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.