March 30, 2006
US CEO's Upbeat on Economy and Benefits of SOX
What we have been seeing in our work, finally is getting reported. Second and third year SOX filers have seen improvements in their financial reporting and like the changes in internal controls. They would never have done it without the legislation, but now they are happy with the results.
You get out what you put in. Those companies who have really embraced this effort, have seen the benefits. Those who have just followed the letter of the law probably just spent money.
An excerpt on this topic ccording to a Reuters survey:
"But the survey showed that executives are beginning to see benefits from tougher compliance rules. Fifty-five percent of the executives polled believed the quality of financial reporting has improved since the Sarbanes-Oxley act was passed." For the complete article, click here.
If your company needs to cost effectively comply with Sarbanes-Oxley or Canadian Investor Confidence Regulations, see www.issuescentral.com or www.compliancepartner.ca to learn more about Compliance Playbook(tm) or Compliance Partner(tm).
You get out what you put in. Those companies who have really embraced this effort, have seen the benefits. Those who have just followed the letter of the law probably just spent money.
An excerpt on this topic ccording to a Reuters survey:
"But the survey showed that executives are beginning to see benefits from tougher compliance rules. Fifty-five percent of the executives polled believed the quality of financial reporting has improved since the Sarbanes-Oxley act was passed." For the complete article, click here.
If your company needs to cost effectively comply with Sarbanes-Oxley or Canadian Investor Confidence Regulations, see www.issuescentral.com or www.compliancepartner.ca to learn more about Compliance Playbook(tm) or Compliance Partner(tm).
March 27, 2006
"Serial Restaters" and the Importance of Internal Controls over Financial Reporting
According to a recent study by Glass Lewis & Co., a financial advisory firm, approximately 15%, or 300, of the nearly 2,000 U.S. public companies that restated past financials were repeat restaters. These restatements occurred during the period from 2003 and 2005. A few of these companies restated their financials up to four times.
Oh, and if you think it is just the smaller companies that are internally control challenged, then think again. Nortel, AIG and Fannie Mae are among the bigger names. Investors must be scratching their heads as to what is going on inside these companies.
What is driving the volume of restatements? Simple. The Sarbanes-Oxley Act of 2002 (SOX).
What the volume of restatements is also revealing is that management fraud and collusion are the exception. Generally the restatements have highlighted internal control weaknesses in financial and procedural "hygiene"; interpretation of GAAP; and, ineffective systems with sloppy closeout execution.
So, are investors better off because of SOX? Maybe another way of asking the question would be to ask investors if they like companies with strong business models and strong internal controls, or is a good business model sufficient?
To learn more about how to strengthen internal controls over financial reporting please go to www.issuescentral.com to learn about the Compliance Playbook(TM). If you are a Canadian-based public issuer, please go to www.compliancepartner.ca to learn more about Compliance Partner(TM).
Oh, and if you think it is just the smaller companies that are internally control challenged, then think again. Nortel, AIG and Fannie Mae are among the bigger names. Investors must be scratching their heads as to what is going on inside these companies.
What is driving the volume of restatements? Simple. The Sarbanes-Oxley Act of 2002 (SOX).
What the volume of restatements is also revealing is that management fraud and collusion are the exception. Generally the restatements have highlighted internal control weaknesses in financial and procedural "hygiene"; interpretation of GAAP; and, ineffective systems with sloppy closeout execution.
So, are investors better off because of SOX? Maybe another way of asking the question would be to ask investors if they like companies with strong business models and strong internal controls, or is a good business model sufficient?
To learn more about how to strengthen internal controls over financial reporting please go to www.issuescentral.com to learn about the Compliance Playbook(TM). If you are a Canadian-based public issuer, please go to www.compliancepartner.ca to learn more about Compliance Partner(TM).
Sarbanes Speaks out on Legality of Recommendations from the SEC Advisory Committee on Smaller Public Companies
In his March 27th speech to the Consumer Federation of America, Senator Sarbanes again implied that the SEC does not have the legal right to exempt companies for sections of Sarbanes-Oxley, namely Section 404.
This would of course be referencing their February recommendations that would fully exempt micro cap companies (newly defined as less than $128 million in market cap and less than $10 million in revenue) from Section 404 except that they still have to comply with Section 302 which addresses internal controls and material weaknesses. Further, the newly defined smallcap companies, greater than $128 million but less than $787 million in market cap and with less than $250 million in revenue. Small cap companies as it is proposed would still sign the Section 404 certification but be exempted from auditor attestation.
This move would exempt about 80% of public companies from Section 404 but 6% of the market cap. The problem is of course that in 2005, restatements are double (1295) what they were in 2004 (650). And smaller companies represent a larger percentage of these restatements.
The law is working. The costs may be high. But now we have something to hang our hats on when the bad guys commit a crime. We have standards on which to judge. If you are going to take the public's money, you have to have higher standards.
Sounds like the only other move the SEC could do is to create a lesser audit standard for smaller companies, a side recommendation by the committee, in the event, the first recommendation could not be adopted.
If your company needs assistance in effectively and economically complying with this legislation, see www.issuescentral.com to learn more about Compliance Playbook(tm) or www.compliancepartner.ca if your company is based in Canada. We reduce cost and time in developing your documentation over internal controls.
This would of course be referencing their February recommendations that would fully exempt micro cap companies (newly defined as less than $128 million in market cap and less than $10 million in revenue) from Section 404 except that they still have to comply with Section 302 which addresses internal controls and material weaknesses. Further, the newly defined smallcap companies, greater than $128 million but less than $787 million in market cap and with less than $250 million in revenue. Small cap companies as it is proposed would still sign the Section 404 certification but be exempted from auditor attestation.
This move would exempt about 80% of public companies from Section 404 but 6% of the market cap. The problem is of course that in 2005, restatements are double (1295) what they were in 2004 (650). And smaller companies represent a larger percentage of these restatements.
The law is working. The costs may be high. But now we have something to hang our hats on when the bad guys commit a crime. We have standards on which to judge. If you are going to take the public's money, you have to have higher standards.
Sounds like the only other move the SEC could do is to create a lesser audit standard for smaller companies, a side recommendation by the committee, in the event, the first recommendation could not be adopted.
If your company needs assistance in effectively and economically complying with this legislation, see www.issuescentral.com to learn more about Compliance Playbook(tm) or www.compliancepartner.ca if your company is based in Canada. We reduce cost and time in developing your documentation over internal controls.
March 25, 2006
Senator Sarbanes Defends SOX Legislation
Senator Paul Sarbanes is actively defending the Sarbanes-Oxley Act of 2002 from criticisms that are gaining momentum in the U.S.
The SOX legislation's co-author defended the legislation in a speech to the Consumer Federation of America on March 23rd. Early on, the Democratic senator from Maryland quoted from an editorial in the Wall Street Journal shortly after Enron imploded:
"The scope and scale of the corporate transgressions of the late 1990s now coming to light exceed anything the U.S. has witnessed since the years preceding the Great Depression."
And then Sarbanes went on to say, "The roots of the problem lay not with the legendary 'few bad apples' but rather with systemic and structural defects that required a statutory remedy."
In this blogger's opinion the sad truth is that a few bad apples (Enron, etc) have revealed that upon further inspection many apples in the barrel have internal control over financial reporting problems. Couple these problems with overly aggressive auditor attestation and you have a very expensive proposition to fix, but in the end investors will be better off. The rules will be tweaked to address some of the intitial implementation/cost concerns and life will move on. In the meantime, if some new IPO candidates move to offshore markets primarily because of lower compliance standards, then let them. Investors are better off avoiding these companies.
The SOX legislation's co-author defended the legislation in a speech to the Consumer Federation of America on March 23rd. Early on, the Democratic senator from Maryland quoted from an editorial in the Wall Street Journal shortly after Enron imploded:
"The scope and scale of the corporate transgressions of the late 1990s now coming to light exceed anything the U.S. has witnessed since the years preceding the Great Depression."
And then Sarbanes went on to say, "The roots of the problem lay not with the legendary 'few bad apples' but rather with systemic and structural defects that required a statutory remedy."
In this blogger's opinion the sad truth is that a few bad apples (Enron, etc) have revealed that upon further inspection many apples in the barrel have internal control over financial reporting problems. Couple these problems with overly aggressive auditor attestation and you have a very expensive proposition to fix, but in the end investors will be better off. The rules will be tweaked to address some of the intitial implementation/cost concerns and life will move on. In the meantime, if some new IPO candidates move to offshore markets primarily because of lower compliance standards, then let them. Investors are better off avoiding these companies.
March 14, 2006
Learning from the US Experience: Canadian Legislators are Giving Public Companies a Chance
Given the massive amounts of publicity that Sarbanes-Oxley Section 404 has gotten ever since its adoption in 2002, the Canadian legislators have had a chance to see what the American experience and leadership has brought out over the last three years.
Canadian legislative approach has been to be somewhat equal to the US legislation but not more stringent. So they have chosen to take a position that makes public companies accountable for their disclosure and internal controls over financial reporting. Wise move. Good strategy.
With ever more restatements by public companies, not the least of which is Nortel, Canadian companies are not exempt from problems in investor confidence. Hopefully, Nortel does not set a record on number restatements. So no country is exempt from corruption.
Canadian legislative approach has been to be somewhat equal to the US legislation but not more stringent. So they have chosen to take a position that makes public companies accountable for their disclosure and internal controls over financial reporting. Wise move. Good strategy.
With ever more restatements by public companies, not the least of which is Nortel, Canadian companies are not exempt from problems in investor confidence. Hopefully, Nortel does not set a record on number restatements. So no country is exempt from corruption.
- Where there is capitalism, there is the potential for fraud. The CSA has wisely decided to keep this need for money and growth with public company accountable.
Canadian public companies have the choice to take this seriously or not. The $64,000 question is whether they will take 52-109 as seriously as they did the proposed 52-111. Without the auditor attestation, it is all up to the CFO and CEO. Little outside oversight except for the provision to discuss the process for internal controls over financial reporting in the MD&A.
The recommendation to eliminate auditor attestation was taken from the SEC Advisory Committee for Smaller Public Companies recommendations published December 2005. - Their recommendation was to stratify the companies based on market cap and a revenue threshold and have the smallest public companies (below $128 Million in market cap and below $10 million in revenue) be exempt from signing Section 404 but still sign Section 302 which discusses internal controls as well as report material weaknesses).
- The next category, below $787 million and below $250 million in revenue would perform the Section 404 activities but not be subject to Auditor Attestation). These are still proposed but look likely to be adopted.
So Canadian public companies have the opportunity to step up to the plate and take this legislation seriously. If they do not, the CSA stands ready to institute the auditor attestation.
Early indications are that Canadian public companies are taking this opportunity to do a good job and avoid more cost and headaches that are associated with the revised Canadian legislation.
If your company is based in Canada and must work to document both disclosure controls and internal controls over financial reporting, see www.compliancepartner.ca . If your company is based in the US or other nations, see www.issuescentral.com to see how you can rapidly and effectively document internal controls and test their effectiveness.
March 13, 2006
Canadian Securities Administrators (CSA) Release Proposals on Harmonized Internal Control Reporting Requirements
Last Friday (just before the start of March school break for many Canadians) the CSA, which is the council of the securities regulators of Canada’s provinces and territories, announced a proposal (CSA Notice 52-313)that would both streamline the scope of internal control over financial reporting (ICFR) activities, while expanding the base of public companies required to address ICFR requirements.
Key highlights are:
1. All TSX (no surprise) and TSX-V companies (pleasant surprise), including those based in British Columbia, would be required to meet the expanded ICFR requirements as proposed under an expanded Multi-Lateral Instrument 52-109: Certification of Disclosures in Issuer's Annual and Interim Filings. These new requirements to begin for issuers' with fiscal years on or after December 31, 2007, will ask for a) management's evaluation and certification as to the effectiveness of ICFR, and b) a discussion of ICFR in the MD&A portion of the issuer's annual report (quite innovative).
2. Multi-Lateral Instrument 52-111: Reporting on Internal Control Over Financial Reporting is to be eliminated. Of particular note in MI 52-111 was the requirement for external auditor attestation on the effectiveness of the issuer's internal controls. The latest announcement eliminates this requirement and the related auditing expense. There will be tears and cheers on this front.
3. All TSX and TSX-V companies, excluding investment funds, will be required to meet the expanded MI 52-109 requirements for fiscal years ending on or after December 31, 2007. There will be no time phasing based on market capitalization.
4. The previous ICFR components of MI 52-109 in terms of "management must cause internal controls over financial reporting to be designed and implemented" are still in place and are on-track to begin phasing in as of June 30, 2006.
5. Canadian companies that are listed on both U.S. exchanges and Canadian exchanges will still need to comply with Sarbanes-Oxley. Depending on their market cap/revenue, they may or may not have auditor attestation under Section 404. This will depend on upcoming adoption of smaller public company recommendations being contemplated by the S.E.C.
All in all, the CSA appears to have taken a thoughtful approach to helping to ensure improved investor confidence while reducing the costs associated with typical SOX projects for SEC-based filers (particularly the auditor attestation cost and related auditor "chill").
As this blogger suggested to the CSA/OSC, in a letter last year (June 29, 2005), it is important to come up with a common standard for all public companies on this issue. Taking the public's money brings with it common responsibilities regardless of company size.
For more information on how both Canadian-based TSX and TSX-V companies can strengthen their ICFR, please go to the Compliance Partner(tm) website: www.compliancepartner.ca. For more general information on ICFR for US-based SOX filers please go to www.issuescentral.com.
Last Friday (just before the start of March school break for many Canadians) the CSA, which is the council of the securities regulators of Canada’s provinces and territories, announced a proposal (CSA Notice 52-313)that would both streamline the scope of internal control over financial reporting (ICFR) activities, while expanding the base of public companies required to address ICFR requirements.
Key highlights are:
1. All TSX (no surprise) and TSX-V companies (pleasant surprise), including those based in British Columbia, would be required to meet the expanded ICFR requirements as proposed under an expanded Multi-Lateral Instrument 52-109: Certification of Disclosures in Issuer's Annual and Interim Filings. These new requirements to begin for issuers' with fiscal years on or after December 31, 2007, will ask for a) management's evaluation and certification as to the effectiveness of ICFR, and b) a discussion of ICFR in the MD&A portion of the issuer's annual report (quite innovative).
2. Multi-Lateral Instrument 52-111: Reporting on Internal Control Over Financial Reporting is to be eliminated. Of particular note in MI 52-111 was the requirement for external auditor attestation on the effectiveness of the issuer's internal controls. The latest announcement eliminates this requirement and the related auditing expense. There will be tears and cheers on this front.
3. All TSX and TSX-V companies, excluding investment funds, will be required to meet the expanded MI 52-109 requirements for fiscal years ending on or after December 31, 2007. There will be no time phasing based on market capitalization.
4. The previous ICFR components of MI 52-109 in terms of "management must cause internal controls over financial reporting to be designed and implemented" are still in place and are on-track to begin phasing in as of June 30, 2006.
5. Canadian companies that are listed on both U.S. exchanges and Canadian exchanges will still need to comply with Sarbanes-Oxley. Depending on their market cap/revenue, they may or may not have auditor attestation under Section 404. This will depend on upcoming adoption of smaller public company recommendations being contemplated by the S.E.C.
All in all, the CSA appears to have taken a thoughtful approach to helping to ensure improved investor confidence while reducing the costs associated with typical SOX projects for SEC-based filers (particularly the auditor attestation cost and related auditor "chill").
As this blogger suggested to the CSA/OSC, in a letter last year (June 29, 2005), it is important to come up with a common standard for all public companies on this issue. Taking the public's money brings with it common responsibilities regardless of company size.
For more information on how both Canadian-based TSX and TSX-V companies can strengthen their ICFR, please go to the Compliance Partner(tm) website: www.compliancepartner.ca. For more general information on ICFR for US-based SOX filers please go to www.issuescentral.com.
March 07, 2006
Let's not get Evidence Amnesia when it comes to SOX
There is so much noise these days about the overburdening of smaller companies with Section 404. But let's not forget that this legislation was enacted due to real problems. Since the legislation was enacted, real problems have had a bright light shone on them.
Restatements have doubled! A larger percentage of these restatements have been with smaller companies. So if your company takes the plunge to be public, it is a big responsibility. There should be more work and higher expectations.
Yes fraud can be committed post-404. No one is arguing that. But one thing that is for sure, fraud has probably NOT increased since SOX was enacted. Truly there is more awareness of controls and fraud prevention. There is better behavior when it comes to internal controls over financial reporting and control environment.
So let's not get evidence amnesia and throw the baby out with the bath water. Controls are good. While Section 404 is not perfect, no one can really imagine a time anymore when controls are not a focus.
An excerpt from an article is here:
Study: SOX Helped Double Financial Restatements
Source: InstitutionalInvestor.com
The effects of the Sarbanes-Oxley have been dramatically felt by companies as witnessed by the skyrocketing number of companies that have restated their financial results, Glass Lewis & Co. has found. Last year, there were 1,195 restatements by U.S. companies, almost double the 613 in 2004, as companies appear to be taking more care in filing results. But the research firm also expects that number to level off or drop, as early as this year, as companies improve their internal controls and avoid some the accounting errors that spawned SOX in the first place. For the complete article, click here.
If your company needs to effectively comply with SOX 404 or CSOX, see www.issuescentral.com to learn more about the Compliance Playbook(tm) or if your company is based in Canada, see www.compliancepartner.ca to learn more about Compliance Partner(tm).
Restatements have doubled! A larger percentage of these restatements have been with smaller companies. So if your company takes the plunge to be public, it is a big responsibility. There should be more work and higher expectations.
Yes fraud can be committed post-404. No one is arguing that. But one thing that is for sure, fraud has probably NOT increased since SOX was enacted. Truly there is more awareness of controls and fraud prevention. There is better behavior when it comes to internal controls over financial reporting and control environment.
So let's not get evidence amnesia and throw the baby out with the bath water. Controls are good. While Section 404 is not perfect, no one can really imagine a time anymore when controls are not a focus.
An excerpt from an article is here:
Study: SOX Helped Double Financial Restatements
Source: InstitutionalInvestor.com
The effects of the Sarbanes-Oxley have been dramatically felt by companies as witnessed by the skyrocketing number of companies that have restated their financial results, Glass Lewis & Co. has found. Last year, there were 1,195 restatements by U.S. companies, almost double the 613 in 2004, as companies appear to be taking more care in filing results. But the research firm also expects that number to level off or drop, as early as this year, as companies improve their internal controls and avoid some the accounting errors that spawned SOX in the first place. For the complete article, click here.
If your company needs to effectively comply with SOX 404 or CSOX, see www.issuescentral.com to learn more about the Compliance Playbook(tm) or if your company is based in Canada, see www.compliancepartner.ca to learn more about Compliance Partner(tm).
March 03, 2006
Is Investor Trust Increased with Sarbanes-Oxley?
There is obviously much debate on the topic of Investor Trust and Sarbanes-Oxley. From my experience in listening to hours and hours of testimony at SEC public meetings over the past year, I believe that investor trust is increased.
When companies are forced to take a hard look at their controls and increase transparency, this is good. When investors have more information about investment choices, this is also good. Just because a share price is not increased when they deliver poor results but have great governance does not diminish the importance of this legislation.
No one can argue that lack of transparency and foggy information increases trust. Companies must still perform well to increase returns for shareholders. This is obvious.
There is no turning back the clock on this one. It would be a big mistake to take information away. Just watch what that does to investor trust.
An excerpt from an article on this topic is here:
"Can Sarbanes-Oxley influence investors' trust?
New Research
By Shula Neuman
March 1, 2006 -- What is a 'fair' price for fairness? New research from Washington University's Olin School of Business reveals that a just system of governance may not enhance trust when returns do not meet investors' expectations. This is sobering news for businesses that have spent countless hours and large amounts of money complying with the Sarbanes-Oxley Act (SOX) in the hopes of building stronger corporate governance.
Ron King, the Myron Northrop Professor of Accounting in the Olin School of Business conducted research on how trust is created under different combinations of procedural justice and payout fairness. King makes the following observations based on his research:
Fairness might be a trade-off for smaller returns.
SOX proponents argue that the extra compliance costs can be justified because these costs are offset by the benefits of increased investors' trust and reduced investors' skittishness. "The central question raised by this policy issue relates to how people make tradeoffs between a fairer system and a smaller pool of resources (because the fairer system is costly)," King says. "That is, this is an issue of procedural and distributive justice." For the complete article, click here.
If your company needs assistance on effective and rapid internal controls documentation and ongoing compliance management, see www.issuescentral.com to learn more about the Compliance PlaybookTMm) and if your company is based in Canada, see www.compliancepartner.ca to learn more about Compliance PartnerTMm) from Thomson-Carswell, the worlds largest financial publisher.
When companies are forced to take a hard look at their controls and increase transparency, this is good. When investors have more information about investment choices, this is also good. Just because a share price is not increased when they deliver poor results but have great governance does not diminish the importance of this legislation.
No one can argue that lack of transparency and foggy information increases trust. Companies must still perform well to increase returns for shareholders. This is obvious.
There is no turning back the clock on this one. It would be a big mistake to take information away. Just watch what that does to investor trust.
An excerpt from an article on this topic is here:
"Can Sarbanes-Oxley influence investors' trust?
New Research
By Shula Neuman
March 1, 2006 -- What is a 'fair' price for fairness? New research from Washington University's Olin School of Business reveals that a just system of governance may not enhance trust when returns do not meet investors' expectations. This is sobering news for businesses that have spent countless hours and large amounts of money complying with the Sarbanes-Oxley Act (SOX) in the hopes of building stronger corporate governance.
Ron King, the Myron Northrop Professor of Accounting in the Olin School of Business conducted research on how trust is created under different combinations of procedural justice and payout fairness. King makes the following observations based on his research:
Fairness might be a trade-off for smaller returns.
SOX proponents argue that the extra compliance costs can be justified because these costs are offset by the benefits of increased investors' trust and reduced investors' skittishness. "The central question raised by this policy issue relates to how people make tradeoffs between a fairer system and a smaller pool of resources (because the fairer system is costly)," King says. "That is, this is an issue of procedural and distributive justice." For the complete article, click here.
If your company needs assistance on effective and rapid internal controls documentation and ongoing compliance management, see www.issuescentral.com to learn more about the Compliance PlaybookTMm) and if your company is based in Canada, see www.compliancepartner.ca to learn more about Compliance PartnerTMm) from Thomson-Carswell, the worlds largest financial publisher.
