Compliance Blog

To be fair, the PCAOB has a bit of a heavy handed reputation regarding its inspections of public audit firms, but 19 out of 76 audits have problems? 25%, that obviously is not close enough for government work!

We have heard rumors that PCAOB inspectors are not all hugs and kisses in their evaluations, but these allegations are stinging. KPMG's clients have to be worried too. The plot thickens.

An excerpt from an article, here:
Overseers Criticize KPMG Audit Quality
"Accounting Board Cites 18 Flawed Audits in First of a Series of Reports on Big Four
By Carrie JohnsonWashington Post Staff WriterFriday, September 30, 2005;

Accounting regulators criticized KPMG LLP yesterday for failing to identify significant errors uncovered in an intense, months-long inspection of the accounting firm's work.
A report by the Public Company Accounting Oversight Board,created by Congress to provide independent oversight of the accounting industry, cited numerous faults in 18 audits performed by KPMG for publicly held companies. In one case, mistakes exposed by the board led an unnamed client company to restate previously reported earnings. Board inspectors selected for review a small slice -- 76 audits -- of KPMG's nearly 1,900 publicly traded clients between June and October 2004." For the complete article, click here.

To help your company effectively comply with Sarbanes-Oxley, see www.issuescentral.com to learn more about Compliance Playbook(tm).

Europe is addressing a wide gap between the continents when it makes its move to oversee auditors. This is a good move. Fraud can be more easily prevented when auditors have a respectable distance from their clients.

See excerpt here:
EU Approves Auditor Oversight Rules
Brussels (Sept. 29, 2005) - The European Parliament approved the controversial Eighth Directive, a sweeping reform measure that mandates new oversight rules for auditors.
However, details of the legislation must still be settled in upcoming negotiations between Parliament and the European Union nations.

The directive will create a oversight board for European firms, similar to the Public Company Accounting Oversight Board in the United States.However, an earlier provision that would have forced every publicly traded company to appoint a special audit committee helmed by EU certified auditors was defeated.

Parliament also abandoned a plan to make firms rotate auditors a minimum of every seven years. For the complete article, click here.

To see how your company can cost effectively comply with Sarbanes-Oxley, see www.issuescentral.com to learn more about the Compliance Playbook(tm).

When Tony Blair recently said he thought Sarbanes-Oxley was overkill, this blog told him to mind his own business. We indicated that he should take care of his own country's problems. Since then the London terror attacks have rightly consumed Blair's attention.

But maybe they also need to look a little at fraud prevention in the UK as well. No one in their right mind thinks that any country where there is huge money involved is perfect. Come on Tony. You Brits are wonderful, but your companies cannot all pass the litmus test for honesty, transparency and an absence of fraud.

See this current example from London (caught by US Officials):
"London firm 'was link in US banking fraud case'
By James Moore, Financial Correspondent (Filed: 27/09/2005)
A City-based securities broker run by a direct descendent of the Duke of Wellington has been named as the company used as the London link in an alleged $101m banking fraud involving collapsed hedge fund Bayou.
Court papers filed by the Arizona Attorney General Office say $101m of funds in the name of Majestic Capital Management were deposited with London-based ODL Securities, run by Graham Wellesley, who holds the title Viscount Dangan, before they were sent on to US bank Wachovia from where they were seized on May 19.

Graham Wellesley had been concerned about the funds. In the papers, the attorney-general said US courts had "probable cause that the seized funds were in the process of being used in a fraud on various financial institutions". The decision to seize the funds was opposed by lawyers representing Bayou, which is being sued by the US Government. "
For complete article, click here.

If your company needs assistance on rapidly and cost effectively complying with Sarbanes-Oxley and MI 52-111, see www.issuescentral.com to learn more about the Compliance Playbook(tm).

The PCAOB has been taking some heat lately to their aggressive approach to audit firm inspections. With Donaldson and now McDonough leaving, it sure looks like people are being thrown under the bus! These are some really talented people who did their jobs too well.

An excerpt here:
McDonough Steps Down from PCAOB
Washington (Sept. 23, 2005) - William J. McDonough, chairman of the Public Company Accounting Oversight Board, announced that he will resign on Nov. 30 or when his successor is put in place, whichever occurs sooner.
In a statement, McDonough, 71, said that his health is fine and he does not intend on retiring. "I have a wide range of interests in corporate governance, finance and international affairs, and will explore one or a variety of activities in those fields," McDonough said.
McDonough had taken over the helm of the regulatory body in June 2003 and led the agency's staff of almost 400 through much of its work overseeing implementation of the Sarbanes-Oxley Act. The five-member Securities and Exchange Commission will appoint his successor.
Calling the PCAOB a "vibrant institution," McDonough said in his statement, "The supervisory process that we have adopted is working well, implemented by the adoption of auditing standards that make sense and an inspection process that helps auditors realize they must improve their practices to win back the support of the public. The firms know that public confidence is won most quickly and effectively through their own efforts, helped and prodded when necessary by the PCAOB." For complete article, click here.

To learn more about how your company can effectively comply with Sarbanes-Oxley see www.issuescentral.com to learn more about Compliance Playbook(tm)

We were in attendance at the SEC meetings earlier in the week in San Francisco. While we think another delay for small companies does little other than cause more procrastination, we are pleased at the change in approach in a couple of areas.

The first area is to recognize that Foreign Private Issuers (FPI) should have the same treatment as US based companies. As of yesterday, companies headquartered outside the US are now dealt with in the same manner - by market cap - really now by public float. So instead of treating foreign companies as small companies they are now treated equally with US companies.

The implication of this is that now FPI's with market cap exceeding $700 million, will file next year not in 2007. This makes sense since the thinking at the SEC is exposure of total market cap not headquarters locations. To see the text of this release, click here.

If your company needs to reduce costs and improve its quality of its Sarbanes-Oxley project, see www.issuescentral.com to learn more about the Compliance Playbook(tm).

Our Commentary on the conference from yesterday's meeting.

US Securities & Exchange Commission 24th Annual Government-Business Forum on Small Business Capital Formation

Holding this meeting in San Francisco, the SEC is trying to get input from various industry experts and investors to understand how to deal with the tricky issue of supporting small company innovation and growth while still serving the public’s needs for transparency and accountability.

It is no surprise that the Sarbanes-Oxley Section 404 has cost more than anyone ever thought. Per the SEC’s Commissioner, Paul Atkins, “Twenty times our original estimates of $98,000 per company”.

While this is costly to larger organizations, it can be catastrophic for smaller and startup companies. So the SEC has been holding a series of round tables around the United States since April of this year to hear from the public on these matters and to seek solutions.

Along with the Capital Formation Forum, the SEC Advisory Committee on Smaller Public Companies is having a meeting today as well. They seek to help the SEC understand how to possibly modify the Section 404 implementation so that smaller public companies can comply without drowning in “one size fits all” legislation.

After attending the initial meeting of the SEC Advisory Committee on Smaller Public Companies in April in Washington DC, the progression of ideas and definitions of the committee is impressive. Part of the problem in this thorny issue is: “What is a small public company?” Sounds simple but it really is not. What about market capitalization? With increases in natural resource prices, some companies have been thrust into larger valuations without any increase in staff. What about revenue? Some companies do not have revenue but have a great deal of spending going on which causes exposure to investors. Examples would be early stage mining companies or development stage drug companies. What about number of investors? Currently, employee option holders are added to the total number of shareholder, causing some private companies to be required to register as public companies. Many issues and paratmeters to consider.

It appears that the definition that is gaining ground is “total market capitalization” not just public float. This simplifies the calculation. This is the current definition that the SEC has used for determining if a company is an accelerated filer. The other part of this definition that is probably going to stick is making two classifications of smaller companies: 1) $100 - $700 million market capitalization as smaller companies and 2) Sub $100 million market cap as “microcap” companies.

The reason for the distinction is that currently all companies over $75 million in market capitalization (as of June 2004) headquartered in the US were considered Accelerated Filers for the Section 404 certification purposes. So two considerations from this change are important: 1) Some companies who are currently considered Accelerated Filers may become non-accelerated filers and 2) The requirements of “Smaller Public Companies” and “Microcaps” may differ.

The thinking is that companies of $700 million still do not have the resources of the largest public companies but should be subject to some more Section 404 requirements than the very smallest companies.

These breakpoints were arrived at as follows: 80% of US public companies provide only 6.4% of the US public market capitalization or less than $700 million. Approximately 50% of the US public companies account for only 1% of the US public company market capitalization or less than $100 million. Therefore, the exposure to the public for these smallest companies, from an exposure point of view is more limited and should be treated differently.

Testimony given by the public yesterday clearly favored maintaining the Section 404 legislation in place. This testimony was provided by securities lawyers and investment bankers in the Bay Area of San Francisco. Most of those testifying represented companies who mainly work with larger organizations. The smaller companies have the ear of the SEC and are getting help. No roll back in sight for the Accelerated Filers.

I posed a question to SEC Commissioner Paul Atkins on the delay. I asked if the size calculation was to apply to only US based companies or to all companies no matter where they were based. He wrote some notes and indicated that he had not considered that. I told him that Canadian companies are treated the same way as US companies on the exchanges. I wondered why size would the determinant and not location of headquarters, especially when dealing with Canadian GAAP is almost identical to US GAAP. He seemed favorable to considering size only. This only makes sense when it comes to exposure. The markets are equal opportunity so it seems market capitalization should not be subject to headquarters locations, especially when Canada is the question.

Those testifying and a summary of their position on SEC Guidelines and Section 404 is as follows:

Kenneth Hahn, Senior Vice President/CFO, Borland Corporation, Cupertino, CA: He believes that the largest cost from Section 404 has been the “over testing” of mundane transactions. This has increased cost without increasing benefit to shareholders. This is due to Audit firms being overly conservative from fear of reprisals.

Gerald Niesar, Partner, Niesar Curls Bartling LLP, San Francisco, CA: Supports a formal registration of unlicensed “finders” who raise money for smaller public companies but are not licensed. He proposed a less stringent and less expensive system to register these individuals.

Donald C Reinke, Partner, Reed Smith, Oakland, CA: He has experienced doing a public offering the London AIM (Alternative Markets) exchange. He said it does not involve approval by regulatory authorities but rather prospectuses are “vetted” by lawyers and accountants. He found the process less painful and 40% less costly. The AIM exchange has experienced very few bankruptcies. Many US companies are listing on AIM to access public markets and not comply with Sarbanes-Oxley.

Lynn E. Turner, Managing Director of Research, Glass, Lewis & Co: He was formerly with the SEC and was instrumental in getting Section 404 into the Sarbanes-Oxley legislation. He deeply believes in the legislation and has submitted a questionnaire to the SEC that he says could be used to help do low cost internal controls work for companies. He does not want to see the legislation rolled back for any size company.

Richard Ueltschy, Executive, Crowe, Chizek and Company LLC, Louisville, KY: As a non-Big Four audit firm, he indicated that he has seen much more competition in audit work in the Section 404 area. He indicated that those companies who do NOT use the Big Four Audit firms have begun to experience a 40% reduction in integrated audit costs for the second year. Those who have stayed with the Big Four have not experienced such reductions.

Ann Walker, Partner, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA: She wants to see auditor attestation removed as a requirement for the smallest public companies because it is the big cost driver. She also wants the SEC to change the regulation for companies who issue options to employees and have more than 500 option holders not to have to register as a public company. She says these option holders are not shareholders and these compensatory options should not be dealt with in the same way as options issued for investment banks.

Chris Ailman, Chief Investment Officer, California State Teachers Retirement System, Sacramento, CA: He does not believe that there should be any roll back of Section 404. He believes that investor trust is too important. He says that his fund lost 15% of its value after Enron and thinks the costs of Section 404 are worth it. His fund only deals in larger companies due to their size, $135 Billion.

Irwin Federman, General Partner, US Venture Partners, Menlo Park, CA: He believes that Section 404 is like a fisherman with a net where the holes are too small. This legislation catches everything in it not just the bad guys. He thinks it has unintended costs and not much benefit. He also believes that the SEC needs to require hedge funds to register because there is a lot of abuse in that sector.

Bill Hambrecht, Founder, Chairman and CEO of W. R. Hambrecht, San Francisco, CA: He thinks the materiality level of PCAOB Audit Standard #2 is too high at 5%. He thinks you can hide a lot of fraud at that level. But he also thinks that the wrong emphasis has been placed on mundane transactions. He thinks revenue and inventory tell the story.

Jon Hickman, Vice President, Equity Research-Technology, MDB Capital Group LLC, Santa Monica, CA: He thinks the costs of Section 404 are too high and the benefits are not high enough.

Michael McConnell, Managing Director, Shamrock Capital Advisors, Burbank, CA: He likes Section 404 and the transparency it brings. He thinks the cost of capital is lowered. He deals with companies of all sizes. He thinks the investors’ voice has been lost until Sarbanes-Oxley.

Andrew Shapiro, President, Lawndale Capital Management, LLC, Mill Valley, CA: He thinks good governance is key. He likes the independence theme in Sarbanes-Oxley and thinks this is key. He would support a tiered system of Section 404 implementation for various sizes of companies so that they could comply more cost effectively.


Today, September 20th, the SEC Advisory Committee on Smaller Public Companies presents its recommendations to the SEC and the public for their consideration. As of yesterday, they are batting a thousand since SEC Commissioner pre-announced the delay was announced for Section 404 certification for another year for smaller public companies as well as a decision not to accelerate annual and quarterly reporting times for smaller public companies. This will be officially announced by the SEC tomorrow.

Wednesday the SEC will render its official details of delays in Section 404 and the acceleration of reporting deadlines for 10Q and 10K.

For ways to cut costs in your Sarbanes-Oxley reporting, see www.issuescentral.com and learn more about the Compliance Playbook(tm).

In San Francisco yesterday, SEC Commissioner pre-announced the expected Section 404 delay for smaller companies. It will be officially announced to the public Wednesday.

Roundtables to discuss the concerns around small business capital formation were held.

The SEC is looking from input from industry experts on how to tackle the tough issues of helping small companies grow while still allowing the public some security that financial statements and filings of smaller companies can be trusted. There is a higher percentage of material weaknesses reported by smaller companies. Much of this is not fraud but merely lack of staff and access to the same expensive accounting and legal resources that larger companies have.

Today the SEC Advisory Committee on Smaller Public Companies holds its meeting in San Francisco as well. The Committee is wrestling with the idea of what is a "small company". More to come later today as the sessions finish at 1:30pm Pacific time.

More companies are delisting AND more companies are doing new listings. So this would make one think that new companies understand the requirements of Sarbanes-Oxley and still decided to do an IPO. Perhaps those companies who are choosing to delist should be private. This is a very deliberate decision now.

All in all, good governance is the right way to go. Being private is the right decision for some companies who do not really benefit from public markets. Being public is a contract with the public and requires higher standards. Companies can choose what standards are right for them and the public gains because it has a clearer set of guidelines on how companies are run.

An excerpt from an article, here:
"What Does Sarbanes-Oxley Mean for Companies That Want to Go Public?
Added costs may keep smaller businesses away.
From: Inc. Magazine, September 2005 Page 138 By: Amy Feldman
Conventional wisdom has it that Sarbanes-Oxley is preventing companies from going public. While that hasn't been proved--Nasdaq will have more IPOs this year than last year if the trend holds--the regulations have clearly made it more expensive to go public and stay public.

Because public companies need to comply with Sarbanes-Oxley, including the costly rules on internal controls, a company planning an IPO needs to have a cash hoard set aside in advance. It will face higher audit costs, higher insurance costs, and more regulatory-related duties for its staffers.

The added costs of Sarbanes-Oxley are one reason, among many, that IPO-ready companies are now larger and more established than they used to be. Jim McGeaver, chief financial officer of business software company NetSuite, which is based in San Mateo, Calif., notes that 10 years ago when he worked at Photon Dynamics, that company had no trouble going public with $20 million in revenue. "Now that has to be in the $50 million to $75 million range for the investment bankers to even look at you," McGeaver says. "It is just going to mean that companies will go public later in the cycles."

Staying public is tougher and costlier for precisely the same reasons. The new costs are pushing some companies to go private and others to delist. Any company with fewer than 300 shareholders can delist by simply filing Form 15 with the Securities and Exchange Commission....

All told, a record 198 companies delisted in 2003, the first full year after the passage of Sarbanes-Oxley, and another 134 did so in 2004, according to a study by Christian Leuz, a professor of accounting at the University of Pennsylvania's Wharton School. That compares with just 67 that jumped in 2002 and 43 in 2001. Another study by law firm Foley Lardner found that 21% of public companies have considered going private or selling out as a result of the act. "
For the complete article, click here.

They must have wondered if someone was pulling their leg, but this IPO takes the cake. We wonder what goes on in people's heads.

Excerpt below:
"U.S. SEC Aims to Halt $3.6 Bln Offering by Apollo (Update4)
Sept. 13 (Bloomberg) -- The U.S. Securities and Exchange Commission is seeking to halt a $3.6 billion initial public offering by a Canadian publisher that claims ``Al Greenspan'' as an auditor and seeks to unite the world using one language, one currency and one postage stamp.

Apollo Publication Corp. said in its IPO filing that former U.S. Presidents George H.W. Bush and Jimmy Carter serve as directors, the SEC said in a statement today. Apollo falsely claimed that Canadian Imperial Bank of Commerce, the country's fourth-largest bank, was leading the stock sale along with eight other banks, the SEC said.

``When God created the Universe, her children have lived on the planets and stars like Earth all over the Universe,'' Apollo said in its company overview filed with the SEC. " For the complete article, click here.

If your company needs help with Sarbanes-Oxley, see www.issuescentral.com and learn more about Compliance Playbook(tm).

We are excited to receive the PCD 2005: PCD Solutions, In-production. With our compliance product development we have strived for ease of use and excellence.

An excerpt of the news release is here:

"ANNANDALE, Va., Sept. 12 /PRNewswire/ -- EPSScentral LLC, the leading worldwide provider of Electronic Performance Support Systems (EPSS) and Performance Centered Design (PCD) today announced the winners of the annual PCD Awards, this year in two categories -- PCD Solutions and Extraordinary PCD Tools....

Noteworthy are two repeat winners (Issues Central and Granite Technologies), and two international recipients (BriteSoft and Awangan Jaya Sdn Bhd). The winners are:Sarbanes-Oxley Compliance Playbook(TM) created by Issues Central, Inc. Contact: Cathy Connally (cathyconnally@issuescentral.com, +1-416-977-1496 x 114). Category: PCD Solutions, In-production."

The entire team at Issues Central, Inc. is pleased to receive this award. Click here to see the full news release. To learn more about our award winning product see www.issuescentral.com and see a walk-through of the Sarbanes-Oxley Compliance Playbook(tm).

After meeting Nicolaisen at several SEC meetings, I can honestly say that his departure will be a big loss to the SEC. He was a great contributor to new directions at the SEC and had an open mind about problems. He worked hard to resolve issues where he could.

Good Luck Don, you will be missed.

An excerpt on this:
"Chief Accountant Nicolaisen Returning to Private Sector
AccountingWEB.com - Sep-8-2005 - The Securities and Exchange Commission (SEC) announced on Wednesday, September 7, 2005, that Chief Accountant Donald T. Nicolaisen will be leaving the Commission in October 2005 to return to the private sector.
A former senior partner with PricewaterhouseCooper, Nicolaisen joined the SEC in September of 2003. As Chief Accountant, he forged close working relationships with the Public Company Accounting Oversight Board (PCAOB) and the Financial Accounting Standards Board (FASB) to fully implement sections of the Sarbanes-Oxley Act. He also worked towards the eventual convergence of accounting standards with regulators and standard setting organizations around the world. Nicolaisen also played a key role in the Commission’s embracing of new technologies including the eXtensible Business Reporting Language (XBRL) pilot program."

To learn more about how your company can improve compliance rapidly and at the lowest cost, see issuescentral.com to learn more about Sarbanes-Oxley Compliance Playbook(tm).

Everyone in the world has been horrified at the pictures shown by the media following the Katrina disaster. What seems to be missed by many about this storm is that for years democrats and republicans alike have been remiss in funding the Army Corps of Engineers so that the levees could be fixed.

Further, what is wrong with so many people on the Gulf Coast who chose to stay and ride out the storm? For weeks, they were told it was going to be bad. Satellite images portrayed a monster storm. I understand that frail and elderly people should have been better taken care of, there is no dispute about that. Our government should help those who cannot help themselves.

But why does the whole nation have to be held accountable when so many people made conscious decisions to stay? Why are they so mad that it took the government so long to respond? Where is the personal fortitude and initiative that made America great?

Fox News O'Reilly said it well the other night: "If you expect your government to take care of you, then you will be disappointed. Since when did the government owe you a living?"

Now all the finger pointing has started.

You have celebrities such as Sean Penn rescuing people but bringing his personal photographer so his heroic efforts can be recorded and no doubt used to further his career.

There is enough blame to go around. But mostly, those who chose to stay and had the means to leave have to think twice about their actions as well. Human suffering could have been reduced if many people had heeded the warnings.

In order to help directors understand the Sarbanes-Oxley law, a Missouri law firm has made a movie. This is quite inventive. After hearing too much about New Orleans, this is a welcome break. Good job on taking lemons and making lemonade on the Sarbanes-Oxley law.

"Sarbanes-Oxley: You've read the law, now see the movie
Gail Appleson
Of the Post-Dispatch
Making an entertaining program about Sarbanes-Oxley and corporate governance is tantamount to Mission Impossible. But for one Missouri law firm, it became a challenge to boldly go where no lawyers had gone before. Indeed, Polsinelli Shalton Welte Suelthaus PC launched a new enterprise: Sarbanes-Oxley, the movie ... or in the law firm's case, a 25-minute film, "Directors' Dilemma." The drama is a result of mind-melding between Ken Suelthaus, vice chairman, and Frank Ross, chairman of the business law department, whose vision was to create a teaching tool that didn't sound like Klingon to executives and directors. "We came to the conclusion that the typical program - one person speaking, one after another - had been done so many times that it wasn't unusual," Suelthaus said, "and aside from that, it wasn't very interesting." Click here for the entire article.

If your company needs more help than just a movie, see www.issuescentral.com and learn more about the Compliance Playbook(tm) or call (800) 410-6681 ext 112.