Increasing accountability leads to less accountability
The federal Sarbanes-Oxley Act was intended to tighten the financial reporting requirements for publicly traded companies. It was Congress’ response to the accounting scandals at WorldCom, Adelphia and Enron. But the increased reporting requirements have lead to increased costs, and as the Act increases liability of CEO’s and Boards making the disclosures, the insurance coverage for these folks has increased in costs as well.
Critics of the act note that the stricter reporting requirements fall equally on big corporations like CitiBank, as they do on your local community bank. Many “small” corporations went public to take advantage of the stock markets to raise capital, but with the increased cost associated with being a public corporation, many are second guessing this decision:
Not only are accounting and legal fees higher, so are insurance premiums. Publicly traded companies routinely buy directors and officers liability insurance to protect company leaders in case shareholders sue them over business decisions.
With the passage of Sarbanes-Oxley, the number of claims is rising, average settlement costs have doubled and increased shareholder activism makes those trends likely to continue, according to Aon Corp., an international insurance company that sells directors and officers liability coverage.
But for some companies, the next stage of compliance is the last straw.
Sarbanes-Oxley has become law in phases. Next year, publicly traded companies will have to start detailing management’s internal controls and include an auditor’s opinion on the effectiveness of those internal controls.
Randy Sizemore, Northeast Indiana Bancorp’s chief financial officer, said the parent of First Federal Savings Bank would incur “much more cost” if it tried to meet that additional reporting standard. Earning a clean bill of health from auditors’ reviews of financial statements and footnotes is already difficult enough, Sizemore said.
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The bottom line for consumers in these small local banks with less than $500 million in assets is less information and less accountability.
