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Thursday, March 24, 2005

Accounting checks delay 10-K filings

WASHINGTON (MarketWatch) -- Hundreds of publicly traded U.S. companies have missed the deadline to file expanded versions of their annual reports, citing the cumbersome requirements of legislation intended to crack down on corporate fraud.

Companies are largely blaming it on the Sarbanes-Oxley Act of 2002. The landmark corporate-reform legislation mandates audited statements attesting to the status of internal procedures for ensuring clean accounting.

In the debate leading up to the law's passage, many companies had said that the extra work would suck up resources, and cost money. It also appears to be taking companies' and auditors' time.

"This is the first time they're actually having to report on the status of their control structures," said Eisha Tierney Armstrong, managing director of the CFO Executive Board, a research firm based in Washington.

Between Jan. 1 and March 15, 2004, a total of 70 companies told the Securities and Exchange Commission they needed more time to file their Form 10-K, or annual reports, with the agency.

But this past March 16 was the deadline, and the number leaped to nearly 300 during this year's comparable period, according to a study by the CFO Executive Board.

That number rose to 469 companies as of last week, according to the SEC.

"The last-minute rush of requests for 15-day extensions wasn't unexpected," said Patrick McGurn, vice president of proxy-advisory firm Institutional Shareholder Services, in an e-mail interview.

Under the Sarbanes-Oxley law, which Congress passed in the aftermath of the Enron and WorldCom scandals, company officers in their annual reports must include an update on so-called internal controls to safeguard against bogus accounting.

An outside auditor must also certify the assessment made by top executives.

Careful wording

The letters written by company officials are worded carefully to leave little room for interpretation. In a filing by Atrion Corp. (ATRI: news, chart, profile) , Chief Executive Emile Battat writes the report contains no falsehoods or omissions "based on my knowledge."

Accounting firms are similarly striving to be unambiguous in their statements.

In their requests for more time, several companies have identified shortcomings in assembling their accounting controls.

None of this has caught the SEC by surprise. The agency has told companies it is willing to listen to their concerns about the law and is convening meetings next month to solicit opinions about how to improve the reporting requirements.

Earlier this month, SEC Chairman William Donaldson said he expected "a number of companies" to announce failure to complete reports on time. He also said it shouldn't be cause for alarm with investors.

Indeed, stock prices of the companies seeking deadline extensions generally haven't moved dramatically.

Corporate governance watchers say this season has been stressful on chief executives and companies who are filing these reports for the first time.

"The problem with [Sarbanes-Oxley] has been its complexity and the newness of the whole process," said John Palafoutas, chief lobbyist for the American Electronics Association. "CEOs have had their pants scared off them by their accounting firms."

Changing jobs

More than half of chief financial officers at companies reporting about weaknesses in their internal controls are changing jobs around the time that disclosures are being made, according to the CFO Executive Board.

It's also been an expensive season for companies, according to a report from Financial Executives International. The group surveyed 217 public companies with average revenues of $5 billion to measure compliance costs -- the money spent for software, consulting and external audits.

Those companies' total costs for complying with the law this year averaged $4.36 million, up 39 percent from the $3.14 million they expected to pay when surveyed in July 2004.

Courses have even sprung up in Sarbanes-Oxley compliance, like the one run by a company called Sarbanes-Oxley Group in Clifton, N.J. "There's one piece that's really missing -- that seems to be the education piece," said Sanjay Anand, who chairs the organization.

He said he expects more registrants for his classes. "This is not going to go away," he said.

Armstrong of the CFO Executive Board says that while investors may have given companies a "hall pass" on compliance with Sarbanes-Oxley's internal control requirements so far this year, "next year they may not be so forgiving."

posted by Brian Moran @ 8:54 AM   4 comments

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