Compliance Blog

This blog has continued to wonder out loud over the past few years how there could be zero positive results from Sarbanes-Oxley.

• Why would companies not want good internal controls?
• Why would companies want fraud and errors in their operations?
• What company could not improve its operations and financial reporting quality with careful review and testing?
• If you took the public's money, shouldn't you disclose information so the investing public can make good decisions?
• Hasn't the business community become a paraiah to the average person?
• Haven't restatements been up four fold over 4 years?

Rhetorical maybe, but here are some other facts that just came out today: An excerpt from an article by the Washington Post is here:

"But one of the study's authors thinks there may be another reason: Companies have cleaned up their acts in the wake of corporate scandals that included the collapse of Enron Corp. and WorldCom Inc.

"It's possible that improved governance may have reduced plaintiffs' ability to allege fraud," said Stanford law professor Joseph Grundfest, who heads the clearinghouse. Still, he added that he continues to believe that Congress's major effort to improve corporate accountability, the 2002 Sarbanes-Oxley law, was too far reaching and too expensive to implement. "We could have achieved the gains of Sarbanes-Oxley at significantly lower cost," he said." Click here for the complete article."

We agree with Professor Grundfest on his conclusion that the gains from Sarbanes-Oxley could have been reached at lower costs. We have always been in the business of providing the best practices in governance and internal controls at the lowest cost.

However, the reality is that without the legislation no company would have made the efforts. Whether it is too far reaching is probably not true. Not reigning in the accounting industry sooner was more the problem.

The value of the good internal controls and disclosures is indisputable. The reduction in lawsuits says it all:

More good has happened out of the efforts put into Sarbanes-Oxley. And the investing public likes the results.

To find out how to cut your costs and improve results for your Sarbanes-Oxley Section 404/302 filings, see www.issuescentral.com and learn more about Compliance Playbook(tm). If you are a Canadian filer, see www.compliancepartner.ca to learn more about our exclusive Distribution Partner, Thomson-Carswell and Compliance Partner(tm).

Yesterday, there was an interesting bit of news about Viacom going private. I waited. I watched. But No! Alas, I heard almost no mention of the dreaded monster Sarbanes-Oxley as the reason for going private.

Could it be that there are more reasons for going or staying public on US markets than Sarbanes-Oxley? No way!!

What could the reasons be? An excerpt from an article from Business Week says this "The attractions are twofold: money and freedom.

The pay can be outrageously good even at the entry levels; for CEOs, it can be spectacular.

The flexibility is alluring, too. In private equity there's less annoyance from the Sarbanes-Oxley Act, the controversial regulations passed in 2002 to police publicly held companies.

And many private CEOs will avoid the Securities & Exchange Commission's new proposal that would require the highest-paid executives at public companies to disclose their compensation in excruciating detail. (These rules and proposals still apply to companies that issue registered public debt.)"

For the complete article, click here.

Quite interesting. The whole ridiculous obsession with Sarbanes-Oxley causing a complete collapse in US markets, could be fading.....

If your company would like to expedite your Internal Controls over Financial Reporting Project, see www.issuescentral.com to learn more about Compliance Playbook(tm). In Canada, click www.compliancepartner.ca to learn more about Compliance Partner(tm).

The SEC issued a Concept Release (click here) related to SOX 404 seeking comments from the public with respect to providing additional guidance to management regarding its evaluation and assessment of internal control over financial reporting (ICFR).

The comments are requested within the next 60 days and will help the SEC as it seeks to put together formal guidance for management teams later this year with respect to SOX 404.

Why are they doing this? Well, the AS2 standard meant for the external auditor has become something of a default for management teams as they understand how best to address the ICFR objective of accurate financial reporting (and as a result improve investor confidence in the capital markets - the SEC's primary concern).

I can't wait to read some of the comments that the SEC receives. A veritable "loot bag" of vested interests.

Well, I'll give you one of my general comments in advance.

"To the SEC: Be steadfast and maintain the highest financial standards in the world. Help the industry to do it in a cost-effective way, and don't listen to the Chicken Littles that talk about the U.S. losing competitiveness in financial markets because of having higher standards (and many would agree higher compliance costs). You are also supported by higher market premiums and greater truth in financial reporting. That will allow the U.S. to maintain long-term competitiveness and greater investor confidence than other markets."

Ah, that felt good.

An excellent, if repetitive, Webcast was held today outlining The Committee of Sponsoring Organizations of the Treadway Commission's (COSO) final guidance for Internal Controls over Financial Reporting for smaller publicly traded companies listed on U.S. markets.

Participants included Larry Rittenberg - head of COSO, David Richards - head of the IIA, Frank Martens - PwC staffer involved with COSO project team on guidance for smaller companies, Trent Gazzaway - Grant Thornton, and Christine Bellino - Jefferson Wells.

The latest guidance is entitled "Internal Control over Financial Reporting – Guidance for Small Public Companies" and will be available for a small fee at a number of association websites such as (AICPA, FEI, IIA, etc).

Highlights of the latest guidance discussed on the Webcast included:

1. The guidance is illustrative and has many examples, but is not different in substance from the original 1992 publication outlined the Internal Control - Integrated Framework.
2. Focused on smaller companies, but can be helpful to larger companies.
3. Outlines 20 key principles, and related characteristics, and supporting examples that range across the 5 components of the COSO framework: Control Environment, Risk Assessment, Control Activities, Information and Communication, and, Monitoring and Assessment.
4. The guidance on IT controls is much more explicit than the original 1992 publication.

Some interesting questions and comments made on the Webcast included:

• Lots of viewers e-mailed questions about cost of SOX 404 projects. Understandably the panel members said it all depends.
• Not a lot of time has been spent on the area of "materiality" in the guidance. The reasoning behind this related to the availability of other information on this topic in the public domain.
• Monitoring (regular event) and assessment (periodic event) will become more integrated over time.
• The challenge of "balancing" management's involvement (addressing management override) in the financial reporting process is critical because of both the potential for conflict (negative) but also because of valuable experience (positive) being needed. The need for smaller company board of directors to become more greatly involved in oversight was discussed.
• The COSO organization is looking at a broader strategy, and obtaining the required funding, on how to help companies to address risk more thoroughly in the areas of enterprise risk (ERM), plus ongoing monitoring, harmonization of control frameworks, and more.

At the end of the day, not much has changed for smaller filers, but the guidance will be helpful.

There are over 1000 foreign private issuers (FPIs) that are listed on U.S. exchanges. The S.E.C.'s deadline for filing of first year SOX 404 reports (Management's Assessment of Internal Controls over Financial Reporting, and, External Auditor's Assessment of Same) is approaching with fiscal years ends on/after July 15, 2006. That means the bulk of the filers will issue their reports for fiscal years ends of December 31st.

Any bets on how the foreigners will stack up on the material weakness front? They have had the benefit of extra time. Has it been well used? According to the S.E.C. (click here) reported results for first year American filers had 16% of the 3900 companies reporting SOX 404 compliance concluding that they did not have effective controls over financial reporting.

How will the Canadians, British, Italians, French, Germans, Japanese, etc stack up? It's kind of like the World Cup of Financial Reporting.

If your company is looking for a product to streamline your SOX 404 journey then please visit www.issuescentral.com to learn more about the Compliance Playbook(TM). If you are a Canadian-based filers needing to comply with SOX 404 or MI 52-109 please visit our Canadian distributor's website, Thomson-Carswell, at www.compliancepartner.ca and learn more about Compliance Partner(TM).