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Monday, February 27, 2006

New calls on SEC to relax rules

A coalition of European business associations is preparing to tell the US market regulator that it has not gone far enough with proposals to make it easier to "deregister" from the SEC and thus avoid US reporting requirements.

Deregistration rules came to prominence after the Sarbanes-Oxley Act imposed new compliance costs on companies and led some to reconsider the merits of trading on US exchanges.

A requirement for foreign companies to refile financial statements under US accounting standards has also reduced the attractiveness of US markets. But a new push to harmonise accounting standards announced today is likely to help bring that to an end.

posted by Brian Moran @ 11:41 AM   0 comments

Executive Survey: Growing Benefits to Sarbanes-Oxley

Despite its cost, The Sarbanes-Oxley Act continues to achieve its objective: bolster corporate integrity and investor confidence in U.S. public markets. The 2006 Oversight Systems Financial Executive Report on Sarbanes-Oxley surveyed 261 financial executives and identified growing benefits of SOX compliance.

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 greatest increases were found in SOX’s ability to improve financial report accuracy, up to 47 percent from 27 percent in 2004, and the ensured individual accountability in financial reports resulting from SOX, up to 65 percent from 46 percent in 2004.

posted by Brian Moran @ 10:19 AM   0 comments

Friday, February 24, 2006

When familiarity fails to find fraud

Just how independent should auditors be from their clients? Should they do only audits, or is it acceptable for them to perform other services for audit clients or for related companies?

Those are issues that have divided auditors from regulators for years. Auditors in the United States lost some, but not nearly all, of their other activities under the Sarbanes-Oxley law, passed in 2002 in response to the Enron fraud, but that reflected their decreased political influence more than it did a careful analysis of real- world results.

One argument that auditors have long advanced is that the closer they are to their clients, the more they know. A chief executive of a major accounting firm once presented to me a graph, reproduced here, that looked suspiciously like the curve invented by Arthur Laffer.

For those without fond memories of the Reagan years, Laffer argued that governments would collect the most money from moderate tax rates, and that there was a point at which receipts would fall if rates were raised, presumably because people did less work at their jobs and more work to evade taxes.

The auditor's version of the curve argued that an auditor with no independence would produce a bad audit, but so would one who was so independent that he did not understand the company and its industry. Consulting services, he argued, provided badly needed knowledge.

posted by Brian Moran @ 9:00 AM   0 comments

Thursday, February 23, 2006

Former SEC Chairmen Soundoff

The Sarbanes-Oxley Act also stirred up considerable debate. Levitt said he opposes plans that would indefinitely impose different Sarbanes-Oxley standards on companies, depending on their size. "These are public companies that passed a threshold," he asserted, adding that investors in a small company that fails should enjoy the same protections as large-company investors.

Donaldson noted that while Sarbox's benefits are substantial, initial compliance with the law was flawed. "We told Corporate America, you do not have to count paper clips," he noted, adding that he expects compliance costs to decline and companies to start applying the law more intelligently.

Breeden amused the audience when he took note of the corporate whining about the costs of implementing Sarbanes-Oxley, particularly the section concerning internal control over financial reporting. "The problem is not the law, but the application of it," he said. "The cost of Section 404 is one ten-millionth of executive compensation, but I do not hear people saying, get rid of executive compensation."

posted by Brian Moran @ 8:37 AM   0 comments

Wednesday, February 22, 2006

Group Opposes Sarbanes Exception

A proposal to exempt 80% of public companies from having auditors certify their internal controls "simply goes too far," former Federal Reserve Chairman Paul Volcker and former Securities and Exchange Commission Chairman Arthur Levitt told regulators.

In a Feb. 13 letter to the SEC, a group including Volcker and Levitt said the proposal would undercut the 2002 Sarbanes-Oxley Act by failing to safeguard against future accounting and company fraud. The letter was sent to SEC Chairman Christopher Cox and to William Gradison, acting chairman of the Public Company Accounting Oversight Board.

"In passing the Sarbanes-Oxley legislation, the Congress adopted a reasonable approach to achieve real reform, not just the appearance of reform," the letter said. "It would be unfortunate now if the SEC and [the accounting oversight board] undercut the effectiveness of congressional legislation through misguided regulatory action."

posted by Brian Moran @ 8:21 AM   0 comments

Tuesday, February 21, 2006

Reporting for Separation of Duties, Sir!

To help ensure that current and former employees can't wreak havoc with finance and IT systems, "companies need to prove to auditors that only the right people have the right access."

Divvying up the work appropriately, however, is especially challenging at smaller companies, according to Nelli, because members of the finance team often back up each other, and some staffers work in both the general ledger and accounts payable. "On the face of it," he says, "it may be a conflict in terms of segregation of duties; but in small organizations, that is just how life is."

To guarantee that current and former workers don't have access to parts of the company that they shouldn't, an employer must update access rights regularly, experts say. One example that's commonly overlooked: E-mail addresses that often continue to function after employees have left the company, granting at least some degree of continued access.

posted by Brian Moran @ 8:58 AM   0 comments

Monday, February 20, 2006

Sharp end of Sarbanes-Oxley shows it means business as agent for change

Log on to the careers website of the US audit regulator and it seems you are not dealing with a shrinking violet - an impression UK accountants will soon be able to test.

"The Public Company Accounting Oversight Board is aggressively seeking accountants . . . to perform on-site inspections of registered accounting firms," it says. "Professionals who join [us] will . . . become focal points of systemic, defining change in the public accounting profession."

And some are crossing the Atlantic to do just that.

The board is putting auditors under the microscope to raise audit quality and bolster investor confidence.

Its mandate extends beyond the US, encompassing any auditor that works for companies traded on the US stock market, including several UK accountancy firms. Those firms held the latest in a series of closed-door meetings in London last Friday to discuss how they dealt with the process.

posted by Brian Moran @ 8:55 AM   0 comments

Thursday, February 16, 2006

Real-Time Transaction Inspection

Oversight Systems drives defect-free financial processes by linking disparate financial systems, inspecting every transaction in real time, and presenting results with quantified risk so that all exceptions can be resolved. Oversight’s software delivers immediate value by identifying errors and control violations as they happen, so companies can address these issues when they are less complex and less costly to correct.

posted by Brian Moran @ 9:41 AM   1 comments

Wednesday, February 15, 2006

Companies Admit to Poor Risk Management

Many corporate leaders lack confidence in their organization's risk management controls, according to a Protiviti study. More than half of the Fortune 1000 C-level executives surveyed acknowledged that there is more they can do to identify, quantify and manage the risks they face.

According to the study, companies do not have just one predominant risk today -- rather, they face a range of risks. The most significant risks relate to information systems and IT security, customer satisfaction, activities of the competition, and legal and regulatory issues.

Most companies are taking at least some steps to improve, according to the study. Sixty-five percent of respondents report their companies are planning to make changes to their risk management capabilities during the next two years. These efforts include enhancing their organization's ability to identify potential risks through implementing better technology and hiring more qualified staff

posted by Brian Moran @ 9:16 AM   0 comments

Tuesday, February 14, 2006

CFOs Seek Sarbox Triage

Since its enactment in 2002, the Sarbanes-Oxley Act has been impressing observers with its sweep. From banning executive loans and auditor conflicts of interest, to setting up financial sign-offs by top executives, to governing audit committees and whistle-blowers, Sarbox cuts a wide swath through Corporate America.

In the first few years of compliance with the act, many finance chiefs seemed too busy to step back and analyze it. Now, however, most sizable companies have ample experience with the toughest parts of Sarbox: certification under Section 404 (governing internal controls over financial reporting) and Section 302 (governing sign-offs of financials by senior executives). With the hectic pace abating somewhat, some CFOs are willing to sound off on Sarbox's shortcomings. And one of the biggest problems many have with the act is its very sweep.

posted by Brian Moran @ 9:08 AM   0 comments

Monday, February 13, 2006

SEC OKs Internal Control Audit Standard

The Securities and Exchange Commission approved a Public Company Accounting Oversight Board standard last week telling auditors how to report on whether a client's previously reported material weakness in internal controls over financial reporting still exists. Since companies already have to report - and auditors opine - on the status of controls gaps in their 10Qs and 10Ks, such reports would be made within a quarter.

Auditing Standard No. 4, which the PCAOB adopted on July 26, 2005, establishes a stand-alone, voluntary engagement in which an auditor would express an opinion on whether the reported material weakness in internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act still exists.

The PCAOB believes that companies will weigh the benefits of the boost in investor confidence in their financial reporting they could gain by an auditor signoff against the costs of such an engagement, according to the board's release on its proposed standard last summer.

posted by Brian Moran @ 8:52 AM   0 comments

Friday, February 10, 2006

CFO survey measures finance departments

Ever since two consultants from A.T. Kearney Inc. launched the first finance benchmarking studies in the 1980s, CFOs have been avid consumers of comparative data. Now there are more numbers to feed their appetite. Last year, the American Productivity and Quality Center, long known for its quality measures, branched out into finance with eight new surveys. One of these, a survey of CFO magazine readers, collected data for a high-level picture of the finance function.

Some of the findings are reassuring. For example, the median total cost of finance is quite low—just 0.8 percent of revenues—reflecting a decade of relentless pruning. Cycle times for finance processes are respectable, if not spectacular. For example, the average finance department spends five days closing the books each month and three days completing a payroll cycle.

Other results are more troubling. For example, finance still spends only 17 percent of its time supporting business decisions. Part of the problem, argues Steve Wright, one of the authors of the study, is that CFOs haven't been considering all finance activities on a value-for-cost basis. If they did, they'd have seen long ago that the value created by the typical financial report, say, is paltry next to the value of good business analysis. Nothing a little benchmarking can't help solve.

posted by Brian Moran @ 8:58 AM   0 comments

Thursday, February 09, 2006

Extended scrutiny causes alarm for foreign auditors

The US Public Company Accounting Oversight Board has attempted to allay fears over plans to significantly increase the number of inspections of foreign audit firms this year.

The board indicated that the rise was due to ‘natural growth’, and did not indicate any change of policy or any new concerns about foreign auditors.

‘Yes, we are doing more inspections of foreign firms this year, in the same way that we’re doing more inspections of US firms, but there is nothing new about this,’ said a PCAOB spokeswoman.

posted by Brian Moran @ 9:18 AM   0 comments

Wednesday, February 08, 2006

Financial Statements Are Still Valuable Tools for Predicting Bankruptcy

Despite growing public skepticism over how useful financial statements are in providing information to investors, researchers at Stanford’s Graduate School of Business have found that the value of financial ratios for predicting bankruptcy has not declined significantly over time.

Professors Maureen McNichols and William Beaver and graduate student Jung-Wu Rhie have reexamined the usefulness for predicting bankruptcy of financial ratios such as return on assets (net income divided by total assets), cash flow to total liabilities (earnings before interest, depreciation, and taxes divided by both short- and long-term debt), and leverage (total liabilities to total assets). The study explored how three forces have influenced this predictive value over the past 40 years.

The first force is that standard-setting bodies such as the Financial Accounting Standards Board and the Securities and Exchange Commission have been trying to increase the usefulness of the information found in financial statements and to enhance the ability of such statements to convey the fair value of assets and liabilities.

posted by Brian Moran @ 3:25 PM   0 comments

Who Watches Accounting's Watchdog?

Ever since Congress created the Public Company Accounting Oversight Board (PCAOB) in 2002, business executives and free-market groups have groused that the accounting-industry regulator wields too much unchecked power. Now, a free-market advocacy group and a small accounting firm are poised to take that complaint to court.

On Feb. 7, the Free Enterprise Fund joined Beckstead & Watts, an accounting firm based in Henderson, Nev., to challenge the constitutionality of the PCAOB in U.S. district court in Washington.

"UNACCOUNTABLE, UNCONSTITUTIONAL." The complaint turns on two points. One is the assertion that the PCAOB exercises wide-ranging governmental powers with little oversight, violating the Constitution's separation of powers. The second issue deals with how five members of PCAOB are appointed.

"The PCAOB is an unaccountable, unconstitutional regulatory body," says Mallory Factor, chairman of the Free Enterprise Fund. "It's the poster child for the dangers of a runaway bureaucracy.

posted by Brian Moran @ 9:03 AM   0 comments

Tuesday, February 07, 2006

Diminishing Returns for Outsourcing?

Outsourcing has become so common among U.S. companies that the question no longer seems to be whether to engage in the practice but how far to extend it. The answer, according to the conventional wisdom, is the farther the better.

The benefits seem obvious indeed. To the extent a company can cut its costs by turning over non-core services to an outside firm, its earnings and stock price may increase. And consultants contend the impact can be transformational. The trick is to identify costly but ancillary functions that can be outsourced without sacrificing the quality of the support.

But there's the rub. In fact, outsourcing's benefits may be harder to come by than is widely assumed, according to recent studies. And they could become more elusive still, if a new international accounting rule is embraced by the Financial Accounting Standards Board.

posted by Brian Moran @ 10:30 AM   0 comments

Monday, February 06, 2006

Corporate accounting is getting exciting

The collapse of companies like Enron and WorldCom stirred primal fears among investors that the system was rigged. It's one thing to worry about rising oil prices or next month's unemployment report but quite another to question whether several years of corporate income statements or balance sheets were falsified.

Unreliable accounting is something you associate with Third World countries. It often goes hand in hand with political unrest, corrupt legal systems and capital controls. It wasn't supposed to happen here. Americans took accounting integrity for granted, if they thought about it at all, until the scandals.

posted by Brian Moran @ 8:56 AM   0 comments

Friday, February 03, 2006

Former Enron IR Exec Details More Fraud

The former head of Enron's investor relations (IR) department testified Thursday that one-time top executives Kenneth Lay and Jeffrey Skilling hid problems from investors related to company’s broadband operations and retail-energy units to keep the stock aloft, according to The Wall Street Journal.

In his second day of testimony, Mark Koenig said the retail-energy business had huge losses, and that revenue reported by the broadband unit in late 2000 and early 2001 did not come from customers using the network, but rather from selling parts of the network or from investments, noted the paper.

"The message I had from accounting and others was [that] the details were not to be discussed publicly," Koenig reportedly testified. He also said that in early 2001, Enron's retail-energy operations lost $230 million, but investors were told in earnings announcements and conference calls that the business was thriving. The earning releases and conference calls, said Koenig, were authorized or conducted by Enron's two top executives reported The Journal.

posted by Brian Moran @ 9:26 AM   0 comments

Thursday, February 02, 2006

A Misguided Exemption

January 27, 2006; Page A8

The SEC and PCAOB should urge accounting and financial executive trade groups, as well as the software industry, to work together to develop reasonably priced tools tailored specifically for small companies and the small accounting firms who mainly audit them. These should permit a company to document internal controls so that auditors do not need to duplicate the documentation, and include control testing programs integrated with that documentation and the work performed on the year-end balance sheet and income statement. The tools must be made available before 2007 when small companies are required to comply with 404.

While the SEC and PCAOB have issued some helpful guidance on how to streamline the auditing of internal controls, they should go further in easing requirements while stepping up enforcement. If a company has documented monitoring controls, and the monitoring process has not discovered any problems except for isolated cases, then no further internal examination by the company should be required. Re-examining controls when monitoring controls are working has layered on unnecessary work that has driven up costs for businesses. Companies should be given credit for doing the right thing, and not have to pay to recheck what they are doing right. However, if the auditor finds that monitoring controls have not been working and financials need to be restated, then a company should expect a swift SEC enforcement action.

posted by Brian Moran @ 1:38 PM   0 comments

Is SOX Working? Home Depot will be the test case.

By Robert D. Kugel

Ventana QuickTake

Take: Home Depot is the subject of an informal investigation by the SEC because of allegations the company was overstating earnings by routinely inflating "Return to Vendor" charges. Retailers assess these charges to suppliers when they return goods damaged in transit, for example. While Ventana Research does not believe the Sarbanes-Oxley Act (SOX) will always prevent major frauds perpetrated by a few senior executives, a company’s internal controls should be able to either prevent or detect these sorts of shenanigans, especially if (as alleged by a former employee) they are widespread.

If, indeed, the company's controls were faulty and yet passed review by internal and external auditors, we expect an outcry - particularly since for several years Home Depot has trumpeted its standards of corporate governance. The fraud alleged at Home Depot is precisely the kind that SOX was supposed to prevent. If it did not do so in this case, it raises serious questions about the effectiveness of a law that has cost public companies in the United States billions of dollars to implement. We also think the opposite is true. If it turns out that the claim is specious, then (depending on the circumstances) Home Depot will be able to demonstrate the value of its internal control systems by showing why the charge was unfounded from the start.

posted by Brian Moran @ 9:02 AM   0 comments

Wednesday, February 01, 2006

Diminishing Returns for Outsourcing?

The benefits may be harder to come by than is widely assumed, and they could become even more elusive if a new international rule is embraced by the Financial Accounting Standards Board.

Outsourcing has become so common among U.S. companies that the question no longer seems to be whether to engage in the practice but how far to extend it. The answer, according to the conventional wisdom, is the farther the better.

The benefits seem obvious indeed. To the extent a company can cut its costs by turning over non-core services to an outside firm, its earnings and stock price may increase. And consultants contend the impact can be transformational. The trick is to identify costly but ancillary functions that can be outsourced without sacrificing the quality of the support.

posted by Brian Moran @ 9:23 AM   0 comments


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