re going to see plenty of that as the next Sarbanes-Oxley deadline for small businesses closes in.

2. SOX Will Undergo Revisions

The Enron scandal that created Sarbanes-Oxley is coming up on its 10-year anniversary, and the memory of the problems that precipitated SOX are waning in the minds of the up-and-coming generation of entrepreneurs and execs. Consequently, I think you’re going to see some minor – and perhaps even major – revisions when it comes to the way that Sarbanes-Oxley will shape the future of the business world.

Currently, many politicians and business leaders have set their sights on reshaping SOX. Truly, not a day goes by that financial bloggers around the world aren’t discussing Sarbanes-Oxley. Some find it praiseworthy, others find it loathsome. But all find it highly interesting and relevant, and that keeps SOX in the public’s eyes and minds.

Though this may sound like great news, it’s important to be realistic… so I have to say that…

3. SOX Is Probably Not Going to Significantly Change for Many Years

Given the fact that laws are tough to change, the chances of SOX going away tomorrow are nil. That means that all businesses – especially public small businesses – need to be prepared.

Last year we notified small public clients of procedures that should be taken. Most said “Let’s wait and see before incurring unnecessary costs given the economic climate.” The SOX audits loom over these businesses again this year and most are expecting another reprieve. Again we will reiterate last year’s notification of procedures that should be taken, and again we will probably wait on the enforcement ruling.

So will my Sarbanes-Oxley forecasts come true? I don’t know. But I do know that it’s absolutely critical for any publicly-owned business (or business that’s considering going IPO) to stay up to speed on the direction of SOX today and tomorrow.

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King of the World, Again

This week Ronald Grover, Tom Lowry and Michael White of BusinessWeek report on Avatar, the phenomenon which is not just a movie, it’s a game-changer for the entertainment industry. By now we all know that Avatar has broken box office records: it’s the highest grossing movie of all time. The movie to hold this title before was Titanic, another James Cameron film.

BusinessWeek says “Cameron is the most important commercial force in modern film, and his vision for the future of the movie business is rapidly demolishing anything that gets in its way”. Sounds like quite a vision. But Cameron is the guy who brought us Aliens, The Terminator and The Abyss, so don’t underestimate him.

Not only is the sheer magnitude of revenue impressive, but how that bucket of cash was achieved is unprecedented. The movie business will never be the same. BW points out that Titanic hit $1 billion after a few months, and it took Avatar only 17 days to reach the same milestone. And no, inflation was not the cause. What did help is ticket prices 30% higher for 3D. Cameron said, “I decided, let’s make a movie they can’t ignore”.

In spite of Cameron’s past success with so many films, Twentieth Century Fox was not about to put all its eggs into Cameron’s basket. Not when Cameron was asking so much to begin with. James Cameron has been called not just a director, but also an entrepreneur. He developed the camera that would be indispensable to the film, using his own funds. Now with other movie makers lining up to use his technology – for a fee, of course – that was his first big success with Avatar.

3D technology existed before, but not quite at the scale of Avatar. This movie proved that people will pay more to see something great, and I predict we will be seeing more. Cameron started to develop the script back in the mid 1990’s, before Titanic hit the theaters. But in the 1990s, the technology did not exist, so the six-legged creatures and blue princess had to wait.

Cameron paid $12 million of his own money to hire Vincent Pace to work on the 3D technology. BW says that Hollywood wisdom is to “never sink your own money into a movie”. But, Cameron proved conventional wisdom wrong, and came out ahead. Fox would not foot the bill for Avatar even though Cameron had proved himself to be a sure thing. Not to be deterred, Cameron went to the private equity industry (see my previous post on Private Equity 101) and persuaded two firms to invest in his gargantuan project.

Cameron worked with Jeffrey Katzenberg of DreamWorks Animation. They created an animated world and put real human characters into the dream world. BW says that rivals in the entertainment world often root against each other, but Katzenberg was a big supporter of the project.

Cameron had to agree to cut his fee in half, cut other expenses and he took a lower percentage of the film’s revenues. Given the blockbuster success, I’m sure Cameron has made up for any financial considerations he had to give up in negotiations.

Production started at Cameron’s hangar in Playa Vista, CA and word soon got out. Other directors began visiting, to see the possibilities of 3D. It is important to note that not all movies benefit from 3D. BW uses the example of a Woody Allen film not being appropriate for 3D. Yikes – Woody Allen up close on the big screen? No thanks. Some things are best in 2D.

BW points out the risk of incurring the extra cost for 3D can pay off. Vincent Pace, Cameron’s technology guy, has a “steady stream of inquiries since Avatar was released”. If you want to make a 3D movie, he’s the guy. There has been interest expressed in 3D commercials and 3D TV sports broadcasts. Now that sounds worthwhile – your favorite sport, truly happening live in your living room.

Pace and Cameron hold the patents on the 3D technology. Of course, anyone smart enough to do what they did, would know to claim a piece of future revenues. Now theater owners are investing in the capability to show 3D movies. They want a piece of the pie, too.

In short, what Cameron has done has completely changed the nature of the business. He has showed that big budget films can pay off, developed the 3D technology that will be the “in thing” for a while, and has made sure that he will be at the top of Hollywood’s A list for years to come.

Apple vs. Google

This week Peter Burrows of BusinessWeek reports on the growing rivalry, and dare we say feud between Apple and Google.


As time goes by – and it always passes quickly in Silicon Valley – Apple and Google are becoming more alike and increasingly treading on each other’s turf. At the start of 2010, on January 5, Google introduced its smartphone, the Nexus One which runs on the Android operating system. This is a clear competitor to the ubiquitous iPhone. Apple, on the same day, announced the acquisition of Quattro Wireless, an advertising company that targets mobile phone users. In the past, before these moves, Apple was the shining star in the smartphone market, and Google was the leader in advertising. Now that the two companies have crossed paths, what will happen next?

BusinessWeek says “when companies start to imitate one another, it’s usually an extreme case of flattery – or war”. Eric Schmidt, CEO of Google, and Steve Jobs, CEO of Apple are the same age, and have known each other for years. As we all know, Jobs has been at Apple for a long time, since he founded the company in the 70s, with a little time off in the late 80s and early 90s before rejoining the company. Eric Schmidt was at Sun Microsystems and Novell, and has experience taking on Microsoft as a competitor. In 2006, Eric Schmidt joined Apple’s board. In August of 2009, Schmidt was off the board. Why? The two companies were overlapping more frequently, and Schmidt had to recuse himself more and more during meetings.

Why the growing overlap? Because the world has changed. Just a few years ago, we all used desktops and laptops for computing, and cell phones were a calling device. Then in 2002, Research In Motion(RIM) introduced the first smartphone, the BlackBerry. This market of smartphones soon grew, competitors sprang up and in 2007, the iPhone entered the market. Computing and internet access soon became something to do on a phone, and something you could do anywhere without lugging a laptop. Most people in the industry predict only a growth of mobile computing, and less of a dependence on desktop and laptop devices. Even the growth of netbooks turned the corner for consumers who want less computing power, not more, just access to the internet.

Apple and Google are strong players, and want to become stronger. But with two of them on the same turf, who will come out ahead? BW managed to get a statement from Apple, attributed to an internal manager. “Apple is a valued partner of ours and we continue to work closely with hem to move the entire mobile ecosystem ahead”. For now each company still need the other. Google dominates search(in spite of Steve Ballmer’s attempts with Bing) and for now it is still on the iPhone. The iPhone does not dominate the smartphone market, but it is certainly a key influence and Google needs more people to access the internet so it can sell advertising.

Mobile computing is clearly the wave of the immediate future, but how to make money off of it? This reminds me of the earlier days of the internet when various companies tried to gain customers regardless of profits. It took Amazon years to turn a profit. In this case, both companies make enormous profits in other lines of business, so they can afford to take a few losses in one area in the hopes of more profitability in the future.

BW says that Apple has the lead in this business. Currently the iPhone has 14% of the smartphone market and the Nexus One has 3.5%. One new wrinkle is that app developers are now starting to have a tough time earning money on their apps. But with more than 125,000 apps in existence, maybe that doesn’t matter.

And if anyone has the creativity to come up with a whiz-bang product, most of us would place our bets on Apple. From the iPod to the iPhone, and all the neat things in between, there seems to have no end to creativity and innovation. BW says that Jobs and company are trying to come up with a way to revolutionize mobile computing. If anyone can do it, I would predict Apple. Google may be brilliant with algorithms, but data manipulation and search just aren’t the same as the innovation we have seen from Apple. Apple’s acquisition of Quattro Wireless puts it in the driver’s seat going forward with mobile ads.

Google may have a problem because people don’t seem to use computing the same way when they are at their desks and when they are on the road. Mobile search has not taken off. The search bars are small, and people can bypass search by using an app, which is more direct, with fewer keystrokes. And Apple knows a lot about you. If you buy music on iTunes, subscribe to podcasts, watch videos and give your credit card number and home address, they have a lot of valuable information about your buying habits. This information is precisely the gold standard of market research that advertisers have been after for decades. Now Apple has a one-stop shop for targeted ads. In the past, Google had a significant head start by knowing search habits, but Apple’s hard data may be even more of an advantage.

It is interesting to note that the Android operating system was developed with the hopes that it would be used on devices not owned by Google. However, Google went ahead and purchased Nexus One, which indicate they may feel they can’t depend on other companies – they need to be a one-stop shop in the smartphone market just like Apple.

Here’s the key question: could Apple take Google off of its iPhones and computers? Sounds possible. Steve Ballmer is chomping at the bit to increase market share for Bing. In spite of the acrimonious nature of previous relations between Apple and Microsoft, BW predicts it is possible for them to come to a truce and start putting Bing as the default on Apple products.

What I hope is that the consumer will win out in this big battle. I don’t think any of us will complain if competition drives prices down, produces superior products, and generally makes life easier for those of us end users. I remember when people used to talk about Pepsi vs. Coke, now it is Nexus One vs. iPhone. Stay tuned folks – I’m sure we’ll be hearing more on this one.

The Disposable Worker

Remember the movie “The Temp”? It came out in the 90s, when the economy was booming, which seems like eons ago. This week Peter Coy, Michelle Conlin and Maria Herbst of BusinessWeek report on “how companies are making the era of the temp less than temporary”.

If you have a traditional, old-fashioned job, thank your lucky stars. What am I talking about? The sort of job where the worker is classified as an employee, with full benefits such as health insurance and a 401k, promotion opportunities, paid vacation and just maybe, an employment contract. Those jobs seem to be going the way of the Dodo bird and the 8-track tape. (Remember those? The CD and the DVD are on their way out also).

The temp is here to stay, and it just may be you some day. That job you are not enamored of may be one you miss – at least you’ll miss the 401k and paid vacation.

I’ve read plenty of reports, and most seem to predict a rebound of employment to 2005 levels sometime in 2015, 2018 or even 2019. That’s a long time, folks. If you have a newborn baby now, that child may be in the fifth grade before this country is happy about employment again. Jobs are going overseas, processes are being automated, management techniques are changing, and good ol’regulation may be to blame. BW gave the scary example that because managers are now responsible for more people, and in a more detached way, it is easier for them to conduct layoffs because they have less of a connection to the people they supervise.

Even if you are an executive, you might find yourself as a “C-level to go” after a few years. What’s that? A C-level temp, willing to take skills and services wherever needed. The CEO of Kelly Services, a staffing firm, said “We’re all temps now”. Barry Asin of Staffing Industry Analysts also says that “The idea that any job is permanent has been well proven not to be true.”

Payroll used to be a fixed cost and it is becoming more and more a variable cost. We’ve all heard of just-in-time inventory, now there is just-in-time employment. The business risk is being transferred from the employer to the employee. When bad times come, the employer doesn’t worry; the brunt will be borne by the employee.

Chronic underemployment and unemployment have a lot of victims. Older people go into early retirement and younger people have a bad start to their career. Even 15 years out of school, that head start has a lasting impact. BW reports that people who graduated in a recession earn 2.5% less than if they had graduated in prosperous times.

Yikes. What’s a salaryman or woman to do? Have highly sought-after skills, that’s what. Get educated. Be in the right industry. The poorly educated and low-skilled fare the worst in this type of system.

Are there any consequences for employers? Do they just get off scot-free? Indeed, they are stuck with an “alienated, dispirited workforce”. That can’t be good for productivity. BW says “poor morale can devastate performance”. No kidding. UBS, Credit Suisse and American Express have all hired a Harvard psychology lecturer to train employees in positive thinking. How about a little decent treatment by the employer? That could work wonders for positive thinking in any organization. Used to work in the old days. And it seems to work for companies like Google and Zappos.

But, corporate profits have been good with a lower payroll. And most of us still hold stocks of some companies.

BW talks about a “trend toward a perma-temp world”. Companies that made big changes in the recession are sticking with those changes. It’s called “taking advantage of flexibility”. Microsoft, whose stock you might not mind holding, is a champ at using temporary teams. In spite of the bad things said about Steve Ballmer (some by me) they’re doing pretty well. The quality and pay of temps is no longer limited to “the girl from the agency” who comes in to file.

BW profiles a “temp exec” who does very well inside the C-level suite, albeit on a temporary basis. BW also mentions a lawyer with an MBA who is now on his own. More fancy degrees don’t necessarily translate into “sought-after skills” which would help the employer to justify hanging onto an employee.

At the bottom of the ladder, workers get the short end of the stick – nothing much they can do. Not surprisingly, depression and other mental health problems are on the rise. I think we would all agree with that. Career problems can be a prime source of stress and anxiety, as we all know. Better buy stock in pharmaceutical companies which sell sleep aids and anti-depressant medications.

Young people are losing out in the new world, unless they want to work as an unpaid intern. Even IBM, which seems like such a stalwart, old-economy company, had 71% of its workforce outside the U.S. in 2008. In 2009, it continued to reduce its workforce in the U.S., eliminating approximately 10,000 jobs.

When will it all stop? BW says that American workers will have to “swallow hard and accept lower pay”. The not-cheery statistic is that pay for 80% of the private workforce is 9% lower than it was in 1973, adjusted for inflation. So your paycheck may be larger in nominal terms (that’s the number on your paycheck) but the real term is lower (what you can buy with it is less). Consider the fact that GM was the largest employer in 1953, and today the largest employer in the U.S. is Wal-Mart. Something tells me the current Wal-Mart hourly wages and benefits don’t quite match up to what GM workers had in 1953.

BW proposes “rapid economic growth sustained over a long period” will fix the situation. Sounds great, but don’t hold your breath waiting. Clearly we could all use an economic stimulus – where will it come from? I wouldn’t bet on buying power from China – I’ve read enough reports that claim the Chinese economy is another bubble waiting to burst. India? Brazil – maybe they are building for the Olympics? Hmm. If anyone sees growth in a sector other than bankruptcy lawyers, let me know.

As usual, the political parties are sharply divided on what to do. Conservatives think the problem is too much government spending and involvement in the economy. Liberals, led by Paul Krugman, think there hasn’t been enough spending and job programs. At this point, I’m happy to see anything that works, regardless of the political affiliation.

BW points out in Europe, traditional jobs are much harder to come by and there is much greater use of temporary and contract employees. However, the big difference is that the temps and contractors receive full benefits, courtesy of the semi-socialist governments there.

One faint hope long in the future – if you are not a baby boomer – is that yes, the baby boomers will eventually retire, and someone needs to take those jobs. And take care of the baby boomers. So if you are starting medical school now, better specialize in geriatric medicine. In the nearer future, once the economy picks up all the employees who do not feel valued by their employers(that’s a lot!) will fly the coop when a better offer comes along. In the meantime, better keep that resume fresh, save for a rainy day and improve those skills.

Why the SEC keeps Backpedaling

Jesse Westbrook of BusinessWeek has a great analysis of what’s going on – or not going on – at the SEC. After the Bernie Madoff debacle, Mary Schapiro, chair of the SEC was ready to crack down and show the backbone of the SEC. This was in contrast to the easier years of the SEC under former chair Christopher Cox. And I’m sure we all wanted to see Mary jump on her horse, ride off after the bad guys, and come back with a whiff of smoke rising from her six-shooters. At the time she said “Investors are looking to the SEC to assure the safekeeping of their assets. We cannot let them down” But this has not happened yet.

At first, Schapiro proposed inspecting almost 10,000 money managers. Somehow this number was reduced to 1,600 in December. Not surprisingly, this change in project scope came after Schapiro met with many executives of fund companies.

BW reports that there were several proposals which sounded great at first, that were then scaled back or delayed . Hedge funds lobbied, and short-selling rules were delayed. Corporate Beard rules were also delayed. Schapiro claims that the SEC is overworked, understaffed, and doing the best it can, which may be true. But why raise our expectations beforehand? The agency may be improving, but it still has a ways to go. Former SEC chair Richard Breeden says, “You get zero points in history for what you propose...you get points for what you get over the goal line.”

Schapiro is an old hand at financial regulation, having started out at the Commodity Futures Trading Commission, and after different assignments at the SEC and CFTC, ended up as CEO of FINRA, the Financial Industry Regulatory Authority. For those of you who read your brokerage statements, you should see the acronym “FINRA” somewhere on the statement. FINRA is a private organization which regulates brokerage firms and trading markets. In its own words, it is “the largest independent regulator for all securities firms doing business in the United States”. The unfortunate souls who invested with Bernie Madoff probably did not see the acronym “FINRA” on their monthly statements. So Schapiro was no slouch by the time she came to the SEC.

People who own stock receive those pesky proxy forms and annual meeting notices once a year. Most of the time, this doesn’t mean anything for the little investor, as the average guy on the street does not own nearly as much as either Warren Buffet or a large institution to actually make a difference. But Schapiro wanted to make it easier for shareholders to “wage proxy fights”. However, the U.S. Chamber of Commerce did not share her opinion and almost filed a lawsuit. Somehow this action – on both sides – was delayed until 2010.

Barney Frank, a politician himself, has noticed that Schapiro is under political pressure. He wanted the uptick rule reinstated, somehow this too is in limbo. Hmm… I’d like to see Schapiro get back on her horse and chase after the bad guys. After all, if the rest of us have to follow the rules, why not them? And if anyone can do it, Schapiro has the right background. However, don’t we all know about organizations which have grand plans, then fail to deliver? Wait and see… per my previous post, I wouldn’t bet much on regulation at this point.