The limits of disclosure

Reporters have had mixed results using the Sarbanes-Oxley Act.

From the Spring 2007 issue of The News Media & The Law, page 36.

By Melissa Attias

Almost five years after the scandals at companies such as Enron, WorldCom, and Tyco prompted Congress to pass the Sarbanes-Oxley Act, some journalists have found that the law has made business reporting more fruitful and crucial documents easier to access.

But others say the hastily passed law has actually decreased public information in unforeseen ways, by prompting publicly traded companies to go private and making executives more reluctant to speak.

Officially known as the Public Company Accounting Reform and Investor Protection Act, the Sarbanes-Oxley Act was approved on July 30, 2002, in response to the flood of corporate scandals.

Introduced by former Sen. Paul Sarbanes (D-Md.) and former Rep. Michael G. Oxley (R-Ohio), the act passed 423-3 in the House of Representatives and 99-0 in the Senate. It aimed to reverse the public’s declining trust in the accounting and financial reporting process.

Out of all 66 pages of the Sarbanes-Oxley Act, Section 404, titled “Management assessment of internal controls,” has received the most corporate attention.

Section 404 requires corporations to file an internal control report that holds management responsible for establishing and maintaining independent oversight over business processes and financial reporting procedures. An assessment evaluating the effectiveness of the corporation’s structure and reporting procedures must also be included.

According to Ben Hammer, a reporter for the Washington Business Journal, these internal reports are easily accessible and have made business reporting easier since the amount of available information has increased.

Hammer said most financial reports can be retrieved online through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system (www.sec.gov/edgar.shtml), which catalogs forms that companies file with the Securities and Exchange Commission.

Although the reports have not led Hammer to any financial scandals, the information has been useful for writing stories.

For example, when defense contractor ManTech International announced last year that it sold some software to a network security company it recently created called NetWitness, it did not cite the price and other key information. Hammer was able to track down the details by looking at ManTech’s SEC filings on EDGAR — which are required by Sarbanes-Oxley — to put together a complete story.

Gregory S. Miller, an associate professor at Harvard Business School, said corporations’ internal business reports may provide clues to which companies deserve attention so journalists can identify “where the fertile grounds are.” If any of the data listed in the reports is contradictory or appears outrageous, Miller said, a journalist may decide to investigate the company further.

‘The informal flow of information’

Dan Cox from the Los Angeles Business Journal, however, said information in the reports is typically “only useful when you’re going after a specific company” and said he has never actually used the act to obtain information.

Since the internal reports come straight from the companies instead of from a neutral party, Miller said, they could represent biased information.

“Investigative reporters frequently need unbiased information,” Miller said. “They will not get this by talking to the company directly.”

And while the documents companies provide to the SEC may increase, their public statements may decrease.

Essentially, the law makes corporate leaders personally responsible for the accuracy of the company’s finance records and establishes penalties for corporations who misuse or misinterpret their financial information.

John Hazlehurst, a reporter for the Colorado Springs Business Journal, said such responsibility has made “companies far more careful about what they say in public statements” such as interviews and press releases.

Miller agreed.

“In theory, there is a lot more information available,” he said. “In reality, though, Sarbanes-Oxley has decreased the informal flow of information because people are afraid to say things.”

Other, less publicized rules may have done more to increase the disclosure of financial information than Sarbanes-Oxley. Charles Glasser, an attorney for Bloomberg News, cites Regulation Fair Disclosure, which the SEC adopted in 2000. The regulation prohibits selective disclosure between investors and promotes increased transparency in investor communication.

Sarbanes-Oxley also has caused many companies to stay private so they do not have to spend the extra time and money on internal reports and auditing that are required of public companies, Hammer said.

A 2006 study by the law firm Foley & Lardner revealed that 21 percent of public companies that responded to the survey are considering going private due to Sarbanes-Oxley’s increased auditing costs. Another 10 percent are considering selling their company and 8 percent are considering merging with another company.

Mike Allen, a reporter for the San Diego Business Journal, said that “most companies support the general concept of Sarbanes-Oxley, but — especially with smaller companies — think it was overkill.”

When companies go private, it means many of their financial records disappear from public view. In those cases, reporters have less access than they did before Sarbanes-Oxley.

Because Congress passed Sarbanes-Oxley during the immediate aftermath of several corporate scandals, Hazlehurst said that legislators did not completely think through the act’s provisions or understand how much they would cost corporations.

“Legislation passed in the heat of the moment is not usually good legislation,” he said.