Experience and strict controls boost confidence
A three-letter acronym – SOX – often comes up in the professional conversations of Jayme Fonseca, who has a degree in business administration and specializes in finance and controllership.
written by ◦ Nelson Letaif photos by ◦ Holanda Cavalcanti

SOX refers to the Sarbanes-Oxley Act, a law issued in the USA to regulate American stock markets and restore investor confidence, which was shaken by the financial scandals that marked the beginning of the decade. The Braskem officer responsible for Controllership, Jayme, 39, has been with the Odebrecht Group for 14 years. He oversees the implementation of the company’s supervision and control processes and ensures compliance with the SOX law, because Braskem shares are traded on Wall Street.

Due to his experience in this area and the expertise he has built up on the subject, Jayme is often consulted about the effects of the SOX law on the lives of other Brazilian companies listed on US stock exchanges. Its most positive impact will be improving the level of corporate governance in those companies. In Jayme’s opinion, this will bring rewards by making them more valuable in the eyes of investors. However, as he explains in this interview, it will also have a down side.

Odebrecht Informa – What is the Sarbanes-Oxley Act, and what impact does it have on publicly traded companies like Braskem?

Jayme Fonseca – The SOX Law was passed in 2002, in the wake of financial scandals like Enron and WorldCom that undermined US investors’ confidence. The aim was to restore investors’ and shareholders’ trust in the stock market. The law establishes a number of standards, some of which create a considerable amount of red tape, in order to officialize and clarify everything that goes on within a company in administrative terms, and bring it to the attention of the highest body, which is the Board of Directors, thereby making board members responsible for everything that goes on in their company.

OI – Board members and executives?

JF – Yes. Board members and executives are equally accountable. The aim of the law is to officially establish new accountability standards at the highest level of the company, which is the Board of Directors, regarding day-to-day operations, which are directly run by the company’s executives. The CEO (Chief Executive Officer) and CFO (Chief Financial Officer) can no longer say that they didn’t know what was going on in the accounting department, because they will have to sign an annual internal control report confirming that they do know, and that the report is a true and accurate statement of what is going on in the company’s businesses.

OI – How will this law impact companies listed on US exchanges?

JF – Although this is an American law, it affects all companies listed on US stock exchanges, including Braskem. There are 41 companies in Brazil that will have to comply with SOX. We are talking about the blue-chip companies in the Brazilian market. SOX contains two sections that directly affect the lives of those firms. One is Section 302, on corporate responsibility for financial reports. Braskem has been in compliance with this section since June 2003. An independent auditor must issue a report on the company’s internal control over financial reporting. In Braskem’s case, that auditor is PricewaterhouseCoopers. The other section of SOX that affects Brazilian companies listed in the USA is 404, which requires that all the company’s most important processes be tested and audited. All these procedures have to be mapped out. Then a flow chart is produced for each of them, and used as a basis for testing whether any factors could create a flaw in the control of that process, or if third parties might interfere and change the original course of that process.

OI – Does the law set a deadline for compliance?

JF – The deadline for section 302 is June 30, 2005, regarding the period ended at December 31, 2004. Section 404 was supposed to come into effect as of December 31, 2005, but that deadline was extended by a year. Therefore, the starting date is now December 31, 2006, which means we have until June 30, 2007 to fulfill the necessary requirements.

OI – What is Braskem doing to adapt to these requirements?

JF – Compliance with SOX requires adapting some processes and control procedures. On the “macro” level, it involves changes in the makeup of our audit committee, for example. This board must be 100% independent and include at least three members of the Board of Directors, which is not the case right now. Brazilian companies sent a petition to our national Securities Commission (CVM), which obtained an exemption on this matter from the US authorities. The supervisory boards that are already required to oversee corporate finances in Brazil can be used as an alternative to the creation of audit committees. Both are acceptable ways of meeting the requirements of sections 302 and 404 of SOX. Braskem will pursue full compliance, which means we will create a completely independent audit committee.

OI – How many people are working on this project at Braskem?

JF – We had to set up a new structure for that. Many companies have created a compliance management area that works directly with the CFO. Braskem has decided to take more objective and pragmatic action by setting up a management area that works with the Controller’s Department, which is responsible for implementing and mapping out all SOX processes and carrying out action plans. These action plans require the involvement of the person managing the process, who may be the most important part of their implementation because SOX is not the exclusive domain of the finance department. This project involves the entire company and requires the involvement and contribution of all company members. Braskem has a manager who is in charge of and responsible for carrying out this process. His name is Valdemir Ferreira, and he is doing his job with the help of an outsourced team of about 20 people.

OI – Does compliance with SOX create value for the company?

JF – Absolutely. For precisely that reason, despite the extended deadline, Braskem has decided to continue working to obtain certification under section 404 by the end of the year. Companies that achieve compliance on time will have a competitive edge and greater value, because they will give shareholders a further guarantee that what they see in the company’s financial statements reflects its true situation. Companies with SOX certification will have more value due to their outstanding corporate governance.

“Companies with SOX certification will have more value due to outstanding corporate governance”

OI - This phenomenon is already making itself felt in the US market. Where else is this process well advanced?

JF - One thing we have seen in the American certification process is that almost all companies are seeking full compliance. Few of them have had any problems with the internal controls the SOX law requires. Obviously, it comes at a high price. All of these companies have invested heavily in this process, but they have been successful. Any US company that is not in full compliance today is almost a black sheep, and viewed as having lax management. Unless of course there’s a good reason, such as companies that acquired other companies in 2004 and have not been able to implement SOX in those new acquisitions. In that case, it’s just a temporary situation.

OI – Is SOX a natural way for companies to adopt good corporate governance practices?

JF – Definitely. In the specific case of Braskem, since the company’s inception we have created a number of committees and governance and compliance standards that ended up being officially required by SOX six months to a year later. The law coincides with the line that companies with outstanding corporate governance practices are already taking. This has a down side, which is added red tape, because we were working to streamline things and build up a simplified, uncomplicated structure that would speed up decisionmaking, and in a way SOX tends to hold back a company’s speed and flexibility. Everything has to be official.

OI – Will these rigid procedures seem worthwhile when the results appear?

JF – Because the corporate scandals had such a devastating effect, the law rose to the occasion and is very strict. Once companies have gone through two or three certification periods, the law may be eased. However, once companies have introduced such a thorough internal control system, they will be unlikely to backtrack. This will lead to a high level of corporate governance that companies will want to maintain.

OI – Will this process invigorate investor confidence?

JF – Yes, it will. Look at what is happening with the American companies that delivered their certifications by the end of 2004. The market now evaluates these companies differently; the ones that had problems exposed them very clearly. It is more prudent for a company to make the first move and admit its weaknesses while detailing the action plans it is carrying out to correct them.

OI – How strong is this armor plating against corporate fraud?

JF – It won’t be entirely bulletproof. The SOX law has created all the tools a company needs to spot fraud when it happens. Even more than that: it is creating a culture of internal controls that can prevent such things from taking place. It can’t be 100% foolproof, but it has created a favorable environment for identifying, preventing and punishing attempted fraud.

OI – Our corporate culture values the relationship between leaders and team members, which takes place from day-to-day on an informal basis. Will SOX change that?

JF – The new law will not get in the way of leader-team member relations, which have always been a competitive edge for our company. We can satisfy our clients’ demands more quickly because our decisionmaking is decentralized. The decisionmaking process may be a bit slower, because it will involve formal procedures that didn’t exist before. However, the law does not conflict with TEO: very much the opposite. In a way, it strengthens the leader-team member relationship even further. The difference is that a process that is now informal will become more official.

“In the case of the Brazilian capital market, we still have a long way to go”

OI – Will companies have higher costs because of the law?

JF – At first, their costs will be higher because of the need to implement new control tools. But later, with continuous maintenance, costs will tend to fall and stabilize at a lower level. The word on the market is that auditing costs will be about 60% to 70% higher, but in some cases they could be 100% more than a conventional audit.

OI – What are the benefits companies will get in return?

JF – When the results start to show and make companies stand out for their quality, investors will give more value to stocks and bonds with solid certification and the fullest compliance with SOX, in line with the companies’ corporate governance decisions. Just remember what happened in the Brazilian market after the adoption of Level 1 in corporate governance and guaranteed tag-along rights for all shareholders (ensuring that minority shareholders get identical treatment if control of the company changes). Nobody gave them much thought until control of major companies changed hands and minority shareholders lost out.

OI – Can the requirements of the US law be extended to other markets?

JF – I believe so, because, for one thing, it has a strong relationship with outstanding corporate governance. In the case of the Brazilian capital market, we still have a long way to go, because, although a handful of companies have adopted an outstanding level of corporate governance in this country, most have a great deal to do in order to achieve that goal. And the CVM and Bovespa (the São Paulo stock exchange) are already looking more favorably on companies that are adapting to the Sarbanes-Oxley Act.