Critics See Some Good From Sarbanes-Oxley

							Critics See Some Good From Sarbanes-Oxley
As Law Turns Five, They Say It's Too Costly, But It Exposes Problems Before They Explode
By JOANN S. LUBLIN and KARA SCANNELL Wall Street Journal July 30, 2007; Page B1



                                                                       Invitrogen Corp. spent about $2.5 million and 10,000 hours of
                                                                       employees' time last year reviewing its inventory-counting
                                                                       procedures, computer-system access and other "internal
                                                                       controls." The checks, required by the Sarbanes-Oxley
                                                                       corporate-reform law, found small gaps in documentation but
                                                                       no hint of accounting fraud.

                                                                       Officials at the Carlsbad, Calif., biotechnology company think
                                                                       the costs are excessive. But they say Sarbanes-Oxley helped to
                                                                       spur other changes that made Invitrogen a better-run business.
                                                                       Directors meet more often without executives present. Multiple
                                                                       ombudsmen field employee complaints. Ethics training is more
                                                                       rigorous. And Chief Executive Greg Lucier requires his
                                                                       lieutenants to take more responsibility for their results.

                                                                       "Sarbanes-Oxley brought a lot more focus to the efforts we
                                                                       were already taking," Mr. Lucier says. "Invitrogen investors are
                                                                       better protected because Sarbanes-Oxley regulations have been
                                                                       put in place."

Invitrogen's experience is instructive as the Sarbanes-Oxley law marks its fifth anniversary today. The law,
passed overwhelmingly by Congress in the wake of scandals at Enron Corp., WorldCom Inc. and elsewhere,
has proved costlier than executives would have liked. By the end of this year, public companies in the U.S.
will have spent more than $26 billion to comply, estimates AMR Research, a Boston technology-research
firm. That figure covers everything from staffing to consultant fees and technology.

But even critics acknowledge the law has done some good. "There is without question greater accountability
in the boardroom," says Thomas Lehner, an official of the Business Roundtable, a Washington group
representing big-company CEOs. More boards resolve potential problems "before they fester and explode,"
concurs John Olson, a senior partner at Gibson, Dunn & Crutcher who advises directors at about a dozen
concerns.

And institutional shareholders hurt by the scandals applaud the law's impact. "Sarbanes-Oxley really has
been a critical safeguard in reassuring investors and restoring confidence in the integrity of companies'
financial statements," says Dan Pedrotty, head of the AFL-CIO's Office of Investment.

The Sarbanes-Oxley statute demanded more rigorous internal controls, forced top executives to certify the
accuracy of financial results and created a watchdog for auditing firms. It also expanded the role of board
audit committees and required companies to take "whistleblower" complaints more seriously. Related stock-
exchange rules bolstered boardroom independence by requiring regular private sessions of independent
directors, among other changes.

"In the minds of the investing public, those are important safeguards, and I think in fact they are," Mr.
Lehner says.
Securities and Exchange Commission Chairman Christopher Cox said last week that the law helped to
restore confidence in U.S. financial markets. He also said that compliance costs for the law are falling and
that the review of internal controls has "contributed significantly to more reliable financial reporting."

During the first years after the law took effect, the heightened focus on internal controls prompted hundreds
                                       of companies to disclose "material weaknesses" in their accounting and
                                       to restate prior financial results.

                                      In 2005, for example, medical-products maker Baxter International Inc.
                                      cited errors in income-tax accounting and said it would restate financial
                                      results from 2001 through the third quarter of 2004. The restatement
                                      increased the company's previously reported stockholders' equity by
                                      about $108 million for 2001 to 2003 but didn't alter revenue or
                                      earnings. A spokesman says Baxter fixed the errors and declines further
                                      comment.

                                      More recently, the wave of restatements and weakness disclosures
                                      appears to have crested, as more companies fixed old problems and
                                      avoided new ones. In 2005, nearly 11% of companies with annual
                                      revenue over $500 million warned of material weaknesses, reports
                                      Corporate Executive Board, a Washington research firm. Last year, that
                                      proportion dropped to 4.3%.

                                    The number of companies restating financial results nearly tripled, to
1,403 from 513, between 2003 and 2006, according to proxy advisers Glass, Lewis & Co. In the first six
months of this year, though, the number of companies with restatements fell to 698 from 786 in the year-
earlier half.

Invitrogen officials say they've always imposed strict ethical and financial controls. But Sarbanes-Oxley
requires extensive reviews to ensure that financial controls are sound. Last year, that meant that the 4,300-
employee company, with annual revenue of nearly $1.2 billion, monitored about 60 accounting processes
and 350 controls, according to Kelli Richard, vice president of finance.

Three years of such reviews have uncovered only minor issues involving documentation of procedures and
small variations during the integration of acquisitions, directors and executives say. "At the core, [controls]
were fine," says Donald Grimm, Invitrogen's lead director and a retired Eli Lilly & Co. executive. "But
sometimes at the edges, they weren't as good as they should be."

Last year, for example, a new software system in Europe delayed customer invoices, swelling accounts
receivable. The board's audit committee asked internal and outside auditors to investigate further and
concluded "there was no accounting or financial-reporting issue," says Raymond Dittamore, a retired partner
of Ernst & Young and an Invitrogen director who is chairman of that committee.

Chief Financial Officer David Hoffmeister says the initial scrutiny of internal controls mandated by
Sarbanes-Oxley cost $3 million to $4 million in 2004. Last year, the tab was $2.5 million because Invitrogen
no longer needed numerous outside consultants. Nonetheless, Mr. Hoffmeister says, employees "are still
spending the same amount of time" on compliance.

He and other Invitrogen officials say Sarbanes-Oxley has had a big impact in other ways, too. Messrs. Lucier
and Hoffmeister now must swear to the accuracy and completeness of financial results. So Mr. Lucier
requires nearly 20 other executives -- including those overseeing functional groups such as law and
information technology -- to certify their reports to him. Before Sarbanes-Oxley, top executives reviewed
results by talking to eight financial controllers world-wide.

"You sit across from your fellow board members and look them in the eye," says Mr. Lucier, who arrived in
2003. "You know you have to certify results. You realize that has a lot of consequences."

Mr. Lucier also beefed up Invitrogen's code of conduct. Each employee must take a 30-minute tutorial about
the code annually, then agree in writing to observe it. The revamped code, dubbed Protocol, is available in
11 languages and contains colorful examples of hypothetical misdeeds, such as falsified accounting for
warehouse shipments in order to achieve profit targets. In late 2004, Invitrogen assigned ombudsmen to all
of its major sites, where they handle complaints from would-be whistleblowers.

Complaints involving accounting or financial results get forwarded immediately to Mr. Dittamore. "No
significant violations have been raised," says John Skousen, Invitrogen's vice president of compliance.

In 2001, before Sarbanes-Oxley became law, Invitrogen's outside directors began meeting among
themselves. Now, the audit committee also meets in executive sessions. The sessions encourage frank
discussions, giving directors more chances to say, "This doesn't smell right. We have to go back and dig
deeper," Mr. Grimm says.

In April, Mr. Lucier surprised the board by proposing to promote an executive to a newly created post.
During the executive session that followed, the nine independent directors objected that the official lacked
the right experience. Directors said, " 'We don't think this is going to work,' " Mr. Grimm recalls. So "we
took that back to Greg."

Heeding their protests, Mr. Lucier says he agreed to phase in his colleague's new duties. That approach
"satisfied everyone's concerns," Mr. Grimm says.

• Theory & Practice is a weekly look at people and ideas influencing managers. Send comments to
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Write to Joann S. Lublin at joann.lublin@wsj.com and Kara Scannell at kara.scannell@wsj.com