UB Viewpoint - Corporate governance, enterprise software, financing

Although corporate scandals such as those at Enron, WorldCom and Parmalat represent a small fraction of business activity, they have garnered an outsized percentage of media attention.

In the United States, the main regulatory response to recent corporate malfeasance has been the Sarbanes-Oxley Act of 2002.

This legislative regimen aspires to vastly expand the transparency and speed of corporate reporting.

The act mandates personal executive responsibility, indeed a powerful lever of compliance.

Business practice and enabling technology drive each other.

During most of the 20th century, the Sarbanes-Oxley mandate would not have been possible.

Absent powerful, reliable computers and software, closing financial statements required months. Discovering aberrations relied on persistence and luck.

In the 1990s, enterprise resource planning (ERP) software developed to rationalize planning over several functional areas of the business enterprise.

As the 21st century begins, business software firms are generalizing this concept to integrate transactions, business processes and enterprise-wide objectives.

Conceptualization, implementation and monitoring of projects and enterprise vision are enabled by integrated business intelligence systems.

Although many firms offer ERP products, Germany's SAP and U.S.- based PeopleSoft dominate the market.

At the Robert G. Merrick School of Business at the University of Baltimore, where I teach finance, we have chosen PeopleSoft as our platform for modernizing and energizing the business school curriculum.

Our goal is to change the perception and teaching of marketing, finance and other functional areas as separate silos of activity and outlook.

By infusing our business courses with at least a sense of PeopleSoft's transacting, business processing, planning and monitoring capabilities, the Merrick School of Business hopes to prepare our students for a Sarbanes-Oxley world of real-time data acquisition, sharing, archiving, exploration, monitoring and reporting.

Compliance with the provisions of the Sarbanes-Oxley Act creates costs such as managerial time, auditing fees and software investments.

For example, Section 404 of the act will force companies to gauge the strengths and weaknesses of their information-gathering processes and demonstrate controls related to the prevention, deterrence and detection of fraud.

Top-level officers are required to attest to the accuracy of the firm's financial statements, encouraged by potentially significant personal financial and criminal sanctions.

They are also required to affirm the adequacy of their firm's internal controls.

Other new requirements involve restriction on stock trading by directors and officers, limitations on services performed by independent auditors, disclosure of off-the-books transactions and the creation of an anonymous channel that employees can use to contact an outside director about possible abuses.

Well-established theories in the accounting and finance literature speak to a reduction in the cost of capital as information frictions are minimized.

When investors know what happens in the companies in their portfolios, they sleep better, which lowers what is known as the equity risk premium.

The value of traded claims on cashflows, such as common stock and bonds, may increase with business transparency.

Higher-security valuations are synonymous with a lower cost of capital, a crucial element of economic growth.

If U.S. managers incorporate enterprise-level best practices and routinely generate accurate and timely financial statements, U.S. industry will reap the joint rewards of management efficiency and enhanced business valuations.

As global investors become comfortable with our country's corporate management and governance, they will continue to facilitate and bankroll economies of scope and scale.

Joel N. Morse is a professor of finance at the University of Baltimore Robert G. Merrick School of Business.

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