Friday, December 22, 2006

SEC Publishes Guidance to Management

On the SEC site, see spotlight on Internal Control Reporting Provisions, which includes the SEC's proposed guidance, "Management Reporting on Internal Control Over Financial Reporting".

This is the first guidance from the SEC directed specifically toward management, and intended to be applied in context with the newly released draft auditing standard (AS5) published by the PCAOB this week.

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Board Proposes Revised Auditing Standard on Internal Control over Financial Reporting

The Public Company Accounting Oversight Board today voted unanimously to propose for public comment a new standard on auditing internal control over financial reporting and other related proposals. The proposed standard would replace the Board’s existing internal control standard, Auditing Standard No. 2.

The proposed new standard on internal control is a principles-based standard designed to focus the auditor on the most important matters, increasing the likelihood that material weaknesses will be found before they cause material misstatement of the financial statements. The proposed standard also eliminates audit requirements that are unnecessary to achieve the intended benefits, provides direction on how to scale the audit for a smaller and less complex company, and simplifies and significantly shortens the text of the standard.

“Today’s proposal is the result of the PCAOB’s experience with the first two years of auditors’ implementation of the internal control provisions of the Sarbanes-Oxley Act,” said PCAOB Chairman Mark Olson. “The Board’s goal has been to apply the feedback we’ve received and our observations of implementation to create an auditing standard that preserves the intended benefits without resulting in unnecessary effort and costs. We believe the new standard will result in audits that are more efficient, risk-based and scaled to the size and complexity of each company. We look forward to comments on the proposal.”

Board Proposes Revised Auditing Standard on Internal Control over Financial Reporting

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Monday, December 11, 2006

SOX Help Finally on the Way?

Forty-eight hours from now, venture-backed companies looking to go public may dwell in a very different regulatory universe from the one they have known since 2002, when Sarbanes Oxley was first enacted.

That’s the optimistic view coming from Conrad Hewitt, chief accountant of the U.S. Securities and Exchange Commission, and echoed by an insider at a Big Four accounting firm who wished to remain anonymous.

What’s expected, at least from the accounting profession, is that VC-backed companies will get an early Christmas on Wednesday, when new guidance from the SEC for small companies is expected to be unveiled.

Mr. Hewitt has said forthcoming SEC and Public Company Accounting Oversight Board provisions will make it easier for small companies to comply with SOX, particularly the controversial section 404, which governs how a company’s internal controls are certified.

SOX Help Finally on the Way?

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UPDATE 2-SOX audit relief ahead for small cos-US regulators

Small companies will get special treatment under upcoming revisions to a section of 2002's post-Enron Sarbanes-Oxley (SOX) law dealing with corporate internal financial controls and audits of them, two senior U.S. accounting regulators said on Monday.

U.S. Securities and Exchange Commission Chief Accountant Conrad Hewitt said he "very definitely" expects separate small-company provisions for SOX Section 404 compliance in both a revised auditing standard coming soon from the Public Company Accounting Oversight Board (PCAOB) and new SEC guidance for companies, expected to be unveiled on Wednesday.

"There's provisions in ours and there will be provisions in theirs ... making it easier for small companies to comply," Hewitt told reporters after speaking at an American Institute of Certified Public Accountants (AICPA) conference.

UPDATE 2-SOX audit relief ahead for small cos-US regulators

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SEC Sarbanes-Oxley Changes to Give Small, Public Firms a Break

The U.S. Securities and Exchange Commission (SEC) is on Wednesday expected to start the process to modify existing auditing provisions for small, public firms within the Sarbanes-Oxley Act of 2002 (Sarbox) when it presents new rules related to section 404 of the act, The New York Times reports.

Under section 404 of Sarbox, publicly-traded firms are required to evaluate and document the safeguards they have in place to make sure their financials are reported accurately, the Times reports.

SEC Sarbanes-Oxley Changes to Give Small, Public Firms a Break

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Thursday, December 07, 2006

Committee on Capital Market Regulation - Interim Report

The Committee on Capital Market Regulation released their interim report earlier this week (Dec 5, 2006).

A couple of interesting data points noted in the study summary:

• 5% of the value of global initial public offerings was raised in the U.S. last year, compared to 50% in 2000.
• The U.S. share of total equity capital raised in the world’s 10 top countries has declined to 27.9% so far this year from 41% in 1995.
• The decrease in U.S. listing premiums erodes the traditional edge maintained by the U.S. on cheaper cost of capital.
• Private equity firms, almost non-existent in 1980, sponsored more than $200 billion of capital commitments last year alone.
• Since 2003, private equity fundraising in the U.S. has even exceeded net cash flows into mutual funds and going private transactions have accounted for more than a quarter of publicly announced takeovers. The increased use of private markets disadvantages the average investor, who typically cannot participate in such markets.
• The dramatic increase in the use of private U.S. markets is important evidence that regulation and litigation are keeping them out of the public market.

Bottom line - changes in implementation, not recision of the SOX 404 requirements.

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Friday, December 01, 2006

Down on the Street

But Sarbanes-Oxley is not just about costs. In theory, a higher standard of corporate-governance should result in a higher valuation, since listing in a well-regulated market shows a commitment from a company that it will not abuse investors. If this premium is high enough, it will offset the costs of compliance. One study, conducted post-Sarbanes-Oxley, found that the premium placed on the value of an emerging-market firm listing in New York can reach 37%; preliminary research suggests the value of a London listing is not as high. Mr Zingales's calculations suggest that the New York premium outweighs costs for companies with a market value of more than $230m.

For the most part, reformers insist they are not out to gut Sarbanes-Oxley, but to make it more "risk-based". This means keeping the goals largely the same but giving firms and their auditors more leeway in achieving them. That battle may already be won: the Securities and Exchange Commission, America's chief market-regulator, and the Public Company Accounting Oversight Board, which was created by Sarbanes-Oxley, have both announced reviews of Section 404, hinting strongly that the burden will be eased, especially for smaller firms. On November 16th Christopher Cox, the SEC's chairman, promised "significant changes" in coming weeks.

Down on the Street

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