Compliance Blog

Senator Snowe is concerned about the burdens of Section 404 on small business. But has she considered the effects of "ghettoization" of lesser requirements for smaller requirements. Most smaller company CFO's do not aspire to stay working at small companies. They want to grow the companies to larger cap companies.
How do you do this if your cost of capital is higher because of lower standards on reporting and disclosures?

See article here:
"Snowe Concerned Sarbanes-Oxley Could Impede Small Business Job Growth and Competitiveness
WASHINGTON, Oct. 27 /U.S. Newswire/ -- In a letter to Securities and Exchange Commission Chairman Christopher Cox, U.S. Sen. Olympia J. Snowe (R-Maine), chair of the Senate Committee on Small Business and Entrepreneurship, today expressed strong concern that the Sarbanes-Oxley Act of 2002 will create unintended burdens on small businesses that will hurt job creation, competitiveness, access to capital, and their ability to continue as publicly traded companies.
Last year Senator Snowe and Senator Michael Enzi asked the Government Accountability Office to study the Act's effects on small businesses, and to determine if the Act places a disproportionate compliance burden on small businesses. This important study will be available by year end.
Sen. Snowe wrote:
"In 2002 Congress enacted the Sarbanes Oxley-Act, which I supported, in response to abusive corporate accounting practices . . .
"While the Act has improved publicly traded companies' corporate governance, I believe strongly that it is necessary to consider whether the Act is creating unintended burdens on small businesses. For example, there is evidence that Section 404 of the Act imposes dis-proportionately high compliance costs on small companies in comparison to large companies. These high costs can eliminate small businesses' profitability and threaten their survival. I am particularly concerned that some of the Act's provisions are diverting many small business owners' focus, and limited resources, away from innovation and growth opportunities and towards a concentration on documenting accounting measures and internal controls. While compliance and controls are needed, the SEC must strike an appropriate balance for small companies . . .
"In order to gauge the depth of the small business involvement in the regulatory process, I would like the SEC to respond to the following questions:
"1. What steps are the SEC taking to facilitate ongoing communication between the SEC, the Advisory Committee, and small public companies that are affected by SEC regulations?
"2. After the Advisory Committee publishes its findings, how will the SEC assure that going forward the views and concerns of small businesses are considered during the regulatory formation process?
"3. How is the SEC working with organizations like the Committee of Sponsoring Organization of the Treadway Commission (COSO) and the Financial Accounting Standards Board, as well as others, to coordinate small business regulatory standards and issue timely and practical guidance to small companies?
"4. What is the SEC's opinion of tiered compliance and regulatory measures that would impose a lower compliance burden on the smallest public companies, with compliance and regulatory requirements increasing as company size increases?
"I am confident that this thorough study will enable the SEC to protect investors without imposing a regulatory burden that impedes small business growth, innovation, and efficiency. I look forward to working with the SEC to strengthen the vitality of small companies and am grateful for your attention to this request. I would appreciate a reply to this letter by November 18, 2005."
Sen. Snowe applauded yesterday's action by COSO in releasing for public comment new guidance that would address the needs of smaller businesses in fulfilling the requirements of Section 404 of the Sarbanes-Oxley Act. http://www.usnewswire.com/"

If your company has to comply with Section 404, see www.issuescentral.com for more information about the Sarbanes-Oxley Compliance Playbook(tm)

Excerpt from COSO statement on new guidance for smaller public companies:
"The guidance asserts that internal control over financial reporting may beaccomplished by choosing approaches to applying the COSO principles that bestfit each company's circumstances in the most effective and efficient manner.According to the guidance, smaller public companies may strengthen internalcontrols by broadening the pool of audit committee members, using controlsbuilt into accounting software, leveraging management monitoring, andoutsourcing some activities. This new guidance provides a tool for managementto use in determining the appropriate level of internal controls overfinancial reporting for smaller businesses. The document is intended for useby board members, senior management, other personnel and external auditors. Because of similar initiatives at the SEC and PCAOB, those organizationseach provided an observer to the project. The report can be accessed at http://www.coso.org. COSO encourages interestedparties to read and comment on the exposure draft and to direct commentsthrough the website at http://www.ic.coso.org. The comment period ends on December31st 2005. Final guidance is expected in the first quarter of 2006."

Leadership is an interesting concept. Without Sarbanes-Oxley, the "Audit Watchdogs" of the world would not be meeting right now. There would have no point. There would have been no baseline. Sarbanes-Oxley may not be popular with some, but it has established standards for investor protection.

These are American standards but they also provide a starting point to work with similar regulatory bodies in the rest of the world to work out a common agenda. It is important work with so much fraud around the world today.

An excerpt on this topic is here:
"Audit watchdogs seek international co-operation
Audit watchdogs meet in London today to improve cross-border co-operation
The FRC has organised a meeting in London today of audit watchdogs from 13 countries to discuss ways of improving cross-border co-operation.

Financial regulators have been facing increasing industry discontent as differing rules drive up the cost of compliance across various jurisdictions for multinationals.

One idea being proposed at the meeting is to create a co-ordinating body for audit regulators that would sit alongside the International Organisation of Securities Commissions, the Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors.
However, efforts to improve regulatory co-ordination will be hampered by differing national views on the issues of investor protection and market integrity, legal and political constraints, and the links between financial regulation and fiscal and tax rules.
The Financial Times reports Paul Boyle, chief executive of the FRC, as saying: 'you can say the last thing the world needs is yet another international organisation, but there is something it need even less than that: a whole series of national regulators coming up with conflicting requirements'.

He added that in a globalised marketplace there are more 'multinational audit firms auditing multinational clients and that's why you need a co-ordinated response'.

Representatives of the PCAOB, the FRC and watchdogs from Germany, France, Japan and elsewhere are due to attend today's meeting, alongside policy-makers from the EU, the World Band and the International Organisation of Securities Commissions."
For the complete article, click here.

To learn more about how your company can comply with Sarbanes-Oxley or the Canadian MI-52-109 and MI 52-111, see www.issuescentral.com and walk through the Compliance Playbook(tm).

The SEC is continuing to listen to the concerns of investors and stakeholders on the issues facing smaller public companies and especially around Section 404.

The October 24/25th meeting in Washington DC will finally yield some more decisions around what their expectations are for smaller public companies. The subcommittee on Section 404 is committed to diminishing the value of Section 404 for small companies. This is a big mistake and will "ghetto-ize" smaller companies.

How can one argue that internal controls are bad for any size company? It is a fact that smaller companies are more subject to fraud so this makes this mission even more ludcricrous.

Please do not take this dangerous course. We will all regret it!

With so much criticism of - so far - two of the top four Audit Firms, the SEC along with its Oversight Board - PCAOB - are trying to rein in the bad behavior of some firms without crippling the industry. With Sarbanes-Oxley consuming so much in resources from accounting firms, the SEC has to tread lightly to assure abuse stops but not bankrupt the firms needed to do the oversight of financial reporting at public companies.

An excerpt is here:
"Some of the issues of concern at the SEC are non-audit financial services offered by audit firms and “high-risk situations,” such as when an auditor and its client each sell services to the same outside party, Bailey said.

He noted that some audit firms are working internally to make it easier to comply with the rules by creating databases of firms' financial interests and business relationships. The information is then extracted to determine whether conflicts could arise on the audit engagement.
The Public Company Accounting Oversight Board (PCAOB) has also proposed an auditor-independence rule change that the SEC will consider for approval.
The PCAOB's July proposal would significantly limit accounting firms' ability to sell tax services to audit clients and their top executives.
"We wanted to strike a balance so as to ensure the independence of the auditor to the extent possible in this area," Charles Niemeier, a PCAOB member and a former chief accountant for the SEC's enforcement division, told the Wall Street Journal. "The other option – to have eliminated the audit firms from providing any tax advice – we did not believe to be in the interest of the public good."
According to an April study by the Government Accountability Office, 61 of the nation's 500 largest companies bought abusive or potentially abusive tax shelters from their independent auditors from 1998 through 2003, costing the U.S. Treasury an estimated $3.4 billion, the Journal reported. " See www.accountingweb.com for the complete article.

If your firm needs to comply with Sarbanes-Oxley in a reasonable manner, then see www.issuescentral.com to learn more about Compliance Playbook(tm).

After getting through at least one Section 404 certification, large multi-nationals agree that technology can assist this whole process and tighten the controls and control environment.

Excerpt from an article:
"Big technology changes comingThree of four surveyed multinationals (75 percent) expect to make significant technology changes in year-two of their Sarbanes 404 compliance, including:
85 percent of those where tech support was seen as "satisfactory-with lots of room for improvement" in year-one;

69 percent where technology was judged as having done a "great" or "effective" job supporting compliance in year-one; and 77 percent where technology was described as a problem area.
Among companies making significant technology changes, 47 percent will give equal emphasis to the control environment and the compliance process; 18 percent will focus mostly on the compliance process, and ten percent will give primary emphasis to the control environment.

..."Senior executives see technology as an opportunity for both enhancing future Sarbanes 404 compliance and achieving overall efficiency and effectiveness of underlying business processes," said Olynyk. "For the 75 percent that will be making significant improvements, rationalizing the control environment and then embedding automated controls throughout cross-enterprise business processes will yield the biggest long-term gains." Click here for the complete article.

To learn more about tools and content that can assist your first and on going years of Section 404, see www.issuescentral.com to learn more about the Compliance Playbook(tm).

There is much talk about lack of clarity of rules and guidance re: Sarbanes-Oxley. The real issue is that the law is a move to try to change a rules based mentality in the US business arena to a principles based approach. This is much maligned by many because there are no loop holes in this approach. Your conscience is your guide.

The HR department along with the Internal Audit Department have become much more important. Both should play important roles in "Entity Level" controls - those principles and behavior that should guide all actions in a corporation.

"Harrison: Sarbanes-Oxley Offers 'Golden Opportunity' for HR Execs
10/3/2005 By Brian E. Clark
WisBusiness.com Steven G. Harrison, chairman of the international outplacement service Lee Hecht Harrison, says he is an optimist. He says he believes that most people -- including those who run corporations -- want to do the right thing.He argues that cynics who say "business ethics" is an oxymoron are wrong. And that the guys who ran Tyco, Enron and WorldCom were the exception. And he says the Sarbanes-Oxley business reforms offer the opportunity for human resources executives to be a guiding force for ethical practices.

"HR people can push leadership training, keep an eye on compensation and be lightning rods for creating an ethical culture and locking it in as a strategic value," he says. Harrison was in Milwaukee to speak to the Society for Human Resource Management state conference last week at the Midwest Airlines Center. Lee Hecht Harrison has eight offices in the state."
For the complete article, click here.

For information on a superior Sarbanes-Oxley solution including those hard to document and manage "Entity Level Controls" see www.issuescentral.com to learn more about Compliance Playbook(tm).

"Oct 3, 2005 — WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission has returned to investors only a small fraction of the $4.8 billion collected under a post-Enron program for penalizing violators of securities laws and returning the money to those harmed, said a congressional watchdog on Monday.
The Government Accountability Office (GAO), Congress' investigative arm, also criticized the SEC for shortcomings in efforts to track collections of fines imposed on violators, as well as for its management of stepped-up collection efforts.
The GAO said in a draft report that the SEC has vigorously exploited the Fair Fund program adopted by Congress as part of a reaction to the corporate scandals that started in 2001.

The program gave the SEC new power to return to investors money paid out as punishment by corporate wrongdoers.
"However, to date, only a small amount of the funds have been distributed. According to SEC, distribution is often a lengthy process … We also found that SEC lacked a reliable method by which to identify and collect data on Fair Fund cases," the GAO said in the draft report's findings.
The GAO said the SEC estimated that as of April 2005 it had designated $4.8 billion in penalties and disgorgements to be returned to harmed investors. But only about $60 million had been distributed and another $25 million was being readied for disbursement at the time of the GAO's review, the GAO said.
Pennsylvania Democratic Rep. Paul Kanjorski said he was pleased the GAO found that the SEC had made some progress on collecting fines, and that some Fair Funds had been disbursed.
But he said, "I am deeply troubled by the difficulties the agency has encountered in expeditiously returning these funds to American investors."
He and Massachusetts Democratic Rep. Barney Frank called for congressional hearings to be held on the issue. Both lawmakers sit on the House of Representatives Financial Services Committee, which oversees the SEC. " Click here for the complete article.

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

At the recent SEC meeting (Sept 19/20) in San Francisco, the Small Business Advisory Committee was critical of the efforts of upcoming new COSO guidance for smaller public companies. The Committee Chair, Janice Dolan, specifically asked the Chair of COSO if they were the right body to come up with a small business framework.

Dolan indicated that if what COSO comes up with is not sufficient (for Section 404 compliance), then the Committee will develop a framework itself for smaller public companies. Janice, do you think this will ghettoize the smaller public companies if they are held to a lesser standard?

An excerpt on the topic is here:
"But SOX was designed as one-size-fits-all answer to the corporate accounting scandals, and many are arguing that a one-size-fits-all solution isn’t the answer as small companies are unduly burdened by SOX’s compliance and reporting requirements. To adhere to SOX’s requirements, companies have to invest a significantly larger proportion of their capital into SOX compliance.

This has left many small public companies crying foul. Critics say that small companies with smaller staffs and where managers often wear numerous hats are unable to dedicate the amount of time and resources required (estimated at as many as 1,000 or more additional staff hours) to adhere to SOX. Large public companies (those with capitalization of $1 billion or more), on the other hand, are reporting having to dedicate between 3-5 percent of revenue to comply SOX – quite a large output but in many ways a drop in the bucket considering their size. " For the complete article, click here.

If your company, large or small, needs help in complying with Section 404, see www.issuescentral.com to review the Compliance Playbook(tm).