Tuesday, January 31, 2006
Oversight Systems Survey Identifies Growing Benefits to SOX Compliance
Financial executives cite higher-than-expected year-two Sarbanes-Oxley costs
ATLANTA (January 30, 2006) Oversight Systems Inc. today released the results of the 2006 Oversight Systems Financial Executive Report on Sarbanes-Oxley. The survey of 261 financial executives identifies growing benefits of SOX compliance and specific compliance goals for 2006.
The findings show an across-the-board increase in the benefits that respondents experienced in 2005 from SOX compliance as compared to those reported in 2004. The reported benefits of improved financial reporting accuracy almost doubled to 47 percent from 27 percent in 2004. Other reported increased benefits include the ensured accountability of individuals involved in financial reports and operations, up to 65 percent from 46 percent in 2004. The report can be downloaded at www.oversightsystems.com/survey.
"Corporate fraud and inaccurate financial reporting drove the creation of Sarbanes-Oxley, and it's clear that the medicine is addressing the disease it was intended to fight," said Dana Hermanson, Dinos Eminent Scholar Chair of Private Enterprise at Kennesaw State University. Hermanson is also an advisor to Oversight Systems and co-author of the COSO-sponsored research report Fraudulent Financial Reporting: 1987-1997, An analysis of U.S. Public Companies. "This legislation has a lot of meat to it, which brings about significant cost and much needed benefits."
The survey also reported increases for SOX compliance benefits, including:
* Reduced errors in financial operations, up to 48 percent from 31 percent in 2004
* Empowered board audit committees through increased information, up to 40 percent from 25 percent in 2004
* Decreased risk of financial fraud, up to 40 percent from 33 percent in 2004
* Strengthened investors' view of the company, up to 26 percent from 20 percent in 2004
"While the law strengthens a company’s controls over financial reporting, SOX compliance also creates an opportunity for financial executives to evaluate their financial processes," said Patrick Taylor, CEO of Oversight Systems. "These results show that many companies have benefited from their investment in SOX compliance by improving their overall financial operations with a stronger control environment."
Emerging Role of Continuous Monitoring
The survey also identified a trend for compliance and financial operations to adopt continuous monitoring. Continuous monitoring of financial processes and real-time transaction inspection can serve to automate manual controls for SOX compliance and, more importantly, strengthen their overall control environment.
Financial executives identified multiple roles that continuous monitoring of financial transactions can play in their organization throughout their financial processes. In fact, 69 percent feel it can serve as a detective control, 61 percent view it as a preventative control and 53 percent think it can help test the effectiveness of other controls.
"While the first two years of SOX compliance were achieved with manual labor for enforcing and testing controls, companies are now looking for ways to mechanize the process," said Joseph V. Carcello, co-founder & director of research for the University of Tennessee's Corporate Governance Center. "Continuous monitoring is the next big frontier for auditors and compliance with Section 404 of Sarbanes-Oxley." Carcello is also an advisor to Oversight Systems.
Real-time transaction monitoring provides financial executives with compliance and operational benefits. Two-thirds of financial executives believe continuous monitoring both strengthens a company’s control environment and reduces errors in financial processes. Nearly half say continuous monitoring of financial transactions automates the testing of control effectiveness.
SOX for Small Caps, Non-Profits & Private Companies
The survey also identified a possible trend among organizations not required to abide by SOX compliance guidelines. Nearly half of financial executives, 45 percent, believe some elements of SOX will be rapidly adopted by private companies and non-profit organizations.
Almost three-quarters of financial executives, 72 percent, say that the requirements of Section 404 of SOX regarding internal controls should apply to all public companies regardless of size. These results contradict much of the public outcry against SOX, which has led to the delayed enforcement of Section 404 for non-accelerated public filers.
"Section 404 should be enforced for all public companies with varying standards for smaller companies," Hermanson said. "Small companies can have less formal controls and less rigorous documentation, but I’ll be concerned if smaller companies are not required to have their controls independently audited. I don’t see much value in a company’s management telling you how great their controls are."
No Break on Year-Two Compliance Cost
The increased benefits companies are experiencing do not come without their cost, however. In fact, 37 percent of financial executives say SOX compliance created a cost burden that suppresses stock prices (up from 33 percent in 2004), and 13 percent feel that SOX decreased their ability to pay out dividends, because compliance expenses are a significant drain on earnings - essentially no change from the 2004.
In fact, the majority of financial executives report that their companies paid more for year-two compliance than expected. In 2004, 42 percent of financial executives reported that they expected to spend less than half of what they did as compared to year-one compliance costs. In reality, only 19 percent realized the expected savings on year-two costs.
"SOX compliance costs are still driven by Section 404 of the law - the demand for stronger controls that are signed off on by management and tested by external auditors," said Todd DeZoort, Accounting Advisory Board Fellow at The University of Alabama and an advisor to Oversight Systems. "Many companies are still figuring out what's actually needed for compliance with Section 404, and external auditors are still settling their 404 audit methodologies."
2006 Compliance Goals
Looking forward to 2006, the survey asked financial executives to identify their goals for the year as they relate to SOX compliance. The two most popular goals involve reducing costs internally, supported by 61 percent, and externally, supported by 59 percent. Half of respondents, 50 percent, would like to automate manual processes with IT solutions, while 42 percent want to focus on the benefit of compliance through the quality of financial operations. Forty percent of respondents would like to reduce both the number of key controls and the reliance on consultants, and 28 percent desire an increase in morale among those employees responsible for compliance.
About the 2006 Oversight Systems Financial Executive Report on Sarbanes-Oxley
Through a combination of an invitation-only online survey and survey intercepts, 261 financial leaders from across the U.S. participated in this study. Titles of those surveyed included chief financial officer, chief audit executive, controller, treasurer, vice president, director and internal auditor.
This study follows the November release of the 2005 Oversight Systems Report on Corporate Fraud, a survey of certified fraud examiners which found most fraud examiners view SOX as an effective tool in fraud identification, though few think it will change the culture of business leaders. Also recently released was the 2005 Oversight Systems Financial Executive Report on Risk Management, which found that CEOs are placing a greater emphasis on risk management, although many companies are struggling to implement the necessary changes.
Other research studies by the company include the 2005 Oversight Systems Financial Executive Report on Sarbanes-Oxley, which found nearly half of financial executives feel the biggest issue related to compliance is maintaining the morale of the employees responsible for compliance, and the 2004 Oversight Systems Financial Executive Report, the industry's first examination of the impacts of SOX as felt by corporate financial executives. All these research studies can be downloaded for free by visiting www.oversightsystems.com/survey.
posted by Brian Moran @ 9:57 AM
Fine Print: SEC Penalty Plan Explains Price Of Fraud
To some, the concept of penalties for violations of the federal securities laws is, without reference to amount, "Draconian," and the practice has been described as criminalizing the federal securities laws. While penalties have been with us at least since Draco, the exacting of penalties as a component of securities law regulation is of more modern vintage. Until 1990, when Congress passed the Remedies Act, the Securities and Exchange Commission lacked explicit authority to obtain civil money penalties in most enforcement cases. That may seem surprising, given the almost routine nature with which monetary penalties now are levied in enforcement cases. The imposition of penalties is a useful punishment and deterrent in the Division of Enforcement program’s arsenal. And, with the enactment of the Fair Funds provision under the Sarbanes-Oxley Act—an idea that originated with the SEC—legislators can sleep better at night knowing that penalties to be imposed will often be returned to wronged investors.
posted by Brian Moran @ 9:41 AM
Monday, January 30, 2006
Enron jury selection ready to start
HOUSTON (Reuters) - Jury selection was set to begin Monday in the long-awaited trial of former Enron Corp. chief executives Ken Lay and Jeffrey Skilling for their roles in the spectacular 2001 collapse of the former energy trading giant.
A pool of 100 potential jurors was to report to the U.S. courthouse in downtown Houston, where 12 jurors and four alternates would be chosen to hear the case.
Lay, 63, and Skilling, 52, presided over Enron as it rose to become the seventh largest U.S. company, then plummeted into bankruptcy in a financial scandal that opened a window on broader U.S. corporate malfeasance.
Combined, the two men face more than three dozen fraud and conspiracy charges that accuse them of lying to investors about the company's financial state while they enriched themselves by selling millions of dollars in stock.
In pre-trial statements, both have denied any wrongdoing and accused prosecutors of criminalizing normal corporate behavior.
posted by Brian Moran @ 9:57 AM
Friday, January 27, 2006
Taking A Page From Toyota's Playbook
A year ago, executives of Wipro Ltd. (WIT) got a glimpse inside a Toyota (TM) assembly plant. During a guided tour of the factory that produces Corollas near their headquarters in Bangalore, India, Wipro execs hoped to pick up fresh ideas for their businesses of developing software and handling clients' back-office operations.
There were plenty of lessons to learn, but for Sambuddha Deb, Wipro's chief quality officer, one stands out. Deb began to take a shortcut when the safety path painted on the factory floor made a sharp turn. The Japanese manager walking behind him reached out, took his shoulders, and gently guided him back onto the path. The message -- all the little rules count. "They had that sort of discipline. It's second nature to them," marvels Deb.
Before the Toyota tour, Wipro had been struggling to get on track in back-office services. That might sound odd: With $1.7 billion in revenues, 42,000 employees, and a U.S.-traded stock that has advanced 230% in two years, Wipro is the embodiment of India's info-tech revolution. It's not only a leader in software development but also a pioneer in business-process outsourcing, where it does everything for clients from running accounting operations to processing mortgage applications. In that business, the company was respected for its low prices and dependability, but the work was too labor-intensive. Wipro wasn't doing enough to improve the way it did its clients' business.
posted by Brian Moran @ 9:05 AM
Thursday, January 26, 2006
Enron's courtroom climax
As the top men behind the Enron accounting scandal finally face the might of the US justice system in court, we look at the state of the profession on the other side of the Atlantic and the cases for the prosecution and defence.
The practices of accountants and auditors are once again likely to be dragged through the metaphorical mud as the much-anticipated trial of Enron’s top two executives is scheduled to start in Houston, Texas next week.
It has taken more than four years, since Enron’s collapse, to bring its top two executives – former CEO Jeffrey Skilling and former chairman and CEO Kenneth Lay – before a jury.
posted by Brian Moran @ 10:54 AM
Wednesday, January 25, 2006
Private Companies Voluntarily Adopt Sarbanes-Oxley Principles
Although most CEOs of fast-growing private companies agree that fewer government regulations are better, more than one in four is borrowing “best practices” from the Sarbanes-Oxley compliance experience of public companies—often to make their business more attractive for public financing or as an acquisition candidate. Many remain concerned however that regulatory compliance, whether voluntary or mandated, is overly costly.
Learning from others' experience. CEOs of fast-growing privately-held businesses are more positive than negative in their assessment of how the Sarbanes-Oxley Act has affected corporate governance and transparency in the public company sector. And although one in four of these private businesses have voluntarily adopted Sarbanes "best practices," three in four are opposed to mandating of these principles across-the-board:
• Thirty-seven percent say Sarbanes-Oxley has done a good to fair job of improving governance and transparency for public companies, while another 34 percent have mixed feelings, and only 17 percent believe it has done a bad job overall. The remaining 12 percent are on the fence or did not report.
• One-fourth (27 percent) of those surveyed say their company has adopted Sarbanes-Oxley best practices. Among these, 30 percent have applied its principles in governance, 26 percent in transparency, and another 43 percent in both areas. Adopters tend to be from larger businesses, averaging $74.2 million in revenues (51 percent above the average). They have grown faster over the past five years, and expect 25 percent higher revenue growth over the next 12 months.
• However, 73 percent of those surveyed oppose any future federal or state regulations that would impose provisions of Sarbanes-Oxley upon other than publicly-traded companies—saying this would be regulatory overkill (62 percent) or a bad precedent (11 percent). Only five percent say such regulations would be a good way to improve transparency across-the-board, while 19 percent say this may be a good idea for some, but on a case-by-case basis.
posted by Brian Moran @ 12:04 PM
Monday, January 23, 2006
Trials And Tribulations Of Enron And S-Ox
WASHINGTON, D.C., - In the next few weeks, the trial of Ken Lay and Jeffrey Skilling--founding members of Enron’s Hall of Shame--will commence. The trial coincides with the approaching fifth anniversary of Enron's demise, which, along with other subsequent corporate implosions, led to passage of the Sarbanes-Oxley Act, badly and hastily written legislation with the salutary purpose of enhancing corporate governance and transparency.
While it's impossible (or at least foolhardy) to predict how a jury of Lay's and Skilling's "peers" will assess the legality of their conduct at Enron, it's definitely possible to assess how S-Ox is working and whether--all things considered--the cure is worse than the disease.
The 2005 Oversight Systems Financial Executive Report on S-Ox surveyed more than 200 financial executives and found a significant majority believe that, after implementing requirements to remedy control deficiencies, they have seen bottom-line business benefits. Nearly half said S-Ox compliance resulted in reduced risk of fraud and errors, and they now have more efficient operations.
posted by Brian Moran @ 9:41 AM
Friday, January 20, 2006
Why Finance And Accounting Outsourcing Will Experience Double Digit Growth
2006 will probably be a year of rapid growth for finance and accounting outsourcing (FAO). We believe FAO has reached the "emerging rapid growth stage" in its life cycle, thanks to a constellation of events that have come together to create the perfect conditions for growth.
According to research from the Everest Research Institute, the number of new FAO contract signings started to take off in 2002. Of the 108 FAO contracts signed to date, 70 percent were signed since 2002.
But the real growth started in 2004 when 31 deals were signed and continued through 2005. We expect this kind of growth to continue this year. We predict FAO will enjoy strong double digit growth for the next five years. We anticipate the cumulative average growth rate (CAGR) to be 24 percent over that five-year period.
posted by Brian Moran @ 12:02 PM
Tuesday, January 17, 2006
Finance Combines Opportunity with Necessity
While spending on compliance will shift toward new technology investments, companies are equally focused on using this technology to improve core finance processes and to sharpen their view of business performance.
After marching through the first phases of compliance with the Sarbanes-Oxley Act, senior finance executives are turning their attention to making their regulatory compliance both more sustainable and also a driver of better business performance, according to a May 2005 survey of readers of CFO magazine. While spending on compliance will shift toward new technology investments, companies are equally focused on using this technology to improve core finance processes and to sharpen their view of business performance.
Senior finance executives believe their current processes and systems are insufficient to deliver sustained, cost-effective compliance with regulation — and they are concerned about the future cost of regulatory compliance. More than two-thirds of finance executives responding to the study say they are troubled by the future cost of regulatory compliance. Clearly, many CFOs underestimated the expenditure in the planning phase.
posted by Brian Moran @ 9:24 AM
Monday, January 16, 2006
Could the scandals be over? Don't bet
Gee, it seems like ages since the public witnessed a good "perp walk" of some stiff-upper-lipped CEO in handcuffs.
Are the crazy corporate scandals years finally over? Or is this a temporary lull, a breather before the next video installment of CEOs Gone Wild?
If you're thinking corporate America has seen the light, think again. It's more likely that all the public attention, toughened regulations such as Sarbanes-Oxley that demand greater corporate accountability and the state of the economy are the real reasons bad-apple companies and their chiefs are, for now, off the front pages and TV news.
Should you need a reminder of the fallen, feast your eyes on the back page of this section. Fourteen prominent companies and their executive woes are waiting.
As the New York Times this month deadpanned about a magazine called, of all things, Business Ethics: "That must be a very thin publication!" and "Isn't that an oxymoron?"
Truth is, the scandal holiday will be brief.
posted by Brian Moran @ 8:55 AM
Thursday, January 12, 2006
Building A Board
A board of directors has clear legal responsibilities, such as voting on key corporate decisions (such as accepting outside capital). In a sense, they are part of the management of the firm. An advisory board, on the other hand, does not have legal responsibilities and is typically less formal. Yet an advisory board can be quite valuable for an early-stage company.
This has certainly been important to Oversight Systems, which develops compliance software to help companies deal with such complex requirements as Sarbanes-Oxley. Customers include such biggies as SAP and Oracle.
No doubt, this is a specialized area, and that's why the company's CEO, Patrick Taylor, thought it was imperative to form an advisory board. "We felt the need to connect with industry thought leaders who would help direct our product development to meet the future demands of the market," said Taylor. "For our market of SOX compliance and financial controls, we reached out to accounting professors who are experts in risk management and corporate governance." His group of advisers includes Dana Hermanson of Kennesaw State University, Joseph Carcello of the University of Tennessee and Mark Beasley of North Carolina State.
"These professors connect us with future developments of SEC policies and work to push emerging technology solutions for industry adoption," said Taylor.
posted by Brian Moran @ 8:38 AM
Wednesday, January 11, 2006
PwC says Sarbox made it rethink business model
The Eighth Directive and Sarbanes-Oxley have forced PwC to rethink its business model, Samuel DiPiazza, the firm's global CEO, has said.
Speaking in advance of the Global Economic Forum in Davos later this month, said: 'The Eighth Law Directive and Sarbanes-Oxley have forced us to re-think long-standing assumptions about our business model - including the way we serve clients, identify and mitigate risk, and manage our global network.
'The challenge is to translate our substantial risk and compliance efforts into opportunities that generate competitive advantage by continually improving quality and enhancing value, not merely reacting to mandated activity.'
Speaking about the biggest challenges facing PwC, he said: 'Overregulation is clearly one evolving issue that continues to impact PwC and our clients. Following a series of high-profile business scandals, legislation was enacted in many parts of the world.
posted by Brian Moran @ 3:58 PM
Tuesday, January 10, 2006
Finance Execs Unimpressed With Sarbanes-Oxley Tools
Two-thirds of finance executives are disappointed in their compliance technology purchases. They aren't thrilled about higher costs and staffing requirements, either.
With the second full year of Sarbanes-Oxley compliance efforts winding down for accelerated filers, CFOs in those companies are taking a hard look at the technologies they invested in to support those activities. And in many cases, they're less than impressed, according to an Accenture survey of 152 finance executives and the same number of IT executives at organizations with $1 billion or more in annual revenue. Two-thirds of the finance respondents rate Sarbanes-Oxley compliance assistance tools as only somewhat effective or worse. IT respondents are a little more enthusiastic about the tools, with a majority (56 percent) describing them as very effective or extremely so.
The study also throws light on two other areas of frustration with Sarbanes-Oxley compliance: overall costs and staffing issues. IT managers report that Sarbanes-Oxley efforts accounted for 9.8 percent of their group's budget, on average, in the previous 12 months. Finance executives report a slightly lower proportional cost, at 9 percent of their department's budget. While about three-quarters of respondents say that their organization currently has the necessary resources to support Sarbanes-Oxley reporting, more than half (53 percent) of the IT execs and 42 percent of the finance leaders say that it is extremely likely or very likely that they will require additional human resources to support compliance activities over the next one to three years.
posted by Brian Moran @ 8:50 AM
Friday, January 06, 2006
Forensic accountants book governance gains
They are the crime scene investigators of their profession. They can spot a financial violation in minutes, act on it and shut it down. More importantly, they can prevent malfeasance, or so they claim.
Forensic accountants are the new wunderkind of the financial world. Every company should have one. They should be mandatory keepers of the vault. Indeed, if a corporation doesn't have one of these risk managers overseeing or securing its operations, the company should be fined. Big time. Here's why: the biggest financial scandals in history could have been prevented had one of these specialists been on staff.
Forensic accountants employ systems and standards that keep a company and its personnel honest. They do this real-time with newfangled gadgetry and risk-management software programs that allow company executives to be alerted when an action is unauthorized or out of order. These alerts can flag computer access or even expense reports.
Tim Leech, a forensic accountant and chief methodology officer (that's a new one on me too) of Paisley Consulting in Cokato, Minn., says he has one simple objective: making sure a company has reliable financial standards.
"We set internal and external controls so that you can monitor and make sure a company is adhering to its assurance context," he says.
That, of course, needs some explaining. In interviews with Leech and several of his colleagues at other firms, I was able to piece together exactly what forensic accountants do.
posted by Brian Moran @ 9:00 AM
Thursday, January 05, 2006
No Slack at Cox's SE
Christopher Cox's Securities & Exchange Commission isn't turning out to be the corporate-friendly place that many in the boardroom set were hoping for -- or expecting. In the SEC chairman's first major policy move, as outlined by BusinessWeek Online in late November, the commission issued standards on Jan. 4 for fining companies that commit financial fraud (see "Corporate Fines: The SEC's Search for Rules"). With that action, Cox locked in a key legacy of his predecessor -- William H. Donaldson, who angered much of Corporate America with his stiff regulation and tough enforcement -- and rejected the conservative line that corporate penalties do more harm than good.
To issue the new standards, Cox had to win over his two felllow Republicans, Commissioners Paul Atkins and Cynthia Glassman. The GOP duo often took exactly that conservative line in dissenting from civil fines imposed by Donaldson's SEC. "There was significant sentiment to go toward Atkins and Glassman," says a top former SEC staffer.
ENRON EFFECT. That would have meant barring corporate penalties in cases where the fraud hurt only the company's own shareholders. "Instead, they stuck with the standards that we used for the last three to five years," the ex-staffer says. "That's going to disappoint some people."
posted by Brian Moran @ 9:59 AM
Wednesday, January 04, 2006
Sarbanes-Oxley Disclosures Matter To Investors
Investors punish firms that disclose internal control weakness as required by Sarbanes Oxley provisions, but having a Big Four auditor mitigates the negative price hit, perhaps because post-SOX, the highest quality auditors have the lowest risk client portfolios, new research shows.
The findings, which appear in two separate research papers by Leslie Hodder, assistant professor of accounting at Indiana University's Kelley School of Business, can be seen as an empirical rebuke to arguments that new "SOX" provisions are a waste of firm's time and money on issues that are of no consequence to investors.
"If that's true," Hodder says, "we shouldn't see the market response to a firm's disclosure of material weakness that we did. Instead, our research shows that the market does care."
In a study coauthored with Messod Beneish and Mary Billings, also of Indiana University, Hodder found "significant abnormal negative returns," in the range of 1.5 to two percent of market capitalization, over three trading days for 336 firms that disclosed internal control weaknesses in 2004, as required by SOX regulations.
posted by Brian Moran @ 12:04 PM
Tuesday, January 03, 2006
Forrester Trends 2006: SOX Compliance Moves To The Next Level
2006 TRENDS TO WATCH IN SOX COMPLIANCE: Controls automation and monitoring solutions will solidify. 2006 will be the year of acceleration for software tools to continuously monitor and automate controls. Companies will adopt these tools to detect errors, monitor transactional integrity, and prevent fraudulent or unauthorized activities.
RECOMMENDATIONS: Consider controls automation and monitoring tools. Automated solutions for analyzing transactional integrity and controlling application access/segregation of duties are maturing. In 2006, consider controls automation and monitoring solutions to detect errors and discourage fraud, in lieu of manual, sample-based auditing methods.
posted by Brian Moran @ 9:00 AM