Compliance Blog

President George Bush signed land mark legislation in 2002, Sarbanes-Oxley Act of 2002. Good job George.

Today, Mr. Cheney indicated that he thinks that maybe SOX is too tough.

After Enron, Worldcom, Tyco, etc the average investor was ready to see something that could make public company financial statements reliable again. But oh my, it is an election year, ladies and gentlemen! And your author is a loyal Republican! I have been a Republican since I was born - way before I could vote.

However, make no mistake about Sarbanes-Oxley. It is a good piece of legislation. It has checks and balances. Frankly, it asks for companies to use judgement and good ethical principles. The much maligned COSO framework really is a good piece of work.

Through much work with registrants and auditors, the framework is well understood by those using it. Small companies have whined non-stop about the excessive regulation but restatements are up 400% from 2001. So this legislation cannot be all "busy work".

Borrowing from our good friends at Mastercard - Investor Confidence is PRICELESS. Let us not forget the situation in 2002 after Enron when market confidence was so low and markets were at very low levels. It seemed then that nothing could be done to restore confidence.

After all, when you lose trust, we all know how hard it is to restore it. But little by little as the regulations were enforced for the largest filers, markets regained their confidence. Big investors supported the legislation and today we have markets at record levels.

Could it be that maybe this legislation is working? Yes it is. Do companies like having to do what they perceive as extra work? NO! But every company we have worked with on their internal controls projects have improved their business, not just complied with the legislation.

For many companies they came to realize that for example, their financial reporting processes were less than perfect. They now had the detail to improve them.

Capitalism is good. Investor Confidence is good. Leave SOX alone!

Do not let election fears overcome important good legislation that is in place and is proven to work. It is interesting that Mr. Cheney stands by decisions on Iraq but not on investor confidence in the markets with the highest standards in the world. Very disappointing.

If your company is public in the US or Canada and wants to comply with Sarbanes-Oxley or MI 52-109 cost effectively, see http://www.issuescentral.com/ to learn more about Compliance Playbook®. For companies based in Canada listed on Canadian or US exchanges, see http://www.compliancepartner.ca/ to learn more about Compliance Partner(tm).

Probably the biggest single contentious issue concerning SOX 404 has been the external auditor attestation. Disagreements between auditors and clients have been rumored to be close to fist fights over differences in interpretations of SOX 404 and AS2. This 1800 page document is exhaustive in its discussion of audit requirements.

Many areas of the standard such as Section 65 may be interpreted in many different ways and are frankly just obtuse and vague. So it is a good thing that the audit standard will be revised and soon, according the PCAOB.

What is a little disconcerting is that both the SEC and PCAOB issued May 2005 guidance for the registrants and auditors, respectively. But it still seems that auditors have continued to be too conservative in their approach, see excerpt below from cfo.com article, referenced above:

"In May 2005, the PCAOB issued a policy statement with guidance on how to implement the internal controls provision of the Sarbanes-Oxley Act, known as Section 404. The guidance recommended that auditors should use a top-down approach, starting with company-level controls and risks, and rely on the work of others (to avoid unnecessary, costly testing of controls). Those concepts will be incorporated into the amendment of the standard, said Ray.

"We've received a lot of feedback that a number of auditors are hesitant to implement the concepts and direction from [the May 2005 guidance] for fear they would violate the standard itself," explained Ray. Amending AS2 is the PCAOB's top priority in the coming year..."

Other complaints have stemmed from external auditors not using client documentation and recreating it at $300-$500 per hour. Additionally, the lack of clarity of what really is a "material weakness" etc. has been a great source of acrimony between client and auditor, to no one's benefit.

We will wait with great anticipation for the details of this revision. This is good news along with a new COSO framework for small companies. You have to give the SEC and PCAOB credit. They ask for feedback and they really try to come up with reasonable solutions.

Other governments could take lessons from the SEC on this topic.

The SEC requires transparency from registrants and they try to practice what they preach.

If your company is public in the US or Canada and wants to comply with Sarbanes-Oxley or MI 52-109 cost effectively, see http://www.issuescentral.com/ to learn more about Compliance Playbook(tm). For companies based in Canada listed on Canadian or US exchanges, see http://www.compliancepartner.ca/ to learn more about Compliance Partner(tm).

In an endorsement of the Sarbanes-Oxley Act of 2002, President George Bush came out yesterday indicating that his administration supports "fine-tuning" the law but "not rolling it back".

This an important comment based on the constant saga of whining about SOX. Yesterday also brought out a Request for Proposal from COSO to develop a framework for small companies to evaluate and manage internal controls over financial reporting.

The COSO RFP was in response to SEC Commissioner Cox's statements earlier this month concerning help for management and small companies to evaluate their internal controls effectively and not using the onerous Audit Standard #2 from the PCAOB.

President Bush indicated that it was important for investors to be able to rely on financial statements and that financial malfeasance would not be tolerated.

You go George! How can anyone say that SOX has not been a huge awakening? Where there have been restatements and trials of former Enron executives, there is truth and worth in the legislation.

Small companies will need work to comply. But they too took the public's money so they too should comply with SOX. If not, then delist. That is an option.

If your company is public in the US or Canada and wants to comply with Sarbanes-Oxley or MI 52-109 cost effectively, see www.issuescentral.com to learn more about Compliance Playbook(tm). For companies based in Canada listed on Canadian or US exchanges, see www.compliancepartner.ca to learn more about Compliance Partner(tm).

Some companies who are Foreign Private Issuers (FPI) who do not have a need for their US listing got news today that they will have to wait little longer to be able to de-register from US markets.

An excerpt from MarketWatch:
"the SEC said it will finalize a proposal on using Internet proxy communications and a second proposal that would make it easier for non-U.S. companies to deregister shares that trade in the U.S. SEC guidance to help corporate managers comply with the internal-control requirements of the 2002 Sarbanes-Oxley Act also will be on the agenda for the Dec. 13 meeting, according to the SEC..." for the complete article, click here.

So folks it will happen, but it will not happen soon enough for some. They have extended the deadline for these important issues. So really we are talking 2007 for these changes to take place.

If your company has to comply with Sarbanes-Oxley Section 404, see www.issuescentral.com for more information on Compliance Playbook(tm) or if your required ICFR project is regulated by CSA MI 52-109, see www.compliancepartner.ca to learn more about Compliance Partner(tm).

A bribe abroad is an indicator of fraud at home. Am I being too harsh?

In a global economy, it makes you wonder about the truth behind words and numbers.

So, if you are an investor and invest worldwide, how do you build in a "risk premium" for transparency and the lack thereof?

An interesting survey from Transparency International provides a form of "risk index" by country by highlighting the propensity for bribing. Click here for lowlights.

The good news is ..... wait there is no good news.

It makes you wonder about the underlying veracity of financial numbers in various capital markets. After all, if one is willing to take a bribe, or give one, it is not a stretch to believe that the "tone-at-the-top" is not good, perhaps we need to give a bit of "juice" to this quarter's numbers.

A prediction. The U.S. is a bellwether because of the drive for high standards and transparency. Just as the Foreign Corrupt Practices Act was brought into U.S. markets in 1977 and highlighted the need to reduce bribery and improve "internal controls over financial reporting", but not really affected (until broader fraud was uncovered) with teeth until SOX in 2002, we will predict that rapidly growing markets will mouth the need for financial compliance during 2006-2007, but their first major financial scandals (and equivalent SOX legislation) will kick in about the time that their growth slows (as does the world economy). SOX will have been omniscient. So, Global SOX? Late 2008?

I hope I'm wrong.

If you blurted out "Sarbanes-Oxley" you win. Well, maybe you don't win, but McKinsey is about to get a small engagement from NYC. Click here to read more.

Some background.

Jeffrey Skilling works at McKinsey. By all accounts he is very bright and driven. He helps Kenneth Lay develop new gas trading products. Skilling jumps to Enron. Business gets really good (now they are cooking with gas!), but then the gas gets shut off. Financial and career ruin for many. Investors start wondering about their investments. No faith, no money.

Sarbanes and Oxley get their "act" together. CEOs and CFOs should do more than testify, they should certify. Controls good, fraud bad.

A new era in financial regulation begins. Everyone gets very thoughtful. The 800 pound gorilla is always in the room. "Yes Virginia, there is a Santa, and he is reading every claus to ensure you've been good. He's a class act waiting to happen."

Lots of time and money are spent. We learn that internal control means something more than anger management. Some of the activity is non-value added driven by management ignorance and by paranoid "externals". Much of the activity is positive. Transparency improves as does management "hygiene" with respect to financial accuracy and control. Investors like what they see and hear. Markets go up, and yes, it is partly because of Sarbanes and Oxley. Faith is back, so is the money. But hark, what is that tinkling I hear? Is that Cristal in London or Dom in Hong Kong? Could it be that in our desire to restore faith, we have driven people to markets with more "flexible" regulatory regimes. Where have our IPOs gone? What happened to our birthright and entitlements?

I know what the problem is: Sarbanes-Oxley!

Root cause (great name for a law firm, don't you think) of IPO shrinkage in North America? Well, it could be the cold shower of high cost legal/accounting fees associated with the IPO process in the U.S., or the discounts given at the offering stage to incent investors to jump on board? Or it could be that the surplus cash driven by American consumer spending is fueling markets and home grown IPOs in places like China where they want to spread the money and fees around in their own neighborhood. Oh and yes, perhaps it is for some the desire to avoid the scrutiny and sunshine associated with Sarbanes-Oxley.

In any event, McKinsey is going to help NYC get to the bottom of this.

The age of irony, just one example of many.


If your company is based in the U.S., or outside of North America, and needs to comply with SOX efficiently and without the drama please visit http://www.issuescentral.com/ to learn more about the Compliance Playbook(TM).

If you are a Canadian-based filer needing to affordably comply with either SOX or MI 52-109 please visit the website of our exclusive Canadian distributor, Thomson Carswell, at http://www.compliancepartner.ca/ to learn about Compliance Partner(TM), plus their new product for the Mining Sector, Compliance Partner(TM) - Mining Edition.

Thomson Carswell is also providing some web-based seminars for TSX and TSX Venture companies on the topic of MI 52-109 and recent changes during the months of October and November 2006. Please click here for more information.