XL Capital CEO says disclosure rules won't ferret out fraud
The Sarbanes-Oxley Act's disclosure requirements won't detect accounting fraud, in the opinion of one of several top insurance executives who analyzed the costs and benefits of the corporate governance law at the recent Standard & Poor's Insurance Conference.
"Fraud isn't going to be caught by looking at minor controls," said Brian O'Hara, president and chief executive officer of XL Capital Ltd., during a discussion of the internal controls over financial reporting required by Section 404 of Sarbanes-Oxley.
"Some of the things that are coming out" now through probes by state attorneys general, insurance regulators, and the Securities and Exchange Commission "weren't even going to be caught by 404," Mr. O'Hara added.
However, better financial statements are being produced as a result of Section 404, according to Stephen Lilienthal, chairman and CEO of CNA–responding to a question from panel moderator Steven Dreyer, S&P managing director.
"Partnerships with external auditors–the amount of work that we do with them–while…intense right now, make for a better company," Mr. Lilienthal said. "I can't think I would volunteer to do that again, but I think it was a better process….I think it was a better answer."
"Certainly I didn't enjoy the amount of money involved," he added, referring to the hike in audit fees. "But at the end of the day, I actually prefer having a definition with respect to what was going to be done–and that there was a deadline to get it done."
He said that "after all the time, after all the money and the lost opportunity…it's done. Let's get on with it," noting his desire to return to the core activities of operating an insurance enterprise.
That's not how Mr. O'Hara viewed 404 deadlines. "I thought we were kind of stampeded," he said, adding that in the first year of implementation, "there was an atmosphere of, 'If you don't pass, get signoffs from your auditors…with no material deficiencies, it's a death sentence.'"
That wasn't even true, he said, noting that some public companies have had material deficiencies "and nothing happened–because investors really care about the core business, whether earnings are going in the right direction," rather than if there's a material deficiency in the tax department.
"The scope was ridiculous. The level of detail of what was considered significant control was absurd, and the cost benefit, I couldn't find," he said.
Dennis Glass, president and CEO of life insurer Jefferson-Pilot, said that while his company spent a lot of money on the process (without disclosing the figure), as a percentage of overall budgeted expenses it was less than industry counterparts.
"We did it. We came out of it, I think, more comfortable than when we went into it–not that we were uncomfortable when we went into control review," he said.
Mr. Lilienthal also commented on the fact that while large companies had some flexibility to use internal resources to complete the 404 process, "smaller, publicly-traded companies choked on this," noting that costs to comply with requirements did not vary by size of company.
Quotebox, with O'Hara mug:
"The scope was ridiculous. The level of detail of what was considered significant control was absurd, and the cost benefit, I couldn't find."
Brian O'Hara, President & CEO
XL Capital Ltd.
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