The reporting and control requirements demanded by the Sarbanes-Oxley Act of 2002 continue to reverberate throughout the accounting and petroleum industries. The act, often referred to as SOX, is definitely causing companies to spend more manpower and dollars, senior financial officers said at the inaugural Senior financial Officers Executive Forum, sponsored by Oil and Gas Investor in New York in December. Speakers were united in their dislike of the law, one even calling it "a wrecking ball" hurting all industries. "Sarbanes-Oxley has turned up the volume and we're all having to listen to the radio," said Ron Harrell, president of reserves analysis firm Ryder Scott. Mike Hart, a partner in the Dallas office of IBM, added, "SOX is having a huge impact on software-solutions companies as their E&P clients have to do painful work-arounds. I see companies interpreting the act in different ways and this is creating inconsistencies." The advent of SOX made Chesapeake Energy reconsider its IT systems, and that was a positive, said Lon Winton, Chesapeake senior vice president, information technology. But Janet Clark, chief financial officer for Marathon Oil Co., said implementation of internal controls and systems required by SOX caused Marathon to spend millions of dollars. "SOX is a huge effort...characterized by tension," said Charles Swanson, head of global energy for Ernst & Young. The law moved the focus from detecting problems to preventing them, yet there are not enough people to get everything done by the deadlines set by the Securities and Exchange Commission, he said. Speakers expect there will be fewer SEC-qualified audit firms, and smaller audit firms will opt out of the process. Too, there will likely be a shortage of skilled accountants in both industry and audit firms. Recruiting and training costs are going through the roof, Swanson said. In the future, companies should expect higher audit fees, greater pressure on improving accounting and financial reporting, and in complex transactions such as mergers, the need to bring in a second auditor. The fallout from SOX may spill over to private firms as well, speakers warned. Swanson said Ernst & Young will apply the same accounting standards to private companies as public companies. "We simply can't have two different models of doing business," Swanson said. One unfortunate effect is the growing presence of the "audit orphan," a small company that the big accounting firms believe they can no longer afford to serve or that accounting firms have rejected for showing a propensity for being unable to become compliant. Indeed, the relationship between companies and their auditors has changed. "The old paradigm where the auditors were advisors and advocates for their clients has changed to a new 'mandatory overkill,'" observed Randall Keys, a partner with Tatum CFO Partners. "The old joke was that auditors come in to bayonet the wounded. Now it seems they have to bayonet them twice." Sarbanes-Oxley is not the only business challenge for E&P companies. Those with publicly held debt must manage their relationships with the credit-rating agencies as well. "If a company hedges around 70% to 80% of its production, we start to look at that as not being positive," said John Thieroff, director of Standard & Poor's energy and project-finance group. S&P is like an umpire, he said: "People are happiest when we are not noticed." To rate an E&P company, S&P looks at its underlying business and financial risk, its capitalization relative to its risk profile (whether it is funding exploration appropriately), and reserves quality, among other criteria. It uses a lower price deck than most, thus giving companies the upside to do things that will enhance their credit rating. "A company's history speaks volumes to us as to our confidence in its reserve reports," Thieroff said. "Predictability begets reliability. Are the reserves being booked today going to perform as planned?" -Leslie Haines