FDs in the many UK businesses that haven’t had to comply with the onerous Sarbanes-Oxley rules are probably sitting there with an ever-so-slightly smug expression, safe in the knowledge that they’ve probably been able to devote more time to actually growing their business than have their Sarbox-compliant rivals.

Enjoy that feeling while it lasts, says a report from Henley Management College, sponsored by Microsoft, because even businesses that don’t have a Wall Street listing will find the burden of Sarbox creeping into their business via the supply chain. Partners and suppliers of Sarbox-compliant businesses will have to comply, according to the report.

Some 5,000 British companies already comply (or are in the process of complying) with Sarbanes-Oxley. The Henley research team says there are 113 quoted companies with a dual UK-US listing, plus a further 5,000 or so UK subsidiaries of US companies – all of which have to comply as well. So that’s the first wave of Sarbox compliance rollout.

The second wave is expected to see a further 9,000 British companies fall into line with the US legislation between 2009 and 2011, while the third wave, between 2012 and 2017, could see a further 30,000-45,000 companies comply. This would take the total number of British companies that meet the US standards up to 45,000-60,000, in round figures.

Proof-negative
Henley describes the Sarbanes-Oxley legislation as “an economic constraint… that negatively impacts the management processes of the firm”. That’s one way of putting it, though those who have had to jump through the Sarbox hoops invariably seem to use other, more colourful descriptions for the regulations.

According to the research, the key to the continuing, non-compulsory rollout of Sarbox compliance, however, is the fact that voluntary adoption of the rules can deliver competitive advantage. “Any organisation looking to trade with the US, for example, must consider Sarbanes-Oxley compliance as an essential part of growing their business.” Conversely, the FD of a £300m-turnover healthcare business said that, for the next three-to-five years, his company would not operate in the US, nor enter into a strategic partnership with a US company, and that while that decision will be re-examined at some future date, Sarbox and the cost of compliance “will be one aspect of the strategic decision-making process”.

The Henley research argues that Sarbox compliance needn’t be out of reach of small startup or fast-growing businesses – the sort of enterprises that might be regarded as too busy doing business to worry about the growth-restricting burden of unnecessary regulation. But early adoption of Sarbox provides such companies with “financial literacy in their business model, without compromising competitive [edge]”.

The early bird...
They argue, too, that early compliance could help secure second- or third-round financing, and could also make it possible to become a partner of, or a supplier to, larger companies. Biotech, high-tech, IT, manufacturing and financial services are the sectors where this phenomenon will be felt most.

‘Thought leaders’ in supply chain management are said to be taking an opportunistic view of Sarbox, regarding it as a unique opportunity to achieve supply management excellence. The report adds that “the more outsourced and dispersed the supply chain, the more difficult it becomes to establish and audit process controls. Therefore, working with trading partners that share a similar commitment to security and financial integrity is imperative.”

Compliance could also be seen in future as a prerequisite of financial reporting quality outside the US – making it a kind of parallel to the international quality standard ISO-9000 for management transparency. This in itself would make voluntarily-compliant companies preferred suppliers of compulsorily-compliant large corporations. The report concludes that “the implications of Sarbox on the supply chain, and as a more ubiquitous component of doing business in the coming years, are significant for UK plc”.

Sarbox impact on supply chain
• Section 401a requires the listing of off-balance sheet transactions and obligations, such as long-term purchase agreements or lease agreements, including fees for early termination.
• Section 404 governs internal controls. Poor purchase commitments visibility would be an example of an s404 breach, yet many companies are said to do an inadequate job of maintaining open purchase commitments visibility, frustrating efforts to forecast cash requirements. The report also highlights poor practices regarding trading partner collaboration.
• Section 409 relates to timely reporting of material events – ‘timely’ having been defined as two days. The report suggests that late supplier deliveries may fall into this category where there is a major disruption of an item that forces a company to notify its customers that it will fail to ship on time.