Friday, December 30, 2005

Profiting From Cures for the Sarbanes-Oxley Blues - New York Times

New regulations that sprang from systematic fraud at those two corporations have created a cottage industry of businesses that provide consulting, accounting, computer security and other services to help companies cope with the Sarbanes-Oxley Act of 2002. That law was passed in an effort to clean up corporate accounting.

Sarbanes-Oxley, nicknamed SOX in the financial world, requires corporate managers to evaluate internal financial controls, hire outside accountants to review those controls annually, make more information available to the public and to follow procedures to stifle fraud.

Critics say the new rules are burdensome, expensive and of questionable value, but some entrepreneurs smelled the sweet scent of opportunity in somebody else's problem.

Sanjay Anand, who ran his own financial and technology consulting business, created the Sarbanes-Oxley Institute of Clifton, N.J., this year to offer training and his brand of Sarbanes-Oxley certification.

Profiting From Cures for the Sarbanes-Oxley Blues - New York Times

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Tuesday, December 27, 2005

Lay, Skilling Stand Trial as Enron-Inspired Rules Face Backlash

The judge who gave Bernard Ebbers 25 years in prison for committing the biggest corporate fraud in U.S. history realized the former head of WorldCom Inc. would probably die there.

"This sentence is likely to be a life sentence,'' U.S. District Court Judge Barbara Jones said in July 2005 after handing Ebbers, 63, one of the longest prison terms ever in a corporate corruption case.

Lay, Skilling Stand Trial as Enron-Inspired Rules Face Backlash

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SEC Study Shows Simplification Needed to Override Complexity

In a recent study on off-balance sheet accounting, the Securities and Exchange Commission discussed the need to make accounting standards less complex.

Many material weaknesses noted in the first Sarbanes-Oxley Section 404 report relate to misapplication of complex accounting standards. The American Institute of Certified Public Accountants recent task force found that current GAAP is too complex and not necessarily useful to the users of private company financial statements. In addition, FEI's Committee on Corporate Reporting has frequently noted that the complexity of accounting standards is simply outpacing the ability to keep up. In fact, both the SEC and FASB have indicated that simplification of accounting standards is a priority.

SEC Study Shows Simplification Needed to Override Complexity

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Sarbox, Pay Attention to Email

A recent online article in the Sarbanes-Oxley Compliance Journal strongly recommends paying closer attention to email activity and recommends email analysis software for increased surveillance and compliance.

“Terrorists are hiding in plain sight, working regular jobs, and trying to not get noticed. The knee-jerk reaction to hardening physical security with x-ray machines, metal detectors and surveillance cameras is a superficial attempt to ease people’s fears. However, the London attacks proved that even with a world class police organization and outstanding surveillance systems, it is unlikely to catch the terrorists before they do their damage. Law enforcement agencies are admitting that better intelligence is needed to identify and stop them,” explained Tom Politowski, President, Waterford Technologies, a leading provider of intelligent email archive and management solutions.

Sarbox, Pay Attention to Email

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Thursday, December 22, 2005

SEC suits could point the way for Sarbanes-Oxley challenges

As corporate critics of the Sarbanes-Oxley Act weigh whether to pursue a partial easing of the law’s accounting requirements through a court challenge, two recent lawsuits filed against the Securities and Exchange Commission (SEC) could serve as models.

Sarbanes-Oxley, passed by Congress in 2002 to boost corporate governance after accounting scandals at WorldCom and Enron, has become a thorn in the side of companies straining to comply with the law’s mandate for new internal financial controls. While the SEC has signaled a willingness to consider industry concerns as it implements the law, conservative and corporate opponents of the law may not be willing to wait for the agency to change its ways.

Court challenges to Sarbanes-Oxley will “absolutely” be mounted in 2006, said Mallory Factor, president and CEO of the Free Enterprise Fund. “I’m highly confident. … [The law] puts a criminality on risk-taking, hurts our entrepreneurial spirit, costs us jobs.”

SEC suits could point the way for Sarbanes-Oxley challenges

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Wednesday, December 21, 2005

Coyote Blog: Sarbanes-Oxley and Enron

Do any of you, as equity holders, feel better about your equities today with SarbOx than without it, especially given the added expense every company has had to take one? It would be interesting to test the market's perceived value of SarbOx by allowing shareholders to vote to opt in or out of SarbOx. Not only would their voting be interesting, but, if they opt out, it would be interesting to see if the stock price goes down (meaning SarbOx has perceived value) or up (meaning SarbOx is mostly perceived as extra regulatory expense).

Coyote Blog: Sarbanes-Oxley and Enron

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The Role of IT in Sarbanes Oxley Section 404

Indeed, "finding a needle in a stack of needles" shows the challenge of designing and enforcing sound internal controls at a public company. In order to comply with Sarbanes Oxley Section 404, the management of a public company must attest to the existence of internal controls. Ideally, those controls need to be good enough to assure accurate financial statements. If the internal controls are not good enough, then the company can suffer a variety of fates, including costly SOX remediation, loss of investor confidence, SEC punishments, shareholder lawsuits, and more. The stakes are quite high, as Refco's dramatic collapse shows.

How then, can a public company institute internal controls that can find needles amongst needles? Invariably, internal controls are derived in large part from the IT systems that support the business transactions that are subject to those controls. Controls are not only about IT, but there is IT in virtually all significant internal controls. This makes for good news and bad news from a SOX perspective. Distinguishing good needles from bad needles requires sophisticated, real time correlation of data between multiple systems. This is a major IT challenge.

The Role of IT in Sarbanes Oxley Section 404

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Tuesday, December 20, 2005

Wrangling the data behemoth

To meet the requirements of the Sarbanes-Oxley Act (SOX) and other similar regulations, enterprises end up replicating major parts of their databases. Under the act, employees are allowed to see only the information necessary for their jobs. That often means giving a department its own copy of the database, tailored to include only the data relevant to its function.

"It used to be that you could put everything into one giant database," said Chuck Ballinger, information analyst for Spokane, Wash.-based energy company Avista Corp. "But now we have to divide it and audit who has access to what. We tend to have to replicate it to maintain the separation."

Wrangling the data behemoth

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Sarbox compliance costs to fall 40% - Financial Director

The costs of complying with Section 404 of the Sarbanes-Oxley Act are expected to drop by 40% in the second year under the new rules, according to a survey.

A sample of the Fortune 1000 companies by consulting firm CRA International, undertaken on behalf of the Big Four, showed that costs associated with meeting the regulations on internal control the second time around will be much smaller for both larger and smaller listed companies.

Sarbox compliance costs to fall 40% - Financial Director

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Monday, December 19, 2005

'Google effect': Directors get millions

Tuck Rickards, a managing director at Russell Reynolds Associates, an executive search firm based in Boston, said companies were increasing pay for directors as their responsibilities became more onerous. New corporate governance regulations, including those in the Sarbanes-Oxley Act and the Regulation Fair Disclosure rule, have added to the work, Rickards said.

'Google effect': Directors get millions

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Intelligent Enterprise Magazine: Bad Tone at the Top

The recent resignations of Mercury Interactive's Chairman/CEO, CFO and General Counsel stemming from their participation in shenanigans related to pricing of stock options and loans to officers may stoke the complaint that the Sarbanes-Oxley Act is ineffective. Ventana Research believes the situation illustrates both the strengths and weaknesses of the act in preventing fraud. We have never believed Sarbanes-Oxley could prevent all acts of fraud, particularly those stemming from concerted efforts by senior executives. On the other hand, most of what happened at Mercury Interactive predated the act; in 2002 the company implemented controls that would have been required to comply with SOX Section 404 and stopped the manipulation of options pricing.

Intelligent Enterprise Magazine: Bad Tone at the Top

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Friday, December 16, 2005

Sarbanes-Oxley Section 404 Costs and Implementation Issues: Survey Update

CRA was retained by Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP to perform a follow-up survey on second-year implementation costs of Section 404 of the Sarbanes-Oxley Act for a select group of small public companies.

The original survey, issued in April 2005, analyzed the initial compliance costs associated with section 404 of Sarbanes-Oxley.

Sarbanes-Oxley Section 404 Costs and Implementation Issues: Survey Update (survey summary download available, published Dec 8, 2005)

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Tuesday, December 13, 2005

Is the Big Four Running Interference for Itself?

Confirming the conventional wisdom, a new study by consultancy CRA International forecasts a hefty drop in the corporate expense of complying with the internal-controls provisions of Sarbanes-Oxley.

While they may be accurate, the survey results fit neatly into what may be very well be an attempt by the Big Four accounting firms that sponsored the study to stave off criticism and futher regulation.

Recall that the Big Four, along with the American Institute for Certified Public Accountants (AICPA), fought tooth and nail against the takeover of auditing standard-making by the Public Company Accounting Oversight Board under Sarbox.

Is the Big Four Running Interference for Itself?

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Sarbanes-Oxley Regulations May Be Loosened

Small public companies could save millions of dollars now spent on audits required by the Sarbanes-Oxley Act, according to a plan that the Securities and Exchange Commission will consider on Wednesday. Last week, a panel created by the SEC proposed that small public companies should not be forced to pay outside auditors to review internal controls, a requirement under Sarbanes-Oxley Rule 404. Instead, companies that have less than $750 million in market capitalization and $250 million in revenue should be allowed to review their own internal controls, the panel said.

The panel also recommended that the commission remove all of the act's regulations on auditing internal controls for smaller public companies that have market capitalizations between $100 and $125 million and revenue less than $125 million.

Sarbanes-Oxley Regulations May Be Loosened

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Greenwood working to ease Sarbanes-Oxley rules

One of the principal GOP figures in Congress’s response to the corporate accounting scandals at the beginning of the decade is leading a coalition of healthcare, high-tech and venture-capital groups in an effort to relax the enforcement of the Sarbanes-Oxley Act.

Former Rep. Jim Greenwood (R-Pa.) is president of the Biotechnology Industry Organization (BIO), which represents many of the kind of smaller publicly traded companies that have been among the most vocal critics of Sarbanes-Oxley and the burdens its corporate integrity standards have placed on businesses.

Greenwood working to ease Sarbanes-Oxley rules

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Monday, December 12, 2005

Sarbanes-Oxley costs BP $100m a year

Compliance with Sarbanes-Oxley has cost Britain's biggest company, BP, $100m a year. BP chief executive, Lord Browne has told The Daily Telegraph that the oil giant's 'external costs' incurred by complying with Sarbox have topped $100m (60m pounds) a year.

'Of course, that doesn't count the time we spend on it internally,' he told the paper. 'The fact is that we do it and we do it very efficiently and comprehensively.

Sarbanes-Oxley costs BP $100m a year

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Saturday, December 10, 2005

SEC committee suggests scaling back Sarbanes-Oxley Act - SEC

The reach of the antifraud Sarbanes-Oxley Act should be scaled back and the smallest public companies should be exempt from one of the most burdensome parts of the law, a Securities and Exchange Commission advisory committee told the agency this week.

Microcap companies with a market capitalization of less than about $100 million to $125 million and annual revenue below $125 million should be exempt from Sarbanes-Oxley 404, according to the preliminary recommendations of the SEC Subcommittee on Internal Controls.

SEC committee suggests scaling back Sarbanes-Oxley Act - SEC

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Thursday, December 08, 2005

Not Just Accounting

The New Yorker this week weighs in on Sarbox (though in its grammatically hair-splitting fashion chooses to spell it "SarbOx") and reminds those who think the cost of compliance outweighs the benefits of an interesting point: Competitors of a fraudulent company may suffer from inflated results no less than its shareholders and other stakeholders.

In fact, the article cites new research that finds WorldCom's fraud was at least partly responsible for overinvestment in capacity by other telecom companies. That still dogs the industry and the economy four years after WorldCom failed because it chose to violate U.S. GAAP and capitalize expenses.

Not Just Accounting

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Sarbox versus XBox

Microsoft CEO Steve Ballmer: "The Ballmer children do not have their Xbox 360 yet. I'm in the same boat as many of you. Thanks to the wonders of Sarbanes-Oxley, management does not get a free Xbox 360."

Sarbox versus XBox

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Tuesday, December 06, 2005

Sarbanes-Oxley compliance can reduce audit costs and bring business benefits

An essential lesson from the US is that, although the role of IT in achieving compliance is critical, it is the underlying business processes and internal controls that are fundamental for Sarbanes-Oxley compliance.

"There is no such thing as Sarbanes-Oxley-compliant software," said Dennis Keeling, chairman of the British Software Developers Association (Basda).

Instead of reaching for a quick-fix IT implementation, the IT director will need to commit both to a major project for achieving compliance, and then, crucially, sustaining it thereafter.

"Sarbanes-Oxley compliance is not a one-off," said Keeling. "The IT director will need to seize the initiative and take control of the processes and architecture within the business. He will have a major ally in the financial director, because he has to justify the audit fee."

Sarbanes-Oxley compliance can reduce audit costs and bring business benefits

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Monday, December 05, 2005

A Gaping Hole In Compliance Efforts

Thanks to Sarbanes-Oxley and other compliance regulations, companies have gone to great lengths to ensure they’re not breaking the law when it comes to information security and reporting.

But in spite of their best efforts, the vast majority of organizations have left a gaping hole in their compliance efforts by ignoring the database and database administrator (DBA).

At the heart of this issue is a very important question that many CIOs, CFOs and CEOs of large enterprises should be asking, but aren’t: Who controls the data? If they were, they would realize that the person with the greatest unimpeded power over their data integrity is the administrative-level DBA.

Currently, most efforts to comply with Sarbanes-Oxley have concentrated on monitoring at the application level, leaving the database to be managed manually by individual DBAs.

A Gaping Hole In Compliance Efforts

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Sunday, December 04, 2005

How to Learn to Love Sarbanes-Oxley

As told to Scott Berinato: Like most of you, I approached Sarbanes-Oxley compliance last year with a certain trepidation. Within many companies, there’s always resistance to change and fear of the unknown, and SOX fits those bills. Even in my own department, employees were a little apprehensive of what they perceived would be extra paperwork, more time required for approval, just more time to do everything. Outside the company, we worried about the auditors. Not because we worried we’d done something wrong; we simply didn’t know what they were looking for.

Despite our concerns, we survived year one of SOX compliance relatively unscathed. And here’s the best news: Contrary to popular opinion—that the addition of controls will inevitably slow you down—I see a strong correlation between efficiency and good controls. That’s right, for all the fretting over regulation, SOX compliance could be a good thing for information security.

Anyway, now it’s year two, and we’re applying what we’ve learned from the first go-round to make this year less stressful and more productive. Here’s what we’ve learned.

How to Learn to Love Sarbanes-Oxley

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Friday, December 02, 2005

A Sarbox Sec. 201 Surprise

Section 201 of the Sarbanes-Oxley Act — which states that auditors cannot perform tax work for clients — will put many small-cap companies at a crossroads. According to tax consultancy experts at Capital J Advisors (a firm that would likely benefit from the situation), companies with a market cap under $200 million will be pressured either to hire additional in-house tax experts or to outsource some or all of their tax work.

The worrisome part, says James Walsh of Capital J, is that small-cap companies are increasingly becoming international, with customers, suppliers, and sometimes facilities dotting the globe. Many will seek to hire a $70,000-per-year tax manager and be done with it. But they may be in for a surprise.

A Sarbox Sec. 201 Surprise

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Board Issues Report on Initial Implementation of Auditing Standard No. 2

Washington, DC, November 30, 2005 – The Public Company Accounting Oversight Board today issued a report discussing issues identified in the course of the Board's monitoring of the implementation of Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. That standard implements Sections 103 and 404 of the Sarbanes-Oxley Act of 2002 by establishing a process for auditing a public company's internal control over financial reporting in conjunction with an audit of financial statements.

The Board found that both firms and issuers faced enormous challenges in the first year of implementation, including strains on available resources; a shortage of staff with prior training and experience in designing, evaluating, and testing controls; and the limited timeframe that issuers and auditors had to implement Section 404. These challenges were compounded in cases in which companies needed to make significant improvements in their internal control systems to make up for deferred maintenance of those systems.

Board Issues Report on Initial Implementation of Auditing Standard No. 2

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More Bargaining Room for D&O Insurance

After years of nightmarish increases, the price of Directors and Officers (D&O) insurance softened in the third quarter of 2004 and continued to drift down through the fourth quarter. Premiums stabilized this year and may head up again in 2006. But in the meantime, CFOs have an opportunity to field bids from multiple carriers, evaluate the quotes and negotiate the best coverage. Capacity is up, but so are claims, so companies that have not already looked for better value in their policies should act now.

More Bargaining Room for D&O Insurance

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Thursday, December 01, 2005

Auditors' New Task Proved Difficult

Companies and their accountants faced "enormous challenges" that diminished the quality of audits as they tackled internal financial control assessments for the first time, the auditing profession's oversight board reported Wednesday.

The Public Company Accounting Oversight Board said experience should allow accountants to overcome the difficulties of the 2002 Sarbanes-Oxley corporate-governance law provision, which required auditor approval of internal financial controls in 2004 annual reports. The challenges included a shortage of trained staff at companies and audit firms, a tight timetable and limited resources.

Auditors "were burned so badly" by the corporate scandals at Enron Corp. and elsewhere "that they've overreacted," Romeo said. "The pendulum swung all the way over to the other side. Now it needs to return to the middle where it belongs."

Auditors' New Task Proved Difficult

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