March 28, 2005
Wal-Mart's Mini-Scandal & The State of U.S. Corporate Governance
Posted by Gordon Smith

Reduced to simplest terms: Wal-Mart says Thomas Coughlin stole as much as $500,000 from the company, and the company called the feds. They also fired Coughlin and three other executives for "integrity-related violations." According to the W$J, "Wal-Mart is reviewing internal controls on reimbursements and gift cards in the wake of the incident." Of course, Wal-Mart is not the only company in the U.S. reviewing internal controls. All public companies are on the task, and almost 300 have delayed the filing of their annual reports with the SEC because they are having trouble verifying their financial statements.

This development has elevated the debate over the costs and benefits of Sarbanes-Oxley to a new level. Under Section 404 of SOX, companies are required to perform an internal control assessment. This section has been a lightening rod for industry since SOX was adopted, and last week Financial Executives International issued a press release (pdf), stating:

Companies’ total costs for year one Section 404 compliance averaged $4.36 million, up 39 percent from the $3.14 million they expected to pay, based on FEI’s earlier July 2004 cost survey. The increase stems largely from a 66 percent leap in external costs for consulting, software and other vendors and a 58 percent increase in the fees charged by external auditors.

On the other hand, all of the delays might be evidence that SOX is doing the sort of deep cleaning that its advocates had hoped. I think it is clear that we can expect more news of scandals like the one involving Coughlin. Moreover, I suspect that many of these scandals would not have been uncovered a decade ago. This looks like old corporate practice meets new corporate governance, and the clash will cause some pain in the near term.

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