How to Profit From Compliance Spending

Leading companies are proving that money spent on governance is a good investment in their business.

Tallies of corporate governance expenditures post-Sarbanes-Oxley are trickling in, and -- surprise, surprise -- companies are paying more for compliance-related technology, staffing and external service providers, and for their boards of directors, than they paid last year. But some businesses are weaving a silver lining into the fabric of compliance initiatives by using their rising investment to achieve process and efficiency returns that surpass the obligatory goal of meeting governance standards. EMC Corp. used the process documentation resulting from its compliance efforts to help plan a new strategy to better meet customer needs. And Owens Corning transformed its Section 404 project into a formal process-improvement initiative that is identifying best practices and standardizing finance processes in 115 manufacturing plants worldwide.

The majority of public companies seem to be postponing necessary compliance activities right up until Section 404 deadlines begin taking effect at the end of November. But it's not too late to generate extra returns on this required investment. To do so, finance executives must get a handle on their organization's current and future governance spending.

The Price of Being Public

The cost of being public for a $1 billion company increased 130 percent between the inception of the Sarbanes-Oxley Act and the end of 2003, according to a May 2004 study by Chicago law firm Foley & Lardner LLP. The study, which is based on input from senior executives and board members at 115 public companies, emphasizes that the recent cost increases associated with corporate governance are not, for the most part, one-time financial events. Governance spending continues to rise.

Of all the new expenses that have cropped up since the passage of Sarbanes-Oxley in July 2002, Section 404 compliance has siphoned the most money from corporate coffers. "I'd say it accounts for more than 50 percent of overall corporate governance -- and it's probably a lot higher," notes Anne Swaller, practice director of Sarbanes-Oxley services for Parson Consulting in New York City. She says the majority of Section 404 compliance costs revolve around process and controls documentation and controls testing. "The demonstration of internal controls is likely to lead to standardizing the format -- physically, what the piece of paper our internal controls are written on looks like," says Bob Knapp, senior vice president and CFO of Siemens Financial Services Inc., the commercial finance and leasing division of Siemens AG, in Iselin, N.J. "That is a project." Knapp adds that because documenting, testing and upgrading controls represent ongoing work, he doesn't expect the cost hikes to disappear after his company's first 404 deadline.