This Week's Herman Trend Alert

Leadership in Normal 2.0

  The Herman Trend Alert

November 22, 2006

Maintenance SOX?

In the past decade there has been a dramatic increase in corporate accountability. High profile accounting debacles have brought management practices under close scrutiny. To answer calls for justice from shareholders, employees and the public, courts are holding governing boards and the executives they hire to task.

One attempt to add safeguards against shareholder fraud result is the Sarbanes-Oxley Act of 2002 (‘SOX’). While established with good intentions, the financial burden on corporations and federal regulators is significant. A recent survey found that companies with average revenues above $5 billion report an average cost of compliance of $4.36 million. Expense areas include more stringent audit procedures, upgraded accounting system technology to enable compliance, and the addition of accounting and controllership staff.

Many people are cautiously optimistic that accounting problems of this scale are behind us. The question now is “how might a skittish administration adapt and apply the SOX ‘solution’ to other areas of big business?”

Some see equipment and facilities maintenance as an emerging area of concern. Like personal property, corporate assets wear out and need maintenance and replacement. At some point it’s only good business to make these investments. But what prevents a company from putting off these important expenditures--if no one is watching?

This situation has already begun to come to the surface in the petroleum products distribution industry. In early 2006 petroleum giant BP reported two pipeline ruptures at its Prudhoe Bay oilfield; one of which totaled some 200,000 gallons of oil. One BP employee admits, “We are at the point where there is so much damage to the lines from corrosion, we don't know where another leak will occur.”

Once again, furious shareholders, Alaska residents, and concerned environmentalists are calling for remedy. Consequently, BP is currently under criminal investigation for its pipeline management practices.

There are countless other examples of deteriorating corporate assets that may cause harm or damage. There is no question that the regulatory environment will shift to address maintenance and related issues. What remains to be seen is when and how it will happen. Remediation will be costly and time consuming.

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