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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

"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

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