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Friday, April 29, 2005

Worthwhile legislation

the Sarbanes-Oxley Act has proven costly to public companies and has reduced their willingness to take risks, the legislation was necessary to maintain the perception of fairness in America’s equity markets, according to Raj Aggarwal, Kent State University’s chair of corporate finance.

The act, passed by Congress in 2002 in the wake of corporate accounting scandals at Enron and Worldcom, will cost businesses about $4.4 million on average this year, Dr. Aggarwal said today at a meeting of the Cleveland chapter of the CFA Society, a group that promotes ethical practices among financial analysts.

That figure applies to companies with about $5 billion in annual sales. He said the cost probably would go down by as much as 25% next year and in subsequent years as companies gain familiarity with the act’s requirements.

After the value of many people’s pensions crashed from holding stocks like Enron, “Congress had to do something,” Dr. Aggarwal said. However, “Congress is not the most informed decision maker when it comes to regulating business,” he said.

posted by Brian Moran @ 2:57 PM   7 comments

Thursday, April 28, 2005

Sarbanes-Oxley Act labeled success

WASHINGTON (MarketWatch) -- The Sarbanes-Oxley Act of 2002 is helping U.S. corporations improve their financial reporting and corporate governance, the chairman of PricewaterhouseCoopers said Thursday.

"I believe, over time, we'll see fewer major restatements, fewer [Securities and Exchange Commission] financial reporting cases and, ultimately, fewer incidents involving accounting fraud," PricewaterhouseCoopers Chairman Dennis Nally told a National Press Club event.

Nally's remarks focused on Section 404 of the act, which requires companies to report on their "internal controls" -- policies and procedures designed to ensure accurate financial statements.

Many companies have complained that the internal controls provision of the 2002 act is costly and time-consuming. The U.S. Chamber of Commerce has also lobbied for a break in some of the reporting rules.

The act has created extra business for accounting firms like PricewaterhouseCoopers, which assist companies in complying with reporting rules. Nally said his firm has worked for about 700 companies across multiple industries.

Nally argued against changing the content of the law and predicted that fewer companies will report internal-control problems in 2005 than they did in 2004.

"Section 404 has definitely laid the groundwork for sounder financial reporting and better investment decisions," Nally said.

posted by Brian Moran @ 1:37 PM   0 comments

Tuesday, April 26, 2005

How Much Testing Is Enough? Cos. Struggle With Sampling

Section 404 of The Sarbanes-Oxley Act of 2002 requires that companies document and test their internal control over financial reporting. And, of course, the standard that auditors use to gauge the success of those efforts is known as Audit Standard Number 2, issued by the Public Company Accounting Oversight Board in June 2004.

But the PCAOB's AS No 2., officially called "An Audit of Internal Control Over Financial Reporting Conducted in Conjunction With an Audit of Financial Statements," does not specify exactly how much testing is enough.

Though in some cases auditors are directed to test controls over a "large portion" of the company's operations and financial position, the PCAOB has preferred not to provide details on what that means. Some auditors, for example, have assumed that a "large portion" means 60 percent or 75 percent of all controls, but the Board does not agree. "Auditing Standard No. 2 does not establish specific percentages that would achieve this level of testing," wrote the PCAOB in answer to one of many "frequently asked questions" published last year.

Instead of prescribing specific numbers, the Board decided to use a "principles-based" approach to the issue. "Therefore," continued the PCAOB FAQ, "Auditing Standard No. 2 leaves to the auditor's judgment the determination of what exactly constitutes a 'large portion.'"

posted by Brian Moran @ 9:13 AM   1 comments

Monday, April 25, 2005

SEC hits Sarbanes-Oxley rollback as "unjustified"

WASHINGTON, April 21 (Reuters) - The top U.S. markets regulator told Congress on Thursday it is "unjustified" to call for a broad weakening of 2002's Sarbanes-Oxley business reforms due to concerns about the costs of one part of them that is aimed at strengthening companies' internal financial controls.

At the same time, U.S. Securities and Exchange Commission Chairman William Donaldson said regulators "must be sensitive to the need to recalibrate and adjust our rules and guidance to avoid unnecessary costs or unintended consequences."

His remarks came amid a push by some corporations to roll back Sarbanes-Oxley's Section 404 rules, which force companies to disclose more about their financial control methods and outside auditors to pass judgment on those methods.

About 79 percent of 222 financial executives surveyed recently by Oversight Systems said their companies have stronger internal controls due to Section 404, said William McDonough, chairman of the Public Company Accounting Oversight Board (PCAOB), set up by Sarbanes-Oxley to oversee auditors.

McDonough and Donaldson both testified before the House of Representatives Financial Services Committee, chaired by Ohio Republican Rep. Michael Oxley, who co-wrote the legislation that was the subject of the committee's hearing.

Despite signs that Section 404 is working, McDonough said, "There have been concerns about the cost of those enhancements and about whether those enhancements create counterproductive, unintended consequences."

Oxley said the PCAOB has improved oversight of auditors. In addition, he said, "Oversight of management activities by corporate boards has been significantly improved."

On Section 404, Oxley said, "We may have heard a complaint or two about the costs, but the benefits are undisputed."

Compliance costs for Section 404 have been higher than expected, especially for smaller companies, he said, adding he believes it should be possible to reduce 404 compliance costs.

Massachusetts Democratic Rep. Barney Frank said Section 404 compliance costs pale by comparison to the soaring pay of top corporate executives as workers' wages stagnate.

"This is something that we have to address," Frank said. "The agenda for corporate governance should be what do we do next, not how do we go backwards."

posted by Brian Moran @ 12:05 PM   0 comments

Thursday, April 21, 2005

Anti-Fraud Law Requirements Scrutinized

Key requirements of the landmark anti-fraud law born of the corporate scandals are getting critical scrutiny nearly three years later as legions of companies complain that the rules are too burdensome and need to be eased.

As memories fade of CEOs being led off in handcuffs, the Enron and WorldCom bankruptcies, and consecutive-day plunges in the Dow averages, the chorus of complaints from all corners of corporate America has risen, especially in recent months.

Smaller public companies have been the most vocal about what they say are the burdens and costs of new reporting requirements that came in with the 2002 law, known as the Sarbanes-Oxley Act.

Executives have gotten a sympathetic ear in Congress, and the government's top securities and accounting regulators have said they plan to tweak the rules in a way that could lighten the perceived burden on companies.

The law, which required the most far-reaching changes in corporate accountability since the Depression, created stiff new criminal penalties and jail terms for company fraud; installed new oversight of the accounting industry; required CEOs to personally certify their companies' financial reports, and held company directors responsible for new areas of corporate activities.

But it is the section of Sarbanes-Oxley requiring stronger internal financial controls that has raised protest from corporations.

The chairman of the Securities and Exchange Commission, William Donaldson, said last week that the agency was weighing possible revisions to the rules governing what companies must disclose about their internal controls.

posted by Brian Moran @ 9:27 AM   1 comments

Wednesday, April 20, 2005

Corporate Tangle

Sarbanes-Oxley turns three and continues to tie up executive suites

By JIM MCTAGUE

IT HAS BEEN THREE YEARS SINCE a wave of spectacular corporate scandals, most notably Enron's collapse, roiled the financial markets and impelled Congress to pass a saw-toothed law called Sarbanes-Oxley. Named for its authors, a Democratic senator from Maryland and a Republican House member from Ohio, the sweeping statute covers corporate governance, financial-reporting standards and record-keeping, and is intended to promote corporate honesty and shore up investor confidence in the fairness of our financial markets. But the cost of achieving these admirable goals has been so steep for many publicly traded companies, particularly smaller ones, that it has curtailed other investments and could curb the economy's growth.

The heart of the problem rests with Section 404, which mandates that chief executives have a soup-to-nuts grasp of their companies' financial reporting and attest to the veracity of results in writing. "The CEO can be held responsible not just for the results, but for the quality of the reports," says Edward Nussbaum, CEO of the global-accounting firm Grant Thornton.

The penalty for lying? Up to 25 years in jail.

The cost of complying with SOX, as the law has been dubbed, can be measured in time and money. The Wall Street Journal recently reported that 280 companies with market capitalizations of more than $100 million continue to delay filing 2004 annual reports, in part because of SOX issues. Big corporations had to be SOX-compliant by the end of last year, while smaller outfits and foreign companies have until the end of 2005 to comply.

Compliance might already have cost U.S. corporations 20 times more than the government estimates. The American Electronics Association says publicly traded companies could shell out up to $35 billion. The Business Roundtable, which represents 160 of the largest U.S. companies, says its members paid an average of $10 million apiece in 2004. And a survey by Financial Executives International, an organization of chief financial officers, put the average cost of compliance at $4.4 million.

The law's one-size-fits-all approach makes the burden proportionally heavier for smaller companies and can have a material impact on their bottom lines. Small wonder some public companies are angling to go private to avoid SOX-related expenses. Meanwhile, some foreign companies are weighing delisting from U.S. exchanges.

posted by Brian Moran @ 3:06 PM   0 comments

Monday, April 18, 2005

"Sarbanes-Oxley Is Not Bad"

But "there's no silver bullet" to prevent another Enron or Tyco, says United Technologies Chairman and CEO George David


George David, chairman and CEO of United Technologies (UTX ), has strong views on his role and his company's in a climate of tightened corporate governance. He's the only inside director on his company's board and also sits on the board of Citigroup.

BusinessWeek Senior Writer Diane Brady recently spoke with David about the new climate in the boardroom. Edited excerpts of their conversation follow:

Q: Do you think much has really changed in the past few years?
A: I think directors are more on notice about their responsibility. They need to [pay] more attention to detail. Independent auditors are also on notice. The landscape is shifting. But there's one misunderstanding. Directors are only able to judge a company at a very high level. The idea that a board will operate 24/7 just isn't realistic. That's not the board's role.

Q: A lot of people rage against the Sarbanes-Oxley regulations. Have they been a help or a hindrance to UTC?
A: Sarbanes-Oxley is not bad. We redid 30,000 financial processes in the company to meet the regulations. We spent $40 million on it last year, though we'll spend less in 2005. Ultimately, it makes the company better.

But we have also had good processes in place. We put out a statement of principles of corporate governance in 1994. Our code of ethics came out in 1997. The audit committee is composed mostly of financial experts. I don't sit on the compensation or audit committees of UTC. These were practices we already had.

Q: How do you make sure your board is effective?
A: I put in front of them what they need to do their job. The board report goes to the directors exactly eight days before each meeting. It's a 15-page document that's designed to be read in two to three hours. It's timely and complete. We never vary from that. There are no surprises.

Q: A lot of corporate governance experts say a company should have an independent chairman. At the very least, some want to split the role of chairman and CEO, yet you still have both roles at UTC. Why is that?
A: I don't agree with having the chairman be independent. It's perfectly O.K. to split the roles. But it takes an immense amount of knowledge to chair a company of the size and complexity of UTC. An independent chairman [wouldn't] have the knowledge to give the board 100% of what it needs to do its job.

posted by Brian Moran @ 9:57 AM   0 comments

Thursday, April 14, 2005

Open Text, closed case

Open Text, closed case: Sometimes it's not what a company says, but what it doesn't say. Take Open Text Corp. (OTEX: news, chart, profile) , a Canadian software maker. The company is no stranger to readers of this column and my subscription newsletter, Herb Greenberg's RealityCheck.

On March 3, in the newsletter, I raised questions about whether the company is the focus of an SEC inquiry. The company didn't give a straight answer to my query, which was prompted after I was contacted by the SEC seeking copies of a story I had written several years ago regarding the way Open Text recognizes revenue.

Fast-forward to Monday: Open Text announced that revenue and earnings for its third quarter, which ended 11 days earlier, would be lighter than expected; ditto for its fourth quarter.

Why did the company wait so long to fess up? It didn't say, but ThinkEquity analyst Nate Swanson, who sliced his rating to a sell from buy, thinks he knows. In a note to clients he said the delay suggests poor internal and financial controls.

As it turns out, the company said its cost of complying with the Sarbanes-Oxley Act were considerable, which is ironic considering one of Open Text's products help companies comply with Sarbanes-Oxley.

posted by Brian Moran @ 10:14 AM   2 comments

Wednesday, April 13, 2005

Sarbanes-Oxley Exposes Missteps as Audit Costs Spur Gripes

April 13 (Bloomberg) -- Yellow Roadway Corp. says it spent almost $10 million last year in a dash to meet new federal audit rules. The biggest U.S. trucker hired 10 employees, added another 20 consultants and had to write new software. Fees to its auditor more than doubled to $4 million.

For its effort to meet the mandates of the 2002 Sarbanes- Oxley Act, Yellow Roadway got a clean bill of health from its auditor, KPMG LLP. Others were less fortunate. Auditors required more than 360 large companies to declare ``weaknesses'' in their financial controls, and as a result 400 companies filed annual reports late. Average audit fees for the 100 largest U.S. companies last year jumped 45 percent to $13 million.

Congress probably won't change Sarbanes-Oxley. Instead, when executives gather today at a U.S. Securities and Exchange Commission hearing on the law, they'll take aim at the implementing regulations they say are causing an excessive burden in money, time and stress. They may also target their accountants.

``There were benefits, but the benefits were greatly exceeded by the costs of the law,'' says Donald Barger Jr., 62, chief financial officer at Yellow Roadway, based in Overland Park, Kansas. ``These costs have to be cut.''

The extra $10 million Yellow Roadway spent meeting the audit rules would have been enough to buy about 130 new, heavy-duty truck cabs costing about $75,000 apiece.

Today's hearing comes as business groups, led by their Washington lobbyists at the U.S. Chamber of Commerce and other trade associations, are pressing regulators at the SEC and the Public Company Accounting Oversight Board to ease their guidelines and interpretations of Sarbanes-Oxley. The antifraud law was passed in the aftermath of accounting scandals at WorldCom Inc. and Enron Corp.

posted by Brian Moran @ 11:47 AM   0 comments

Tuesday, April 12, 2005

SEC set to hear complaints on U.S. reporting rules

WASHINGTON, April 12 (Reuters) - Companies trying to meet a new rules for tighter internal financial controls are expected to give regulators and major audit firms an earful at a forum on Wednesday hosted by the Securities and Exchange Commission.

The rule, from Section 404 of the 2002 Sarbanes-Oxley Act crackdown on accounting fraud, requires managers to explain in annual reports how they keep their finances in order and for outside auditors to approve their methods.

Hundreds of companies have already complained about the cost and time involved in meeting 404 and more complaints and possible solutions are expected to be aired on Wednesday.

The forum will "let people vent and to see if there are areas of implementation that need to be changed," SEC Commissioner Roel Campos said at a public event on Monday.

Companies are complaining that audit fees are "going through the roof," while auditors are using less professional judgment in performing their jobs.

"Do auditors really need to look under every rock?" Campos asked.

posted by Brian Moran @ 4:55 PM   0 comments

Monday, April 11, 2005

Corporate Tangle: Sarbanes-Oxley turns three and continues to tie up executive suites

IT HAS BEEN THREE YEARS SINCE a wave of spectacular corporate scandals, most notably Enron's collapse, roiled the financial markets and impelled Congress to pass a saw-toothed law called Sarbanes-Oxley. Named for its authors, a Democratic senator from Maryland and a Republican House member from Ohio, the sweeping statute covers corporate governance, financial-reporting standards and record-keeping, and is intended to promote corporate honesty and shore up investor confidence in the fairness of our financial markets. But the cost of achieving these admirable goals has been so steep for many publicly traded companies, particularly smaller ones, that it has curtailed other investments and could curb the economy's growth.

The heart of the problem rests with Section 404, which mandates that chief executives have a soup-to-nuts grasp of their companies' financial reporting and attest to the veracity of results in writing. "The CEO can be held responsible not just for the results, but for the quality of the reports," says Edward Nussbaum, CEO of the global-accounting firm Grant Thornton.

The penalty for lying? Up to 25 years in jail.

The cost of complying with SOX , as the law has been dubbed, can be measured in time and money. The Wall Street Journal recently reported that 280 companies with market capitalizations of more than $100 million continue to delay filing 2004 annual reports, in part because of SOX issues. Big corporations had to be SOX-compliant by the end of last year, while smaller outfits and foreign companies have until the end of 2005 to comply.

posted by Brian Moran @ 9:07 AM   0 comments

Thursday, April 07, 2005

Kodak cuts profit by $101M: Restated 2003, '04 results flow from accounting reform rules

Eastman Kodak Co. is lowering reported profits for the last two years and making other changes internally following an extensive review of accounting procedures mandated by new corporate reform legislation.

The company said Wednesday that earnings last year were $556 million, or $1.94 a share, down from $649 million, or $2.16 a share, reported on a preliminary basis in January. That's a difference of $93 million, or 14.3 percent. Kodak lowered profit for 2003 by $8 million, or 3 cents a share.

Kodak attributes the changes to a series of errors in accounting for income taxes, pensions and other post-retirement benefits. The mistakes will not change Kodak's reported revenue or cash flow, nor will they affect the company's ability to pay pension and other retirement obligations.

The errors triggered the review under the provisions of the Sarbanes-Oxley corporate reform bill, which attempts to provide greater transparency in financial reporting following a series of high-profile corporate scandals. An estimated 20 percent to 30 percent of the nation's largest companies are reporting accounting issues in connection with Sarbanes-Oxley, said Thomas Bonadio, managing partner of The Bonadio Group. The bill requires companies that uncover errors to identify the source of problems and implement corrections

posted by Brian Moran @ 10:31 AM   4 comments

Tuesday, April 05, 2005

6 Percent Of Companies Failed Section 404

According to a review of regulatory filings conducted by Compliance Week and Raisch Financial Information Services of Newton, Mass., 6 percent of the 10-Ks filed this proxy season have been given "failing grades" by the companies' external auditor. The toughest Big 4 grader so far: Pricewater-houseCoopers, which failed 9 percent of the 366 annual reports that it audited. Deloitte and Touche failed only 3 percent of its internal control audits. The industry with the largest number of failing grades was "metals and mining." This week, Compliance Week and Raisch Financial Information Services debut a downloadable spreadsheet of SOX 404 audit results. The spreadsheet, which includes data derived from the 10-Ks of the Russell 3000, will be updated weekly, and includes summaries by auditor, by industry, and by opinion. Source data are included, as well.

posted by Brian Moran @ 8:49 AM   0 comments

Monday, April 04, 2005

Companies socked by Sarbanes audit rules

After WorldCom and Enron, all public companies are paying -- their accountants.

While the verdict is still out on whether the Sarbanes-Oxley Act of 2002 is a friend or foe to Corporate America, one thing is certain: The law is denting the wallets of companies big and small.

According to Boston Business Journal research, a sampling of local, publicly held companies has seen an 88 percent jump in annual auditing fees since President George W. Bush signed Sarbanes-Oxley, or SOX, into law. For many firms, the expenses have added up to millions of dollars; some have even redirected close to 10 percent of their net earnings to comply with the law's strict accounting measures.

Of the 14 companies profiled, seven highlighted specific dollar amounts spent on SOX compliance in 2004. Those outlays represented between 36 percent and 75 percent of each company's total auditing budget. In more than half of those cases, SOX-related expenses exceeded the total spent on auditing fees for all of 2003.

Among the examples: Waltham-based Raytheon Co. The defense contractor spent $7.5 million on SOX auditing fees in 2004, bringing its auditing budget to $15.2 million. Raytheon's auditing budget was only $7.3 million in 2003.

posted by Brian Moran @ 5:37 PM   0 comments

 

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