An ASA member wholesaler, “ABC Supply,” recently contacted Pat O'Connor, ASA's lobbyist in Washington, with a question about Sarbanes Oxley. We thought it would be a valuable exchange to share with SUPPLY HOUSE TIMES readers.

The Question

In a nutshell, ABC Supply (a pseudonym) said that “XYZ Manufacturer” (a pseudonym) had reneged on a pricing commitment made last year on a certain product. As a result of having been given that pricing commitment, ABC Supply had in turn made pricing commitments to their customers, but now found themselves losing $150-200 per unit on that particular product.

So, since ABC Supply also handles (the local outlet of) a national retailer's account for the same product, ABC knows that the retailer gets a better price from XYZ. ABC asked XYZ to let them apply the lower price. XYZ refused, and pointed to Sarbanes Oxley restrictions on pricing as the reason.

The Answer

Unfortunately, Sarbanes-Oxley (or “S-Ox”) does have a broad reach across virtually every aspect of a public company's operations, with repercussions for private companies down the supply chain, as some ASA members are discovering. At first glance, many view S-Ox compliance as a narrow issue as it relates to accounting and internal control matters. However, there is virtually nothing in the company that, defined in its broadest sense, would not fall under the rubric of accounting, auditing or internal controls. For example, matters as disparate as price fixing, sexual harassment, age discrimination or discount pricing structures can become S-Ox issues.

With Sarbanes-Oxley, section 404, public companies must now be able to identify, document and audit the key business processes that govern their business transactions and their financial reporting accuracy. Companies must also be able to show documented proof that they are following internal controls and are in compliance with company standards and industry or federal regulations.

In response to these requirements, many public companies are therefore establishing internal controls to review and approve product pricing and discount levels to demonstrate consistent revenue recognition policies and compliance with Robinson-Patman Act and other federal laws.

So it is not farfetched for XYZ Manufacturing to point to Sarbanes-Oxley as the reason they cannot meet the ABC Supply price. No doubt the company has a whole new set of internal controls and documentation requirements in place to govern discount pricing arrangements. And with accountants and auditors driving this process, salespeople within a company are finding themselves increasingly restrained.

And of course, along with these genuine S-Ox issues that are very real, Sarbanes-Oxley can also become a convenient excuse for not responding in a more flexible way. It is very difficult to separate the two.

For ABC Supply to make any headway with XYZ Manufacturing, they will need to provide whatever documentation they are asking for in the various emails that they sent. If S-Ox is their reason, they should be pressed to describe exactly what it will take to meet their internal requirements for S-Ox. S-Ox itself does not prohibit the discounted price - S-Ox simply dictates that a certain transparent process be followed and documented to justify the price. The challenge will be to work with XYZ Manufacturing to find out what their company requires and then provide them with the hard documentation to back up the desired transaction.