For Corporate RE Execs, Sarbanes-Oxley Brings Opportunity Among the Challenges
The Sarbanes-Oxley Act of 2002 has brought a heightened awareness of internal controls to publicly traded companies, including their real estate departments. The impact on corporate real estate directors has been a challenge and, in many cases, also an unexpected benefit to operations.
The importance of compliance to corporate real estate executives was evident at a recent evening event hosted by the Chicago chapter of CoreNet Global. Held at the Sears Tower, the event drew a crowd of more than 50 industry professionals to hear real estate executives from public companies discuss their experiences with the new requirements.
Sarbanes-Oxley was enacted by Congress to restore trust and confidence and assign accountability for corporate accounting and reporting practices. Among other things, the law includes new certification requirements for CEOs and CFOs, new attestation standards for external auditors, procedures for improved disclosures, and defined penalties for failure to comply.
Establishing and documenting controls to comply with the law has typically been a costly and time-consuming process, and more than one corporate executive has wondered aloud if the result is worth the effort. For many companies, however, Sarbanes-Oxley compliance also results in a valuable ongoing process of evaluation and self-improvement that can lead to better operations, not just better financial reporting. Some corporate real estate departments have reacted to the need for better control over financial information by requiring, and getting, more control over real estate transactions and processes.
"Sarbanes-Oxley started with an increasing expectation for us to understand our financial obligations and the book value of our real estate at any given time," said Denis DeCamp, Director of Global Real Estate at Rockwell Automation. The task initially seemed daunting because half of Rockwell's real estate was outside the U.S., where transactions were sometimes conducted by regional business unit leaders, with limited input from the real estate department. To comply with Sarbanes-Oxley, the company has moved to a more centralized model for real estate decision-making. "The increased responsibility turned out to be an opportunity for us to take control and direct activities," DeCamp noted.
"We came to see Sarbanes-Oxley as an opportunity disguised as a problem," said Kelly Stradinger, Senior Real Estate Executive at ABN AMRO. "Now, we've got an extra arrow in our quiver to explain why someone who is authorized to make a $10 million loan is not authorized to sign a 10,000-square-foot lease. We say, 'it's a SOX thing.'"
As a global banking firm, ABN AMRO was heavily regulated with a lot of controls and documentation in place prior to Sarbanes-Oxley, so the internal control procedures were not an entirely new experience. "It became part of our best practices," Stradinger said.
"Management support is the number one key success factor in making Sarbanes-Oxley work," said Karen Whitney, Director of Special Projects at Trammell Crow Co. She oversees the new compliance initiatives at her own company and coordinates real estate compliance at client organizations. "We had centralized our accounting in 2001 before SOX was an issue, and that made the process a lot easier," she said.
The panelists at the CoreNet event agreed that Sarbanes-Oxley is having an impact on the way corporate real estate departments interact with their service providers. The two-year-old law does not let companies off the hook just because they may have outsourced key functions, so transactions conducted by service providers are subject to the same requirements as those done in-house. "Whether you outsource or not, never give someone on the outside control over anything that you are ultimately responsible for," DeCamp said. "When something needs to be signed, we sign it."
Companies may take a variety of actions to evaluate service providers' internal controls and re-assess outsourcing decisions. For example, a company may request that its own internal audit team visit the service provider's site to evaluate its controls; or if the service provider is a public company, require a copy of its certification. One of the most common alternatives is an SAS 70 report, wherein an outside firm gives an opinion on the service provider's transaction processing controls. Whitney confirmed that an increasing number of RFPs received by Trammell Crow address such Sarbanes-Oxley compliance issues.
Sarbanes-Oxley compliance is not done when the processes are in place. It is an ongoing effort to improve internal controls, or in DeCamp's words, "a race without a finish line-but the process becomes easier as it matures." Thanks to Sarbanes-Oxley, some real estate executives are gaining greater control over transactions, and that may benefit their organizations in ways that go beyond compliance.
Kapila Anand, partner at KPMG LLP, the audit, tax and advisory firm, is the national director for real estate and hospitality advisory services. She served as moderator of the Feb. 24 CoreNet Global panel, "Sarbanes-Oxley Compliance Issues for Today's Corporate Real Estate Executives."
The information provided herein is of a general nature and is not intended to address the specific circumstances of any individual or entity.
