Compliance Blog

Chairman Cox Testifies Before House Financial Services Committee

Charley Best — Wed, 20 Sep 2006 14:32:00 +0000

On September 19th, S.E.C. Chairman Cox and PCAOB Chairman Olson testified before the Financial Services Committee.

Congressman Michael Oxley, one of the co-sponsors of the Sarbanes-Oxley Act of 2002, kicked off the meeting with an excellent overview of the progress and challenges associated with SOX.

Cox and Olson highlighted SOX benefits, but also addressed some of the challenges associated with Section 404 - Management's Report on Internal Control over Financial Reporting (SOX 404). In particular they addressed upcoming revisions to Audit Standard 2 (AS2 is used by the external auditors to evaluate the internal controls) to improve the efficiency of audits (and reduce excessive zealotry by the "externals"), plus developments on the front of providing management with more formal guidance with respect to ICFR implementation as an alternative to AS 2.

Click here to go to the C-Span: On Demand recording.

Investors all over the world, and in particular in the U.S., owe thanks to Senator Sarbanes and Congressman Oxley. As Cox said the Sarbanes-Oxley Act is "iconic" and "we have come a long way from the dark days of 2002" and "it is remarkable how many countries have adopted similar legislation".

By the way, doesn't Cox sound more than a little Presidential? Hmmm.

Product Eases SOX 404 and MI 52-109 compliance for Mining Companies - Can You Dig It!

Charley Best — Wed, 13 Sep 2006 13:31:00 +0000

Normally I like to wax poetic about the world of internal controls over financial reporting (ICFR). Haikus, sonnets, compliance limericks, that sort of thing. However, I must "refrain" for this blog entry.

The boss told me to toot our own horn on an important announcement to reduce the cost of internal control over financial reporting(ICFR) for mining companies that need to comply with either SOX 404 or the ICFR portion of MI 52-109 (for TSX and TSX-Venture based miners).

The Compliance Playbook(TM) - Mining Edition was announced by Issues Central, Inc. yesterday (www.issuescentral.com).

From the press release:

"The Compliance Playbook™ - Mining Edition is the first software-based financial compliance product dedicated to the mining sector and comes complete with over 100+ industry-specific compliance templates ranging from Reserve Valuation, Mining AFEs, Asset Impairment, Mining AROs, Mineral Claims and Production through to Financial Close as well as Entity Level Controls. The product offers a “start-to-certification” approach that covers all aspects of an ICFR project including planning, top down risk-based scoping, entity-level controls, process-level controls, testing and remediation, and ongoing compliance beyond year one.

Important features include:

Rapid documentation
Automatic flowcharting
Customizable compliance reporting
Minimal IT investment

The product comes standard with a tight integration with Microsoft® Office including Word, Excel and Visio."

If you are a miner based in the U.S. , or outside North America, and would like more information please call Issues Central at 1.800.410.6681 ext 112 or e-mail: mining@issuescentral.com and provide your name, company and telephone number.

If you are a Canadian-based miner and need to comply with SOX 404, or MI 52-109, please contact Thomson-Carswell, our Canadian distributor, at www.compliancepartner.ca or via e-mail at: carswell.compliancepartner@thomson.com.

SOX Compliance Costs - Heading Down

Charley Best — Wed, 13 Sep 2006 13:10:00 +0000

Do you subscribe to the various news/keyword alert services? I do. It is no surprise that several of my alerts are based around "Sarbanes-Oxley", "SOX 404" and so on. A trend is becoming clear with respect to the cost of SOX 404 for large accelerated and accelerated filers. I need to firm up my numbers based on recent earnings announcements, but it appears that in the range 6-7 out of 10 filers are saying that SOX 404 costs are dropping. In some cases significantly. As an example, Craftmade International (NASDAQ- CRFT) mentions in their earnings press release today (Click here) that SOX 404 processes are being streamlined, etc etc.

From an overall perspective, this is a natural consequence of the compliance learning curve. Effective internal controls over financial reporting (ICFR) should not be a burden once companies have it integrated into their operations.

To help your firm achieve cost-effective SOX 404 compliance please go to http://www.issuescentral.com/ to learn more about the Compliance Playbook(TM).

If you are a Canadian-based filer, please go to our exclusive Canadian distributor's (Thomson-Carswell) website http://www.compliancepartner.ca/ to learn more about achieving SOX 404 or MI 52-109 compliance with Compliance Partner(TM).

AS2 Revisions In The Near Future?

Charley Best — Tue, 12 Sep 2006 15:15:00 +0000

According to the good people at CFO.com, the PCAOB has made draft revisions to Audit Standard 2 (AS2), which is used by the external audit community as their guidance for conducting internal control over financial reporting (ICFR) reviews, and provided these suggested revisions to the SEC. Click here to read more.

While AS2 is for the external auditor, there has been no formal equivalent ICFR guidance for management which has meant that management teams defaulted to using AS2 as part of their own internal reviews of ICFR. In the coming weeks it appears that the SEC will initiate the process of constructing a framework for management to use as part of the SOX 404 ICFR requirements.

Progressive improvement beats postponed perfection.

To help your firm achieve cost-effective SOX 404 compliance please go to http://www.issuescentral.com/ to learn more about the Compliance Playbook(TM).

If you are a Canadian-based filer, please go to our exclusive Canadian distributor's (Thomson-Carswell) website http://www.compliancepartner.ca/ to learn more about achieving SOX 404 or MI 52-109 compliance with Compliance Partner(TM).

According to the SEC - The World is Pulling Up Its SOXs

Charley Best — Mon, 11 Sep 2006 23:26:00 +0000

An excellent overview of global compliance initiatives and comparative regulatory measures was provided by Ethiopis Tafara the Director, Office of International Affairs for the SEC in the International Financial Law Review - September 2006. Click here to read more.

To help your firm achieve cost-effective SOX 404 compliance please go to http://www.issuescentral.com/ to learn more about the Compliance Playbook(TM).

If you are a Canadian-based filer, please go to our exclusive Canadian distributor's (Thomson-Carswell) website http://www.compliancepartner.ca/ to learn more about achieving SOX 404 or MI 52-109 compliance with Compliance Partner(TM).

Canadian Internal Control over Financial Reporting Rules Are Kicking In

Charley Best — Mon, 28 Aug 2006 15:24:00 +0000

Today we are going to give SOX 404 a break and focus on its Canadian cousin - Multilateral Instrument 52-109: Certification of Disclosure in Issuers' Annual and Interim Filings (MI 52-109).

The Canadian capital market is noteworthy for its decentralized approach to securities regulation (provincially run) and the strong market returns of the last few years.

The Canadian approach has been to take elements of SOX 302 (CEO/CFO Certifications) and SOX 404 (Internal Controls over Financial Reporting - ICFR) and combine them into MI 52-109 and then apply the rule across both TSX and TSX Venture filers.

The first phase of MI 52-109 associated with CEO/CFO certification of Disclosure Controls - Design and Evaluation has been in place for fiscal years ending on/after March 30, 2005.

The second phase of MI 52-109 associated with CEO/CFO certification of Internal Controls - Design is now kicking in for fiscal years on/after June 30, 2006. If our U.S. experience is any indication there are going to be lots of late nights in the coming months in Canada as ICFR teams rush to ensure that at least the Design portion of their ICFR projects is completed.

The third and proposed phase of MI 52-109 (click here to read - CSA Notice 52-313), commencing for fiscal years ending on/after December 31, 2007, will require all issuers to provide a Management Evaluation of Internal Controls and related CEO/CFO certification (similar to SOX 404) and detailed discussion within the MD&A with respect to ICFR evaluation process and results. However, as proposed this last phase will not require the dreaded auditor attestation from the "externals". So, on the one hand the issuer will save money with respect to external audit costs, but the issuer's board of directors takes on more responsibility and perhaps more liability with respect to errors made in the financial statements and "core" documents.

Stay tuned for upcoming Public and Industry input with respect to this third phase of MI 52-109 as it is anticipated that the various provincial securities regulators and the Canadian Securities Administrator (CSA) will be issuing an amended version of MI 52-109 after Labor Day.

It will be interesting to see if the CSA members attempt to include some form of "management guidance with respect to ICFR" as is being contemplated by the SEC to improve the clarity and efficiency of the SOX 404 process for issuers.

If you a Canadian-based issuer needing to either meet the requirements of MI 52-109 or SOX 404, please go to the website of our exclusive Canadian ICFR distributor, Thomson-Carswell, at www.compliancepartner.ca to learn more about their market leading MI 52-109/SOX 404 product - Compliance Partner(TM).

Ready, AIM, but don't head Higher!

Charley Best — Thu, 24 Aug 2006 16:07:00 +0000

There has been much press in the U.S. as to how the Sarbanes-Oxley Act of 2002 is driving away IPOs. There has also been much glee in places like London where the AIM Exchange (Alternative Investment Market) has experienced a dramatic increase in listings as compared with U.S. markets such as NASDAQ.

Is the effort and cost associated with SOX really a detriment to the market and to investors?

A progressive Republican senator from California (imagine!), Senator Hiram Johnson, is reported to have said in 1917 around the time the US joined WWI was that " When war is declared, truth is the first casualty."

Methinks "truth" is lacking in the debate as to the perceived weakness in U.S. capital markets.

Some facts of interest to help move the debate forward are as follows:

Listings on AIM are indeed far higher than NASDAQ.
Legal costs and accounting costs are higher to list on U.S. markets than international markets.
IPO discounts (money left on the table) are generally higher on U.S. markets.
U.S. markets provide higher overall investor returns and greater share multiples than foreign markets.
Indeed the compliance requirements are stricter on U.S. exchanges than all other exchanges. Only the Canadian markets (TSX and TSX Venture) have compliance standards of comparable quality to the U.S. markets.

A very interesting study by an M&A boutique, Innovation Advisors, can be found here under the title- "Research Shows AIM Misses the Mark".

It appears to me that the following can be said on this debate as to U.S. market competitiveness:

The U.S. was an expensive market (fees, discounts) prior to SOX - not because of SOX. If you want to be the "Wal-Mart of IPOs" then lawyers, accountants and brokerage firms are going to have to reduce their fees.
Smaller and in many cases marginal firms are listing on AIM. It smells lots like a "pink sheet" market that is more geared to initial investors getting some money out than a long-term trading alternative.
Investors will make more money and companies will achieve greater market valuations on U.S. exchanges.
Some of the large foreign IPOs, particularly from China, never had any intention of listing on U.S. exchanges for both political and transparency (lack thereof) reasons.

You could actually argue that SOX is improving the quality of firms on U.S. markets and forcing marginal businesses to capital pools with lower standards.

There is no doubt that investors in the U.S. appear to be enjoying the benefits!

If your company must comply with SOX, then we can help you reduce the cost of compliance. Please visit www.issuescentral.com to learn more about the Compliance Playbook(TM). If you are a Canadian-based filer needing to comply with either SOX or MI 52-109 please visit the website of our exclusive Canadian distributor, Thomson-Carswell, at www.compliancepartner.ca to learn about Compliance Partner(TM).

SOX 404 and Foreign Filers - To Delay, or not To Delay. That is the Question.

Charley Best — Mon, 07 Aug 2006 19:57:00 +0000

Rumor has it that the SEC may wish to delay the required first year filing of SOX 404 (Management's Report and Assessment on Internal Control over Financial Reporting) reports for non-U.S. based SEC filers. Click here to read more.

It appears that Chairman COX and the SEC may be willing to consider some additional deadline extensions for smaller (non-accelerated) U.S. filers, as well as foreign filers, with respect to SOX 404 activity. Foreign filers were set to file their reports for all fiscal year-ends on/after July 31, 2006, whereas U.S. based non-accelerated filers were looking at revised filing deadlines for fiscal years beginning on/after December 15, 2006 (i.e. effectively Dec 31, 2007 years ends as for most filers).

So what is happening?

The SEC and PCAOB are looking at a number of initiatives at present including the PCAOB's revision of Audit Standard 2 (External Auditor's Standard with respect to Internal Control audit), as well as the SEC's recent initiative to solicit feedback on providing a "management version" of AS2.

Oh brother, how much more time do foreign filers and smaller filers need to get on with this! Haven't they had the benefit of watching the activities of the last 3 years with respect to larger filers? I guess that if a smaller filer and a foreign filer has already been providing certifications for SOX 302 (CEO/CFO Certifications) that cover elements of internal controls, then what is the real problem? Think about it. If you have signed a 302 certificate you would have done most of the work already, right? How could a CEO/CFO sign 302 without having done their own assessment over internal controls over financial reporting? I guess I don't get it.

If your company is a non-accelerated filer or a foreign filer needing to comply with SOX 404, you can learn more about a cost-effective and streamlined approach to achieving SOX 404 compliance, then go to www.issuescentral.com to learn about the Compliance Playbook(TM).

If you a Canadian-based filer needing to comply with SOX 404 or MI 52-109, please visit the website of our exclusive Canadian distributor, Thomson-Carswell, at www.compliancepartner.ca and learn more about Compliance Partner(TM).

Interview with Canadian Underwriter Magazine - Cathy Connally

Charley Best — Fri, 04 Aug 2006 20:13:00 +0000

Our organization's fearless (and opinionated) President gave the following interview back in March 2006 during a seminar entitled "The Impact of the Sarbanes-Oxley Act on the Canadian Insurance Industry".

Click here to read the interview published in the June 2006 issue of Canadian Underwriter. There is nothing to fear.

Mr. Cox. Has it already been one year?

Charley Best — Fri, 04 Aug 2006 15:00:00 +0000

Time flies when you are head of the Securities & Exchange Commission (SEC). Christopher Cox, as the first Congressman ever appointed to head the SEC, has had an extremely busy year with a variety of initiatives including:

Interactive data and XBRL initiatives
Further review of the implementation of Internal Control Reporting provisions (SOX 404) and action to ensure that the PCAOB improves external auditor work with respect to internal control audits
Protection of seniors from investment fraud
Hedge fund regulation (oops!)
Regulations NMS (National Market System) initiatives to provide a more level quotation and pricing "playing field"
International initiatives to begin the march towards more global market rule harmonization (IFRS and U.S. GAAP)
and lots more

We knew that William Donaldson, the previous head of the SEC, was going to be a hard act to follow. Cox has done a strong job in year one. The future is going to be very interesting for Mr. Cox. I wouldn't be surprised to hear his name being mentioned in 2007 as a potential Republican presidential candidate.

Sarbanes-Oxley: Four Year Review - The Grades Are In!

Charley Best — Tue, 01 Aug 2006 15:00:00 +0000

So, how would you grade the results associated with the Sarbanes-Oxley Act passed by President Bush on July 30, 2002?

It all depends on your perspective.

Here is how the grades might pan out depending on what type of stakeholder you are:

Investors - "B+" - SOX was created to help rebuild confidence in financial reporting and transparency. SOX has succeeded in this regard. Large investors such as Calpers are strong proponents of improved reporting and transparency. Investors in smaller companies don't like the costs of SOX 404 (Management's Report on Internal Controls) on smaller companies. Overall the stock markets are up significantly from July 2002. SOX is a contributing factor to the markets success as without SOX larger investors might have balked at financial information and assumed a larger risk premium and therefore greater cost of capital for all market participants. Investors like CEOs and CFOs to certify their companies' financial results and provide solid controls. It is all part of earning that big executive pay check.
Management teams of Publicly Traded Firms - "C-" - Management teams have long complained that they are spending too much time on compliance initiatives, and not enough on strategic management. While the furor has died down with larger filers, smaller filers continue to complain. Some management teams admit that financial reporting has improved, but don't feel that the cost justifies the benefits.
Public Accounting/Consulting Firms with SOX Consulting Practices - "A" - SOX has provided a service and revenue bonanza for firms providing SOX services, particularly those services associated with SOX 404. The demise of Enron and Arthur Andersen has created unprecedented wealth creation for public accounting firms and accounting grads.
U.S. Exchanges and U.S. Competitiveness Proponents - "C" - While it is acknowledged that investor confidence has been restored since its nadir in 2001/2002, it is widely felt that the U.S. markets are setting the compliance high bar too high and are thus losing new listings to exchanges such as LSE-AIM, Hong Kong, etc. Time will tell whether the "flexible compliance regimes" of these offshore markets will protect investor interest and market capitalization.
Foreign Markets - "A+" - Markets such as the LSE-AIM and others love SOX because they feel that is it driving many listings their way that otherwise might look at listing in the U.S.. Fewer rules and lower market access costs are attractive to many firms, but they tend to achieve lower market valuations in comparison to similar firms listed in the U.S.. Are shareholders okay with this? Perhaps theses listings will ultimately move on to U.S. exchanges to achieve higher market caps.

So, everyone has their perspective. In implementing SOX, the U.S. took a leadership position to ensure improved investor confidence. This mission is ongoing but stands in very good shape. The larger concern is now how to achieve cost-effective compliance and enhance competitiveness. No doubt this challenge can be met now that the market is resting on a strong controls and transparency foundation.

To help your firm achieve cost-effective SOX 404 compliance please go to www.issuescentral.com to learn more about the Compliance Playbook(TM).

If you are a Canadian-based filer, please go to our exclusive Canadian distributor's (Thomson-Carswell) website www.compliancepartner.ca to learn more about achieving SOX 404 or MI 52-109 compliance with Compliance Partner(TM).

Wait a Minute? Did you say Sarbanes-Oxley has had a Positive Effect?

Cathy Connally — Thu, 27 Jul 2006 14:35:00 +0000

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).

Hark! Going Private and No Mention of Sarbanes-Oxley

Cathy Connally — Thu, 27 Jul 2006 14:21:00 +0000

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).

SEC Issues Concept Release Concerning SOX 404 - Management's Reports On Internal Control Over Financial Reporting

Charley Best — Tue, 11 Jul 2006 19:13:00 +0000

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.

COSO Webcast Today Outlined Internal Control Examples for Smaller SOX 404 Filers

Charley Best — Tue, 11 Jul 2006 18:13:00 +0000

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:

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.
Focused on smaller companies, but can be helpful to larger companies.
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.
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.