Profiting from Sarbanes-Oxley

An article on SmartMoneydiscusses the price performance of Resources Global Professionals a financial consulting company that has profited greatly from Sarbanes-Oxley. The company has been doing extremely well over the last 12 months and gives a solid forecast for the future:

But one comment sheds particular light on the company's continued success: "Fiscal 2005 saw the expansion of many client relationships with companies who initially became familiar with Resources for Sarbanes-Oxley compliance efforts, but have extended their work with us into other core business areas."

Cross-selling, in other words. And Resources is still doing plenty of compliance and audit work for foreign companies, as well as companies that are trying to resolve problems that initial audits uncovered. That reflects pretty cleanly an observation from CIBC analyst Thatcher Thompson that we mentioned in our last story, that "upfront compliance is revealing shortcomings at many companies that will involve other projects to fix."

I assume that this is also good news for the other accounting firms and consulting companies (althought the shares of Accenture have been basically flat for the past 18 months).

The next round of Sarbanes-Oxley may result in less work, but be more specialized. Deloitte in a recent newsletter stated the following:

Many financial institutions are evaluating next steps in their 404 programs. Some are sitting back and waiting until next year to repeat the cycle of testing and evaluation of their internal controls. Others are taking the lessons learned and using them to implement new processes and modify system shortcomings. For several reasons, we believe the latter approach is far more prudent.
First, Section 404 is more than a “pass/fail” test of controls. The misleading implication of viewing Section 404 in this way is that a firm that passes has nothing to worry about. But this might not be the case. A pass does not necessarily mean that all is right with a firm’s risk management program. By its nature, compliance and reporting can never be entirely fail-safe. 404 programs will require constant fine-tuning and vigilance.

Stock buybacks

There is an interesting article at Investor's Business Daily about the amount of stock buyback programs announced year to date. The article states that more buyback programs are resulting in fewer shares outstanding as opposed to simply netting out the added shares of option programs:

"Earnings this quarter came in above expectations. The sheer scope of cash in the corporate coffers is quite impressive," said Richard Peterson, market strategist for Thomson Financial.

By buying back shares, companies give an instant boost to their earnings per share, since there are fewer shares outstanding.

Also, by diminishing the supply of shares, they can raise the price if demand remains the same.

In actual practice, most buybacks are used to offset stock option grants to employees or dilution from acquisitions. So they don't truly reduce share counts.

But that's changing, said Howard Silverblatt, equity analyst with Standard & Poor's.

In the first quarter, 34% of buybacks were used to reduce shares, he said. That's way up from the fourth quarter's 22%, which is the long-term average.

I had a post a bit ago about Autozone and its buyback program and how it has affected the company's reported EPS. Companies are paying a high price to boost EPS. This was also crux of the issue with Altera and its treatment of Wells Fargo analyst Ted LaFountain (for a recap click here).

Microsemi's acceleration of options

In a press release today Microsemi's board of director's stated that it had accelerated the vesting of all of its 8.2 M (note that "only" 35% are held by executive officers and directors, geez why not just leave open the company safe) stock options in order to avoid stock compensation expense under SFAS 123(r). The release goes on to state:

Microsemi took the action in the belief that it is in the best interests of stockholders to minimize future compensation expense, and this was the purpose of the vesting acceleration. Upon Microsemi's planned adoption of FASB Statement No. 123 R, "Share-Based Payment," effective for fiscal year 2006, vesting of unvested options will add to Microsemi's compensation expense. Therefore, we accelerated vesting into fiscal year 2005 before the new accounting rule takes effect.

Stock options are granted for numerous reasons: one being to align employees interests with those of stockholders, but if a company is just giving them away what is the point?

The chairman of Microsemi stated:
Microsemi's Chairman Dennis R. Leibel commented, "We believe that the accelerated vesting of these options is in the best interests of Microsemi and its stockholders, as this action will avoid a significant non-cash compensation expense in future periods and has minimal net effect on the optionees."