While the purpose of the regulation is to prevent fraud and restore investor confidence, there was no empirical evidence suggesting that investor confidence has increased after complying with the legislation. The benefits of complying with the legislation appear to be access to capital markets in the United States, and awareness of the controls environment by all employees. The costs incurred are listed as initial implementation costs and ongoing sustainable costs, and the overall costs are greater than benefits obtained. In the long term, benefits should exceed the costs, as the sustainable costs are low compared to implementation costs. DECLARATION I declare that this research project is my own, unaided work. It is submitted in partial fulfilment of the requirements of the degree of Master of Business Administration for the Gordon Institute of Business Science, University of Pretoria. It has not been submitted before for any degree or examination in any other university. ………………………………………. Salim Motala Date: 14 November 2007 ii ACKNOWLEDGEMENTS I would like to thank the following individuals who have contributed and enabled this research project to be successfully completed: ?
Too much emphasis on one may have an impact on the other. With regulatory bodies adding to the list of requirements, the question could be asked as to the additional benefits to be derived from complying with the requirements of the relevant pieces of legislation. Do the benefits of compliance exceed the costs incurred in becoming compliant? SOX is applicable to companies that are listed on the New York Stock Exchange (NYSE).
Introduction This section covers 4 areas and should be written about the organisation as a whole not just the key area you will focus on later:- Overview of Business (cover PIC 1. 1, 1. 3, 1. 4) What do they do? How big are they? What external relationships do they have? Who are the key stakeholders? (key customers/ suppliers, staff, shareholders etc) Describe the accounts department structure ( ...
Various South African companies are listed on the NYSE and have been burdened with the responsibility of having to comply with SOX in addition to the list of the King Report governance requirements. 1. 3. RESEARCH AIM SOX has created a complex regulatory environment that requires substantial management effort and company resources to ensure compliance. The complexity and cost required to comply with these regulations raises questions as to their benefits. The aim of this research is to determine the corporate governance structures that were in place before the advent of SOX and the changes that SOX has brought about. It also aims to determine the specific additional benefits obtained and the components of costs incurred by applying the provisions of SOX.
These benefits are measured against the costs incurred in compliance, to determine whether the legislation provides any value to shareholders and other stakeholders. As mentioned, SOX is a piece of legislation that has arisen solely as a result of the Enron financial failure and is applicable only to companies that are traded on the NYSE (Hussain, 2006).
In fact, it has been suggested that Enron was “the straw that broke the camel’s back”. The US investors have been greeted with many corporate failures and not much was done about the scandals.
Although the scandals were not significant individually, the aggregation became a burden for the investors. Enron being the final scandal that brought about the legislation. The research will aim to determine the overall success of SOX in achieving its objective. 4 With this in mind, this study focuses on South African companies listed in the US, as well as other South African companies applying the provisions of SOX. The companies that form the study sample are all in the mining and minerals industry in South Africa. This will enable the researcher to determine the impact of SOX in the mining industry. . 4. RESEARCH MOTIVATION The rationale behind this research is personal and also pertinent to the questions that are being asked on the feasibility of South African companies achieving SOX compliance. On a personal level, the aim was to obtain knowledge on SOX and the wider topic of corporate governance, as well as to gain insight into the mining industry. In addition to the personal aims, the researcher was unable to find conclusive proof of the value of South African companies applying the provisions of SOX – this will be sought through the research.
Corporate governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organization. It has become an increasingly important issue for organizations for three main reasons. The separation of ownership and management control of organizations (which is now the norm except with very small businesses) means that ...
McKinsey & Company conducted a series of surveys to discover how shareholders perceive and value corporate governance in developed and emerging markets. The findings reveal that in certain countries, investors are willing to pay a premium for companies that are well governed (McKinsey, 2000).
However, the researcher was unable to obtain inconclusive proof to suggest without a doubt that good governance leads to an improved performance. The research is aimed at determining the effect of corporate governance and SOX on South African companies and investors. The mining industry is an interesting one, due to its size and complexity. It is by far the largest in the economy, with resources accounting for over forty percent of the JSE index (Business Day, 2007).
It is also one of the largest employers of labour. Mining is a capital-intensive industry and requires vast sums of capital to finance its operations. In acquiring capital, these companies seek funds from investors, both locally and off-shore. Although local capital is available, access to offshore capital is greater, as the audience is larger.
Since the advent of SOX, there has been no empirical evidence to suggest that SOX adds value, or whether it simply adds costs. Although there have been similar studies in the US, no such study has been conducted in South Africa, and this research aims to remedy this position. The research would be useful to South African companies considering listing on the NYSE or companies considering delisting from the NYSE. 1. 5. OUTLINE OF THE RESEARCH REPORT This report is divided into seven chapters, beginning with a review of the current literature on corporate governance, SOX and the mining industry in Chapter Two.
Chapter Three outlines the research questions that emerged from the review of the literature, followed by a description of the research methodology employed to answer these questions in Chapter Four. The results are presented in Chapter Five and discussed in Chapter Six. The report is concluded in Chapter Seven, which recommends further avenues of research. 6 2. LITERATURE REVIEW 2. 1. CORPORATE GOVERNANCE 2. 1. 1. Corporate Governance The ordinary meaning of governance is the manner of directing and controlling the actions and affairs of an entity. Incorporated entities are called companies and corporations.
South Africa contains some of the oldest archaeological sites in the world. Extensive fossil remains at the Sterkfontein, Kromdraai and Makapansgat caves suggest that various australopithecines existed in South Africa from about three million years ago. These were succeeded by various species of Homo, including Homo habilis, Homo erectus and modern humans, Homo sapiens. Settlements ...
The governance of incorporated entities is generally described as corporate governance (King, 2006).
2. 1. 2. History of Corporate Governance The history and timeline of corporate governance shows that from 1855, which marked the start of the modern company; to the last half of the twentieth century there was no corporate legislation as to how directors should govern. Entrepreneurs were able to implement their business ideas with the protection of limited liability. During this time the focus was on the single bottom-line and the shareholder model of wealthy families (King, 2006).
In the last half of the twentieth century, financial institutions took over from wealthy families as major shareholders which by then were listed on stock exchanges. The concept of shareholders (those whose policies, funds and stocks were being managed by financial companies) was introduced (King, 2006).
7 In the last two decades of the twentieth century, the concept of governance came into being as questions were asked in America and the United Kingdom as to whether directors were governing companies correctly. The questions were asked in response of the outperformance of the American companies by the Far Eastern companies (King, 2006).
. 1. 3. Corporate Governance Structures Around the 1970’s and 80’s, questions related to governance practices were raised on the basis of companies’ performance and corporate scandals, such as the BCCI and the Maxwell sagas, in the UK emerged. The rise in corporate scandals resulted in the publication of the Cadbury Report in 1992, which focused on the financial aspects of governance (King, 2006).
In the UK, more reports followed on the back of the Cadbury Report, such as the Greenbury Report 1995, the Hempel Report 1998, Turnbull 1999, and the Combined Code in 2000 (Jones and Pollitt, 2003).
Corporate Governance Corporate Governance is the relationship between the shareholders, directors, and management of a company, as defined by the corporate character, bylaws, formal policies and rule laws. The corporate governance system was designed to help oversee the decisions and best interest of the shareholders. The system should works accordingly: The shareholders elect directors, who in ...
In South Africa, the King Report was published in 1994. Subsequently, the King II Report on Corporate Governance was published in 2002. Internationally, the OECD Principles on Corporate Governance were published in 1999, followed by the CACG Guidelines in 2003. Finally, the advent of corporate scandals in the US brought along legislative and other requirements for US companies, such as the Federal Corrupt Practices Act, Federal Sentencing Guidelines for Organisations and the Sarbanes-Oxley Act. 8 2. 1. 4. Good Corporate Governance An organisation is created for a purpose.
This purpose is likely to be the creation, protection and development of shareholder value. For a commercial organisation this value is to maximise the return on investment to its shareholders, sustainable employment for its employees and win-win relationships with its suppliers (PwC, 2002).
Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place (Cadbury, 1992).
The company’s management runs the organisation in a responsible manner and is governed by the board of directors. The directors are accountable to the shareholders for the affairs of the company. Good corporate governance requires that the board must govern the corporation with integrity and enterprise in a manner which entrenches and enhances the licence it has to operate (CACG, 1999).
2. 1. 5. South Africa South Africa was excluded and isolated from the global economy between 1961 and 1994 by the United Nations because of its oppressive political environment. Vaughn and Ryan, 2006).
The country was also excluded from participating in international organisations and had trade and economic sanctions imposed against 9 it. As a result of the sanctions and disconnect from the global world, its economic practices, law reforms and corporate regulations fell well below international standards. This resulted in corporations losing focus and being run by complacent and entrenched managers, which made South Africa uncompetitive globally (Malherbe and Segal, 2001).
The Law On Involuntary Manslaughter Needs Reform. In Particular, The Law On Corporate Manslaughter I Public confidence in the law and the judiciary has been seriously affected in the last few years with a number of disasters where the law of manslaughter, as it currently stands in England and Wales has failed to lead to any prosecutions. There has been the growing perception that the law dealing ...
With the fall of apartheid, South Africa was readmitted into the global economy and business and diplomatic relations with the rest of the world began to develop and expand. This presented tremendous challenges for South Africa in the global market, and South African companies had to engage in practices to improve on corporate governance to compete effectively. “Investors wanted assurances that corporations practised accountability, transparency and fairness to all shareholders” (Vaughn and Ryan, 2006).
South Africa then developed various corporate governance initiatives to address its lack of governance compared to the first world countries. These included the King Report on Corporate Governance, the Insider Trading Act, the Financial Intelligent Centre Act (FICA) and various other listing requirements. Currently, South Africa is in the process of preparing the King III Report. The King Report was not stimulated by a corporate crisis in South Africa and was developed as an initiative of the Institute of Directors in Southern Africa.
The King Report drew attention to the importance of a properly functioning board of directors as a key ingredient of good corporate governance. It advanced many of the 10 standards and principles advocated in the plethora of national codes that were adopted, particularly in the Commonwealth countries, following the release of the Cadbury Report in the United Kingdom in 1992 (Armstrong, Segal and Davis, 2005).
In response to growing awareness of the importance of good corporate governance, the Organisation for Economic Co-operation and Development (OECD) was mandated to develop a set of standards and guidelines for presentation to ministers.
These principles are referred to as “OECD Principles of Corporate Governance” and form part of a broader international effort to promote increased transparency, integrity and the rule of the law. There is no single model of corporate governance due to different legal systems, institutional frameworks and traditions which results in a variety of approaches being developed around the world. The OECD Principles of Corporate Governance will represent core elements of good corporate governance to be used as a benchmark by governments to evaluate their laws and regulations (OECD, 1999).
. 2. THE ABSENCE OF GOOD CORPORATE GOVERNANCE 2. 2. 1. Management The responsibility of corporate governance lies with the board of directors. In certain public companies the board of directors are the management, and in these instances they are effectively managing themselves, creating a catch 22 situation. While committees and various other structures are put in place to manage the process and to keep a check on the affairs of management, it is sometimes difficult 11 to report to managers on structures put in place to oversee the affairs of management.
Introduction Background The literature being studied is an article written by Hellen O's ullivan, the Director of Scientific Methods Australia. The article entitled "Business ethics are set to set to stage a comeback" was published on the 75 th page of The Australian Financial Review on the 6 th February 1990. Literature Review Basically, the article discussed several important issues about ...
At times this leads to independence issues, as in effect they will be reporting on their own managers – certainly a case of the turkey voting for the idea of Christmas! In light of the above, the company is at risk of manipulation and fraud by its management team in instances where the board of directors is not independent. An independent director is defined as a person who is not employed by the company, has no contractual links to the company and is not an advisor or a shareholder to the company (King, 2006).
Although there is governance structures in place fraud may occur at organisations and pose a risk to shareholders.
The major global scandals that have surfaced are Enron, Worldcom and Parmalat, with Leisurenet in South Africa. 2. 2. 2. Enron Enron was created in 1985 by a merger between Houston Natural Gas and Internooth (Terry, 2007).
Under the leadership of Kenneth Lay and Jeffery Skilling, Enron adopted an aggressive growth strategy and as a result created a complex accounting structure and a strategy that required significant capital. The finance was raised using loan capital as opposed to equity and these loans were placed in special purpose entities (SPEs).
The company used the SPEs and inappropriate accounting practises to inflate earnings.
The business had reflected ample cash through its SPEs, yet there was no cash as it was an accounting entry to bolster its profits. The negative cash trend eventually surfaced when Enron had no cash to 12 finance its operations and the company filed for bankruptcy. Fingers, attributing blame, were pointed in various directions, including auditors Arthur Andersen and the Enron board. “The failure of Enron’s board to take responsibility for the risks inherent in the company’s business plan, in particular the use of special purpose entities (SPEs) and related forms of so-called ‘structured finance’”(Deakin and Konzelmann, 2004).
. 2. 3. WorldCom The Worldcom fraud story arose as a result of an internal auditor who reported irregular practices to the CFO. After nothing had been done she took the matter into her own hands and reported the matter to the audit committee, which resulted in the dismissal of the CFO. The effect of the scandal was $11 billion and was the biggest corporate fraud in US history (Lehigh University, 2005).
“Ms Cooper and her team are a case of middle managers who took their commitment to financial reporting to extraordinary lengths.
As she pursued the trail of fraud, Ms Cooper time and again was obstructed by fellow employees, some of who disapproved of WorldCom’s accounting methods but were not willing to contradict their bosses or thwart the company’s goals” (CAE Bulletin, 2007).
John Ebbers (CEO) was in personal debt and had his shares in WorldCom held as security for the debt and the share price began to fall as a result of the earnings expectations announcements. The CFO was commissioned by the CEO to inflate 13 earnings.
This had occurred by capitalising expenditure on telecommunication services and equipment and resulting in an increase in earnings (Crawford, 2005).
2. 2. 4. Leisurenet Leisurenet was a South African company that had been growing at a very fast rate and was growing through acquisition. As a result of its expanded growth, it ran into financial trouble and had cash flow problems. The directors involved were entering into transactions on behalf of the organisation and were failing to disclose their interests in the transactions. The directors charged personal expenses – including home renovations, house purchases and travel and foreign exchange expenses for their children – to LeisureNet” (IOL, 2001).
2. 2. 5. Detection of Fraud With the introduction of SOX, the duties of the auditors were increased significantly. Prior to Enron, auditors accounted for 9. 6% of frauds detected by external parties, whilst post-Enron the figure has risen up to 16. 9%. Previously auditors were only focused on frauds requiring financial restatements whilst after Enron the auditors were additionally focused on fraud cases not involving restatements.
Auditors increased their activities as their exposure to liability has broadened (Zingales, Dyck and Morse, 2007).
14 2. 3. SARBANES-OXLEY AS A RESULT 2. 3. 1. Introduction to SOX The Sarbanes-Oxley Act of 2002 is a US federal law passed in direct response to the major corporate and accounting scandals – Enron and WorldCom in particular (Wikipedia, 2007).
The legislation establishes new enhanced standards for all US public company boards, management and public accounting firms. The act is focused on financial reporting on the need to maintain a strong control environment (Wikipedia, 2007).
Strong internal control over financial reporting is fundamental to providing reliable financial statements. The main difference between SOX and other corporate governance initiatives around the world lies with compliance. Compliance with SOX is legislated and is thus compulsory, as opposed to the ‘comply or explain’ approach adopted for the Cadbury and King Reports. Post-SOX, the acronym “CIO” means “Compliance isn’t Optional” (Leskela, 2004).
With all of these additional requirements, SOX has become despised by many businesspeople in the US and beyond.
The authors have conceded that its hasty passage into law meant it was badly drafted in parts. “Frankly, I would have written it differently, but it was not normal times,” Michael Oxley, one of the former congressman who drafted the act said. He added that the same was true of his coauthor, Paul Sarbanes (Kambayashi, 2007).
15 2. 3. 2. The Impact of Sarbanes-Oxley It is difficult to assess whether investors believe that SOX is, overall, good or bad for US firms. There were various events surrounding the adoption of SOX and one cannot rule out other causes for market price changes of companies’ securities listed in US markets.
The effect of SOX was easier to assess on companies that were cross-listed, as cross-listed companies fall in two categories, namely companies that need to comply with SOX and companies that do not need to comply. The results of a study by Litvak (2007) measuring reactions of investors of cross-listed firms due to SOX, indicate that countries that are well governed produced a negative reaction, as investors thought SOX to be bad. The results further indicate that SOX has been positive for investors in companies located in poorly governed, low disclosing countries (Litvak, 2007).
In a study by Bargeron, Lehn and Zutter (2007), data on initial public offerings (IPOs) in the US and UK equity markets after the adoption of SOX were examined. The results indicate that the number of IPOs in the US decreased substantially post-SOX. The number of IPOs in the UK has increased dramatically relative to the US; however, not remarkably different from historic levels. The likelihood of an IPO occurrence in the UK increased significantly compared to the likelihood of an IPO occurrence in the US (Bargeron, Lehn and Zutter 2007).
16 2. 3. 3.
Going Private To evaluate the effect of SOX, a study by Kamar, Karaca-Mandic and Talley (2006) was performed and compared the change in the propensity of American public targets to be bought by private acquirers rather than by public acquirers to the corresponding change for foreign public targets. The results indicate that SOX disproportionately burdens small firms and induced small public companies to be sold. There was increasing propensity of small public companies to be sold to private acquirers rather than public acquirers in the first year after enactment of SOX.
The price that public acquirers would pay for target companies would be lower than what private acquirers would pay, as public companies would inherit the compliance costs associated with the target firm (Kamar, Karaca-Mandic and Talley, 2006).
When a company delists from the stock exchange it is regarded as going dark. The two reasons for going dark are firstly costs of compliance, and secondly economic incentives of the internal and external shareholders. With the advent of SOX, compliance costs have increased and are one of the major driving forces behind a firm’s decision to go dark.
Investors in such firms suffer abnormal negative cumulative returns upon announcement of deregistration and are left holding illiquid shares. Inside and outside shareholders have divergent interests regarding cost of corporate governance as outside shareholders value corporate governance and inside shareholders view it negatively (Marosi and Massoud 2007).
17 2. 3. 4. Effect of SOX on Risk Taking In the study by Bargeron, Lehn and Zutter (2007), several measures of corporate risk taking for publicly traded US companies were examined since SOX came into law.
The results indicate that US firms’ measures of risk have decreased compared to UK firms. Decreases in risk measures in the US are generally larger than decreases in risk measures for UK firms, which imply that SOX has chilled risktaking by US corporations. Since the adoption of SOX, US companies have significantly reduced capital expenditure and expenditure in R&D, and significantly increased holdings of cash relative to UK firms. The total risk for US firms comprising market risk and firm-specific risk – has decreased since the adoption of SOX relative to UK firms (Bargeron, Lehn and Zutter 2007).
SOX has forced CFOs to spend nearly a third of their time on IT systems, paperwork and tedious board enquiries rather than focus on the bigger picture. CFOs are no longer considered the stars on the boardroom bench waiting to become CEO. According to 10-K wizard, companies with a market cap of at least $1 billion changed CFOs three times more often in 2005 than in 2002. This can be attributed to SOX, however there is no conclusive evidence to prove the attribution. According to Richard Jacovitz of Liberium Research, among public companies of all sizes, CFO exits increased from 1 867 in 2005 to 2 302 in 2006 (Demos, 2007).
8 2. 4. THE COSTS AND BENEFITS OF SARBANES-OXLEY 2. 4. 1. Benefits “Increased shareholder activism in the Unites States and elsewhere stems from the conviction that better corporate governance will deliver higher shareholder returns. Yet repeated attempts by academics to show an irrefutable link between the two have failed, such is the complexity of the relationship” (Mc Kinsey, 2000).
According to the McKinsey Investor Opinion survey (2000), 75 percent of investors say board practices are at least as important to them as financial performance when they are evaluating companies for investment.
In Latin America almost half the respondents consider board practices to be more important than financial performance. In addition, over 80 percent of investors say they would pay more for the shares of a well governed company than for those of a poorly governed company with a comparable financial performance. The actual premium that the investors say they would be willing to pay for a well-governed company differs by country (McKinsey, 2000).
According to Miklvic and Leskela (2002), complying with SOX is good business.
It isn’t just about compliance, but also about having an efficient, effective organisation. If you can see into your production, identify where the problems are likely to arise and have an action plan to rectify the situation, your organisation can be more productive and generate more revenue (Miklovic and Leskela, 2004).
19 2. 4. 2. Costs GartnerG2 conducted a survey and conducted interviews with 75 respondents from publicly traded companies on the US stock exchanges. The respondents were senior compliance managers responsible for, or directly involved in, managing the company’s overall compliance with SOX.
The findings revealed that 85 percent of respondents reported that they do not have an official budget for SOX compliance. Estimates of costs varied from $15,000 to $4. 5 million in total. The estimates include external consultants, internal and external auditing costs, personnel, insurance and software (Leskela, 2004).
The costs of compliance are high and vary from company to company. According to the Financial Executives International (FEI), in a SOX compliance costs survey of 200 companies with average revenue of $6. 8 billion, the cost of compliance has decreased 23% from 2005 to 2006.
The results show decreases in internal and external costs of compliance. The decreases are directly as a result of increased efficiencies in complying with section 404. The first year costs were high and future year’s costs of maintenance will be less than costs incurred in initially complying with SOX. Initial year costs are impacted by lack of documentation; deferred maintenance catch-up of internal controls, large number of control deficiencies identified and remediated inadequate project management and resources (Kambayashi, 2007).
The overall costs of SOX on business could well outweigh its private benefits, as it is too costly to eliminate all corporate fraud. Investors consider SOX to be costly and the message sent by the legislation is bad for business. In addition, firms with perceived weak governance experience more negative abnormal returns around events that increase the likelihood of passing tough governance rules. Firms with weak governance experience negative returns when tough governance structures are imposed on companies. The firms do not benefit from enhanced governance as expected, and challenge the value of SOX (Zhang, 2005).
There is some evidence that suggests that SOX is costly to implement as well as evidence to suggest that costs of SOX is decreasing on an annually. Understanding the costs of SOX in relation to the benefits will enable the companies to determine to what extent the costs are overcome by the benefits. 2. 5. MINING AND MINERALS INDUSTRY IN SOUTH AFRICA There is a great deal of evidence worldwide that resource-rich countries lend themselves to corrupt practices in the form of minimal fees and granting of licences.
According to Feeney (2002), there has been insufficient public debate around the exemptions that mining companies have negotiated with governments that release them from compliance with national and international standards for lengthy terms (Feeney, 2002).
Several recent studies have found that states with large oil and minerals sectors tend to be abnormally corrupt – perhaps because these sectors periodically flood the government with revenues, creating opportunities for the misuse of funds (Ross, 2001).
21 Corporate responsibility initiatives in the mining industry are important and necessary.
However, it is not sufficient to ensure that natural resource exploitation results in economic growth and broad-based socio-economic improvements. Multilateral organisations may still deliver disappointing outcomes if weak governance structures cannot be changed and improved. Good investments in an environment of weak governance may fail to spread their benefits to the country as a whole (ICMM, 2006).
South Africa is a world leader in the mining sector and is internationally renowned for an abundance of mineral resources, accounting for a significant proportion of both world production and reserves.
Globally, it is the largest producer of gold, vermiculite, platinum and chromium; in addition it has major deposits of antimony, coal, iron ore, manganese, nickel, phosphates, tin, uranium, diamonds, copper and vanadium (Diliza, 2007).
South Africa’s mining industry is continually expanding and adapting to changing local and international world conditions. It remains a cornerstone of the economy, making a significant contribution to economic activity, job creation and foreign exchange earnings.
The impact of SOX on the mining industry may affect the time and effort currently spent by mining companies on current programmes and initiatives. 22 In South Africa the mining industry accounts for the following:15% to 20% of GDP (directly and indirectly), 50% of merchandise exports, 12% of fixed investment, 20% of formal sector employment, 50% of the country’s rail and ports, 93% of electricity generation via coal powered plants and 16% of electricity demand (Chamber of Mines, 2004).
The South African mining industry is the second largest mining sector by value of any country in the world after the US (Chamber of Mines, 2004).
Being such a large portion of the economy and the most global industry in South Africa, the mining industry was chosen as the industry of specialisation for this research. Listed companies on the Johannesburg Stock Exchange (JSE) are accountable to the JSE on the extent of compliance. In addition, mining companies are subject to the requirements of the Minerals and Metals Act and the industry charter. Companies operate substantial human resources developments, corporate social investments and other initiatives in South Africa and other operations worldwide.
By and large, South African companies seek to apply best practices in health and safety and accounting standards, and their good performance is not generally limited to financial aspects. Relatively few South African companies are required to comply with SOX, and most of those that do, fall in the mining industry, as it is a capital intensive industry and companies require access to capital. The US is one of the largest capital markets in the world and a listing on the NYSE would give good access to capital 23 in those markets.
Some South African companies in the mining industry operate globally and require capital for their operations, thus often seeking listing on US markets. AngloGold Ashanti Limited, Sasol Limited and Harmony Gold are South African companies that operate globally and are listed on the New York Stock Exchange. They are required to comply with SOX in all of their operations around the world. 2. 6. CONCLUSION SOX has come about with the intention of increasing investor confidence by eliminating corporate fraud. South African (SA) companies follow good corporate governance structures.
Certain companies have to apply SOX in addition to the SA corporate governance structures. Understanding the costs involved and benefits obtained from will determine the cost-benefit equation of SOX and will indicate whether it is feasible to comply with the regulation. 24 3. RESEARCH QUESTIONS The study investigates various factors relating to implementing governance guidelines and regulations. The factors were being considered in light of the each organisation’s management, shareholders and providers of capital, and auditors.
Due to the exploratory nature of the study, research questions were used to define the research problem pertaining to the value provided by SOX. The following questions were formulated from the research problem: Research Question 1: What corporate governance structures were in place before the introduction of Sarbanes-Oxley and what has changed since the introduction of Sarbanes-Oxley? Research Question 2: What are the different categories of costs involved in achieving compliance with Sarbanes-Oxley? Research Question 3: What are the different categories of benefits that have arisen in achieving compliance with Sarbanes-Oxley?
Research Question 4: What is the impact of Sarbanes-Oxley on companies in the mining industry operating in South Africa? Research Question 5: What is the objective of Sarbanes-Oxley and is it achieving its objective? 25 4. RESEARCH METHODOLOGY The study aimed to quantify the costs and benefits involved in complying with the legislation laid out by the regulatory body, as well as to prepare an exhaustive list of qualitative factors. The study was exploratory and qualitative as well as quantitative in nature. Exploratory studies provide information to use in analysing a situation (Zikmund, 2003).
The study aimed to quantify the responses from the respondents in light of the above research questions. The results were quantified as far as possible and thereafter qualitative factors were explored to obtain a list of data, which was then analysed. The research was conducted in two phases. Phase one consisted of documentary research, while phase two consisted of interview-based research. This approach was taken to ensure the validity of the analysis. The design of the research was a descriptive design using a structured interview technique. The survey took the form of personal interviews. 4. 1. PHASE ONE: DOCUMENTARY RESEARCH . 1. 1. RESEARCH DESIGN Phase one of the research was focused on an analysis of the SOX legislation and a review of the commentary and perceptions of some experts in the field of corporate governance. The review of the legislation required a detailed 26 understanding of the legislation and the purpose in the business environment and documentation thereof. The expected benefits and components of the costs were determined from the documentation and the results of the interviews. 4. 1. 2. UNIT OF ANALYSIS The unit of analysis used in this phase of the research was the opinions of the experts on SOX legislation.
They were assumed to have a good understanding of the Act and its implications. 4. 1. 3. POPULATION OF RELEVANCE The population of relevance in this phase was experts in the field of corporate governance and SOX. 4. 1. 4. SAMPLING METHOD AND SAMPLE SIZE The sampling method was non-probability sampling. This is characterised by the use of judgement and a deliberate effort to obtain representative samples by including typical areas or groups in the sample. As a result of the specialised nature of the population, purposive sampling was most effective. The sample size was to obtain one expert each from two of the big four audit firms. The ‘big four’ is a collective term given to PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young. ) 4. 1. 5. RESEARCH INSTRUMENT There was no research instrument for documentary research. An interview guide was drawn up for the conducting of structured interviews with the experts. 27 4. 1. 6. DATA COLLECTION The data collected consisted of documentary research obtained from various secondary data sources and the opinions of experts in the field SOX. The secondary data was sourced through a review of electronic databases, discussions with two of the big four audit firms, newspapers and other documentation in the public domain. . 1. 7. DATA ANALYSIS Documentation collected for the SOX legislation was reviewed and relevant content extracted. A definition of the purpose of the Act, how it supported the environment and a listing of the benefits and costs were conducted from the documentation reviewed. The results have been summarised for ease of reference. 4. 2. PHASE TWO: STRUCTURED INTERVIEWS 4. 2. 1. RESEARCH DESIGN Phase two of the research focused on an analysis of the stakeholders of the organisations that were involved in the implementation. There are relatively few South African companies that are required to comply with SOX. These rganisations comprise of the following companies: ? ? ? ? BHP Billiton Plc; AngloGold Ashanti Limited; Harmony Gold Limited; and Sasol Limited. 28 The benefits and costs arising from the implementation of SOX legislation were computed from the results of the interviews with the stakeholders. Benefits were determined for the organisation and its shareholders. Benefits included all benefits that were not obtained through previous corporate governance initiatives. In addition, they included benefits that were obtained in the process of preparing the compliance report and the improved perception of the shareholder on the organisation.
The costs included the initial implementation costs, as well as the annual maintenance costs. Costs comprised direct and indirect costs attributable to SOX. Direct costs included consultants’ costs, staff costs and other costs directly attributable to SOX. Indirect costs included cost of corporate performance and other costs indirectly attributable to SOX. Indirect costs are non quantifiable and are determined by evaluating the time spent on SOX compliance by senior management and the cost of their time which could have been used more effectively in the business.
The stakeholders were identified as follows: ? Shareholders outside of the management of the company which will be represented by investor analysts; ? Management of the abovementioned companies, including financial managers who have the details of costs; and ? Auditors. 29 4. 2. 2. UNIT OF ANALYSIS The unit of analysis used in this phase of the research was the interview results from the stakeholders affected by and involved in SOX legislation implementation. These were all individuals in a senior management role within a governancerelated role, executives, employees and providers of apital. 4. 2. 3. POPULATION OF RELEVANCE The population of relevance in this phase was the management and employees involved in implementation of SOX and shareholders or providers of capital. 4. 2. 4. SAMPLING METHOD AND SAMPLE SIZE The sampling method that was used is non-probability sampling as per phase one. Eight individuals were selected for this phase of the research. This comprised the following: ? ? ? Two shareholder analysts; Four management officials; and Two auditors. 4. 2. 5. RESEARCH INSTRUMENT The research instrument was the interviews that were conducted.
An interview guide was drawn up for the conducting of structured interviews with the stakeholders. The interview guide was drawn up using the research questions as a base, as well as the responses obtained from the experts identified in phase one of this research. The interview focused on the quantification of each of the cost components, as well as the quantification of the benefits. When costs and benefits 30 could not be quantified, any further qualitative factors were explored until an exhaustive list of costs and benefits was drawn up. 4. 2. 6. DATA COLLECTION
The data collected consisted of the factual information on all the cost components and related benefits in achieving compliance, as well as the opinions of the stakeholders identified. The opinions were collected during the interviews with each of the stakeholders identified in the sample. The interviews were structured using the interview guide. The results of the interviews were kept on record and analysed. 4. 2. 7. DATA ANALYSIS To ensure that the responses of the various individuals could be compared to reach a conclusion, the interviews conducted were structured and consistent from individual to individual.
The data was summarised as per phase one, which provided a suitable format for ease of comparison amongst the various respondents. This resulted in being able to analyse the data and draw findings. 4. 3. COMPARATIVE ANALYSIS The results from the two phases above were compared and combined to provide a holistic answer to the research questions. Phase two results were used to corroborate the results of phase one and present the holistic view. 31 4. 4. RESEARCH LIMITATIONS Some limitations were recognised at this stage of the research and findings were considered in light of these.
The limitations are set out as follows: ? The nature of the study was predominantly qualitative and resulted in small sample sizes; ? The use of judgemental sampling produced results that may not be a true representation of the total population; and ? The data obtained was predominantly from the interviews. The interviews could have been influenced by factors such as emotional distress of the respondents and time pressures and could influence quality of information provided by the stakeholder. Whilst every effort was made to mitigate these limitations, the limitations were present and could not be ignored. 2 5. RESULTS The results of phase 1 and phase 2 of the research are detailed below. Phase 1 refers to the results of the documentary research and phase 2 refers to the results of the structured interviews. The documentary research results include a section for each of the following: ? ? ? ? ? A detailed understanding of SOX; The purpose of SOX; The expected benefits of SOX; The expected costs of SOX; and The opinions of the experts interviewed. The structured interview results include a section for the response to each of the following: ? ? ? ? ? Additional corporate governance structures as a result of SOX; Different categories of costs involved in SOX; Different categories of benefits arising from implementing SOX; The impact of SOX in the mining industry; Success of SOX; and Whether benefits of SOX compliance exceed costs. The frequencies of the responses from the structured interviews will be disclosed where necessary. 33 5. 1 PHASE ONE: DOCUMENTARY RESEARCH 5. 1. 1 UNDERSTANDING OF SOX In response to a number of high-profile scandals since late 2001, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) to enhance corporate governance and restore public confidence.
SOX brought about significant changes in accounting, auditing, and reporting environment of organisations that traded in American securities markets (Kamar, Karaca-Mandic and Talley, 2006).
The Act has introduced significant changes in both management’s reporting responsibilities and the scope and nature of responsibilities of the auditors. When President Bush signed the act into law, he characterised it as “the most far reaching reform of American business practices since the time of Franklin Delano Roosevelt” (Zhang, 2005).
Section 404 – Management Assessment of Internal Controls The most significant provision introduced by SOX is section 404 of the Act, which requires organisations to maintain internal controls over the accuracy of financial reporting and to include in the firm’s annual report an audit by an external auditor on the effectiveness of these internal controls, describing any material weaknesses and significant deficiencies found. This provision is the most challenging aspect of the Act and will cost organisations the most in becoming compliant, as it requires a substantial investment of time, people and intellectual capital. SOX, 2002) 34 The main challenges for corporate boards and management posed by section 404 are: ? ? The need to devote significant time and resources to ensure compliance; The need for management to evaluate and report on the effectiveness of internal control over financial reporting; ? The requirement for external auditors to opine on management’s assessment of the effectiveness of its internal control over financial reporting; ? The need to assess the implications of reporting the new information to the marketplace; and ? The need for board of director and audit committee versight of management’s process, findings, and remediation efforts as management scopes and executes its section 404 plan. (PwC, 2004) Section 906 & 302 – Corporate Responsibility for Financial Reports Provisions other than section 404 did not take as long to implement. Section 906 requires that chief executive officers (CEOs) and chief financial officers (CFOs) certify the accuracy of the organisation’s periodic reports. In addition, the CEOs and CFOs are subject to criminal penalties and fines for false declarations and certifications.
Similar to section 906, section 302 requires that CEOs and CFOs certify the organisation’s periodic reports on the effectiveness of internal controls over financial reporting. This section lays the foundation for section 404 (SOX, 2002).
35 Section 804 – Statute of Limitations for Securities Fraud Another immediate effect of SOX was the extension of the statute of limitations for filing shareholder lawsuits. Before the enactment of SOX, shareholder plaintiffs had been required to file claims within the earlier of three years of the occurrence of the fraud or one year of its discovery.
Section 804 increased these time limits to five years and two years respectively (Kamar, Karaca-Mandic and Talley, 2006).
Section 306, 402 & 403 – Directors, Officers and Shareholders SOX made immediate changes to executive compensation on several fronts. Section 402 bans loans by firms to directors and officers. Many of the loans to directors and officers are provided on attractive terms and were viewed as hidden compensation. Section 306 precludes directors and officers from trading in firm securities during pension blackout periods unless the trade is part of a trading plan.
Section 403 requires directors, officers and 10% shareholders to report their trade in an organisation’s securities within two business days following the trade – up from ten business days after the month of trade, and in some cases forty days after the end of the fiscal year of trade, under previous law (Kamar, Karaca-Mandic and Talley, 2006).
Section 301 and 407 – Audit Committees and Financial Expert Section 301 of SOX requires that all firms listed on the stock exchanges have an audit committee comprising independent directors only. Independent director” has been defined as a person who may not, other than his position as a member of the audit committee, accept any other form of fees from the organisation nor be affiliated to any subsidiary thereof. In addition, the audit committee has been 36 provided with full authority to engage in independent counsel and other advisors as it determines necessary to carry out its duties (SOX, 2002).
Section 407 requires that organisations disclose whether any members of the audit committee are financial experts. If there are no experts on the audit committee, a reason needs to be provided (Kamar, Karaca-Mandic and Talley, 2006).
Section 201 – Services outside the Scope of Practice of Auditors Section 201 of SOX prohibits an organisation’s external auditing firm from providing various non-audit services, including bookkeeping or other services related to the accounting records or financial statements of the audit client, financial information systems design and implementation, appraisal or valuation services, actuarial services, internal audit services, management or human resource functions, investment banking services, legal services and any other service that the board determines impermissible (SOX, 2002).
The above provisions of the Sarbanes-Oxley Act were legislated in 2002 and applicable to all organisations listed on US stock exchanges. Some provisions were applicable to listed organisations immediately, while others where phased in and applicable over a period of time, giving organisations time to implement the necessary provisions to become compliant. 37 5. 1. 2 PURPOSE OF SOX The purpose of the Act is to prevent deceptive accounting and management behaviour.
As mentioned before, not much was done by the American regulators about the series of corporate scandals such as Enron and Worldcom, which were caused by questionable accounting practices, bad management and poor internal controls. In fact, these scandals proved to be the last two straws that broke the camel’s back, resulting in the introduction of the Sarbanes-Oxley Act of 2002. “The market decline and corporate failures led to just such a general sense that politicians should do something”.
The fact that the November 2002 elections were very close also gave urgency to the legislation action, and corporate responsibility became an important political issue for first time in 70 years. In July 2002 congress passed the Act with only three members voting “no” (Atkins, 2003).
Another result of these scandals was low investor confidence, and 2002 was the first year since 1988 that US investors took more money out of stock mutual funds than they put in.
Many investors had also lost confidence in equity securities since the burst of the dot com bubble and the effect of the corporate scandals simply exacerbated the situation. Corporate governance had to be strengthened to restore investor confidence (Atkins, 2003).
The Act acknowledges the importance of the investor and shareholder value and strengthens the role of directors as representatives of shareholders and reinforces the role of management as stewards of the shareholders interest (Atkins, 2003).
38 5. 1. 3 EXPECTED BENEFITS OF SOX ?
Registrants’ attention to maintaining effective systems of internal control and identifying and remediating internal control deficiencies before material misstatements occur has intensified and will improve reliability of financial reporting; ? Business processes are enhanced through standardisation and simplification, enhanced appreciation and accountability for internal controls and a shift from manual to automated controls; ? Reduction of risk in the organisation through an enhanced internal control environment and availability of funding and resources to remediate internal control deficiencies and weaknesses; ?
Audit committees and boards of directors are more attentive to their fiduciary responsibilities related to financial reporting and are more engaged in overseeing the financial reporting process; ? Investors and analysts are currently being provided greater transparency, allowing them to make more informed investment decisions based on reliable and transparent financial statements; ? The audit profession has been subjected to regulatory processes that provide external oversight and focus on the profession’s business platforms, independence, and professional practices; and ?
Audit firms have enhanced their relationships with audit committees, have trained their people on auditing internal controls, and enhanced their audit approach to focus on the evaluation of internal controls along with the performance of the financial statement audit. These changes and 39 enhancements coupled with external regulation help to restore investor confidence in capital markets. (PwC, 2005) 5. 1. 4 EXPECTED COSTS OF SOX Unlike the benefits, the costs are more easily quantifiable.
Initial implementation costs and setup costs will be much higher compared to subsequent year costs due to the benefits of the learning curve of year one and reduced documentation. Costs associated with compliance are as follows: ? Internal costs o Staff costs – additional staff recruitment o Training and development o Computer software o Internal audit costs ? External costs o Computer software consultants o Implementation consultants o External audit costs arising from increase in audit fees due to increase in scope o External training consultants 0 A survey was conducted by CRA international to review data on costs of SOX compliance for a sample of Fortune 1000 clients of the big four audit firms with a market capitalisation over $700 million. The same survey was conducted to review data on costs of SOX compliance for a separate group of smaller public companies with a market capitalisation between $75 million and $700 million (CRA, 2006).
The survey of costs for smaller companies are summarised as follows: Table 1 – Smaller Company Costs Summary Source: CRA International
The total cost of section 404 has decreased on average by 30. 7% from the first year to the second year for smaller companies. This decrease is attributable to a decrease in 36% for total issuer costs and a decrease in 20. 6% for section 404 audit costs (CRA, 2006).
41 Table 2 – Larger Company Costs Summary Source: CRA International The total cost of section 404 has decreased on average by 43. 9% from the first year to the second year for smaller companies. This decrease is attributable to a decrease in 50. % for total issuer costs and a decrease in 22. 3% for section 404 audit costs (CRA, 2006).
The decrease in the total issuer costs in the tables above is attributed to the cost of implementation incurred in year 1 while year 2 cost is the cost of maintaining and had reduced documentation and better internal controls. The decrease in the audit fees is attributed to the learning curve experienced from year 1 to year 2 by the auditors (CRA, 2006).
For SOX to be sustainable in the long term, the annual costs must not be abnormally high.
The costs of SOX compliance has been high initially when compared to the second year of compliance costs incurred. With the costs decreasing from initial costs, SOX may prove to be sustainable in the long term. 42 5. 1. 5 RESULTS FROM THE INTERVIEWS WITH THE EXPERTS Table 3 – Experts interviewed Interview Category Audit Expert Company PricewaterhouseCoopers Name Function Megan Naidoo Senior Manager, Energy and Mining Pieter Marais Mike White Senior Manager, Energy and Mining Director, Enterprise Risk Services Audit Expert Audit Expert
PricewaterhouseCoopers Deloitte The results of the interviews with the experts were divided into the five research questions as discussed in Chapter 3 and the overall conclusion of whether benefits exceed costs provided. Where a response was stated by more than one expert, the number of times the response was given is stated in brackets at the end of the sentence. Table 4 – Response from Experts on Corporate Governance Structures 5. 1. 5. 1 ? ? Corporate Governance Structures Companies were following the King Code on Corporate Governance. 2) SOX didn’t change anything for companies that were listed on the JSE except for companies with dual listings. ? SOX forces companies to implement internal controls that relate to financial reporting. (2) ? SOX requires management to test controls for adequacy and effectiveness and requires the auditors to test management’s assessment on controls. (2) 43 ? SOX formalised the controls process through documentation of the controls, as well as determining the adequacy of the controls. The experts have indicated that the companies in South Africa were following the King report before SOX came about.
This has not changed since the advent of SOX as companies were still following the King report in addition to SOX. With SOX, the companies implemented financial controls and this changed the mindset of individuals in the organisation towards controls and risk. Management were more involved in the financial reporting process and were now accountable for their processes. The results from the two stakeholders were consistent with each other. Table 5 – Response from Experts on Costs of SOX 5. 1. 5. 2 ? Costs of SOX
Constraints by internal audit departments due to the additional work responsibilities tasked to them. ? ? Hiring of additional staff due to the increased work requirements. Consultants’ costs as firms outsourced of the whole control identification and documenting process to certain audit firms in the readiness phase. ? ? Additional audit costs due to application of Auditing Standards. (2).
SOX resulted in unintended consequences of certain companies shifting away from a US listing to an alternate exchange because of the costs involved with compliance. (2) 4 Table 6 – Response from Experts on Benefits of SOX 5. 1. 5. 3 ? ? Benefits of SOX There was an awareness of the controls process by all employees. Audit committees were more involved and focused and ensured that management did not override controls by following up vigorously on any abnormal occurrences. ? ? ? Companies’ operations have improved by addressing the risks. The quality of the external audit has been improved. Companies with bad governance or no governance structures in place have benefited by being forced to have good governance structures. Allows companies access to the US capital market, which is one of the most liquid markets to raise finance. (2) Table 7 – Response from Experts on SOX Impact on Mining Industry 5. 1. 5. 4 ? Impact on Mining Industry The mining industry is one of the oldest industries in South Africa and has good controls. The existing controls in place before SOX were adequate and the additional controls that came about through SOX merely filled the gaps. ? SOX provided no additional enhancement to fraud prevention as code of ethics with mining companies is high. 45
Table 8 – Response from Experts on Whether SOX achieves its Objective 5. 1. 5. 5 ? ? Does SOX achieve its Objective It is uncertain whether SOX is achieving its objective. Maybe it does achieve its objective, as there have been no scandals since the inception of SOX. (2) ? ? Has SOX restored investor confidence? It is debatable. Investors know which companies are well governed and the disclosure of significant deficiencies makes a company more transparent and hence the investor will have more faith in the company. Table 9 – Response from Experts on SOX Benefit vs Costs 5. . 5. 6 ? Does Benefit Exceed Costs? If SOX is implemented smartly it can result in benefits exceeding costs. Year 1 costs were high and benefits were not as high as costs involved in compliance, as too many controls. Year 2 costs have come down as companies found the right level of controls and benefited from the learning’s achieved in year one. (2) ? You can’t legislate for governance. It is an attitude and not a set of rules. SOX is a set of rules to enforce good morals and common sense. The SOX argument is an exercise in futility and the cost benefit equation is nil.
If people are rotten apples they will override the rules. You can’t force people to have good morals. It is interesting to have a correlation between poorly governed before SOX and share price and SOX compliant and share price. 46 5. 2 PHASE TWO: STRUCTURED INTERVIEWS Table 10 – Respondents Interviewed Interview Details Category Company Name Hester Hickey Function Executive Officer, Head of Risk Management Harmony Gold Mining Company Limited Management BHP Billiton Nolubabalo Sondlo Kobus Boolsen Management BHP Billiton Carl Klingenberg Management Sasol Limited
Nina Stofberg Assistance Audit Manager Group SOX 404 Compliance Manager Investment Analyst Investment Analyst Auditor PricewaterhouseCoopers Hermann Waschefort Macquarie First South Securities JP Morgan Justin Froneman Allan Cooke Equity Research Analyst Equity Research Analyst Senior Manager, Systems and Process Assurance Auditor Deloitte Sidesh Maharaj Director, Enterprise Risk Services Sarbanes-Oxley Compliance Manager Regional Audit Manager Management AngloGold Ashanti 47
The results of the interviews with the experts were divided into the five research questions as discussed in Chapter 3 and the overall conclusion of whether benefits exceed costs provided. Where a response was stated by more than one expert the number of times the response was given is stated in brackets at the end of the sentence. Table 11 – Responses from Stakeholders on Governance Structures 5. 2. 1 CORPORATE GOVERNANCE STRUCTURES IN PLACE ? The organisations were complying with the King Code on Corporate Governance. (7) ?
The company conducts annual stewardship reviews, which requires a site visit and inspection of the financial reporting processes across the various sites. ? The company complies with the Principles of Good Governance and Code of Best Practice contained in section 1 of the UK combined code. ? ? The organisation used to apply the COSO framework of internal controls. (3) After the introduction of SOX, the company still applies the previous corporate governance structures in addition to SOX initiatives. (8) ? With the application of SOX, the company has set up a project team to implement the Sarbanes-Oxley Act and has created a Compliance Office.
The company set up a SOX steering committee, which discusses issues between external audit, internal audit, the SOX office and finance. (2) ? Main additional effect of SOX was the documentation and testing of controls, a disclosure committee that is responsible for signing off of financial statements (20F) before being given to the CEO and CFO, and the creation of a Code of Ethics for employees and senior financial officers. (6) 48 ? CFOs and CEOs of each business unit had to sign off on their respective divisions’ financial reporting controls (20F) to sign off the SOX certification. 2) Table 12 – Response from Stakeholders on Costs Involved in Compliance 5. 2. 2 COSTS INVOLVED IN COMPLIANCE Internal Costs ? ? ? ? ? ? ? ? ? ? ? ? Additional staff costs – (4) Internal audit costs Systems to put in place (4) Systems specialist (4) Overseas visits and travel costs (3) Productivity losses and loss of business focus. Management’s time spent on governance (3) Telephone costs Time to develop a central SOX team Time lost spent on internal audit (2) Training of staff Use of SOX as a budget enhancer External Costs ? ? ? External audit fee increase (4) External consultants costs (6) Systems reviews (2) Additional office space 49 ? ? ? ? Tools – SOX-compliant tools. Legal fees Offshore listing costs Additional compliance costs Below is the actual costs provided by one of the stakeholder respondents. The costs represent a breakdown of costs from the application of SOX. Table 13 – Costs of Compliance for a Company Expenditure Software for SOX External Consultants Internal Staff Costs Travel Costs Total Costs 2008 R300 000 R7 500 000 R7 500 000 R1 000 000 007 R300 000 R9 000 000 R9 000 000 R1 000 000 2006 R300 000 R10 000 000 R4 000 000 R1 000 000 2005 Nil R9 000 000 R1 000 000 Nil R16 300 000 R19 300 000 R15 300 000 R10 000 000 Costs involved in compliance were minimal for all sections but section 404. The costs incurred in 2005 were low, as the company was not required to comply with the Act and was at the beginning of its implementation phase. The costs for 2006 contained the majority of the costs as it was in the finalisation of its implementation phase as well as the testing phase.
Although 2007 costs were higher than 2006 costs, a fair bit of expenditure included in 2007 is related to 2006. The 2008 expenditure is an estimate and costs are expected to fall from the 2007 levels. The 2008 cost is expected to represent the average costs of compliance going forward. 50 The above costs exclude external audit fees that relate to the audit of SOX. The audit of SOX was conducted together with the annual audit and resulted in a significant jump in audit fees, from R24 million to R60 million – of this, the increase attributable to SOX was R24 million. The audit was passed with no material weaknesses.
After SOX there was a radical shift – fear and hype about the Public Company Accounting Oversight Board (PCAOB), Securities and Exchange Commission (SEC) and possible prosecution abounded. No guidance was given by the SEC on AS 2 and significant effort was put into implementing controls and using internal audit more effectively. The result – a huge increase in audit fees – noted in one circular to be ranging from 50% to 110%. Table 14 – Response from Stakeholders on Benefits Obtained from Compliance 5. 2. 3 BENEFITS OTAINED FROM COMPLIANCE ? Controls are in place and are formalised thorough adequate documentation of controls in place. 4) ? ? Significant awareness by management of consequences of non-compliance Perceived benefit by shareholders due to confidence in management and more detail in the 20F certification of the financial statements ? ? ? Audit committees have additional comfort. (2) People are more accountable for the work under their review. (2) There is a better understanding of the business processes, control environment 51 and the risks inherent in the process. (3) ? ? Processes have been mapped out and have become streamlined. Removed silos that prevented interaction between various business units and departments. Identified gaps and weaknesses in the control environment and financial reporting system that have been addressed or are in the process of being addressed. ? It puts the investor more at ease with the affairs of the company with regard to the disclosure of material weaknesses that do or do not materially misstate the financial results of the company. (3) ? Peace of mind by the management team if proper processes have been followed ? Companies now have a comprehensive corporate governance structure in place. ? ? ? ? ? There is an increased transparency of corporate affairs. Investors have greater confidence in the company.
There was a great improvement in the processes. There is a benefit from the change in mindset. Leadership has been moved in the right direction with a control focused organisation. ? Committees were created, which added additional admin initially and have evolved into a controls steering committee. ? ? Credibility has been brought to the Internal Audit function. It has changed the level of communication and relationship at CFO level. 52 ? The world has moved to a more responsible and accountable executive team towards shareholders. ? ? ? ? ? ? ? Governance in the organisation has improved. Internal control rating has improved.
Maintain a listing on the NYSE – access to one of the largest capital markets International exposure to global markets Implemented a culture of control awareness at an employee level Heightened fraud awareness Overseas investors were fickle about SA and SA companies and paint one brush over all companies in SA. Being SOX-compliant changed perception of US investors in SA markets. Table 15 – Response from Stakeholders on the Impact on the Mining Industry 5. 2. 4 IMPACT ON MINING INDUSTRY ? A significant amount of costs have been incurred by the mining industry, as they are huge organisations with operations and offices around the world. 5) ? The additional work performed by the auditors will also be substantial and the organisation will incur huge audit costs compared to previous years. It is difficult to measure the benefit to the mining industry, as there is no real benefit to the industry that has arisen due to SOX. (2) ? There was no significant impact other than costs that affected the mining industry. SOX had no real impact on corporate governance. SOX made things more onerous with no real quantifiable benefit. (2) 53 ? Mining industry is huge with high expenditures. SOX costs might be individually significant; however, immaterial in the mining industry. (2) ?