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In a speech given by Mark Olson to the FEI "International Shaping the Future of Financial Reporting Conference" in New York, Olson restated the four goals of the PCAOB in revisiting the AS2 standard: Since its announcement last May that I just mentioned, the PCAOB has been working hard to prepare a new standard to replace the current AS2 that will be released for public comment shortly. In undertaking this work, the PCAOB has four goals:I'm particularly excited to see how the fourth point manifests itself in the new guidance. So much of the real value in my mind occurs in the revisiting and enforcement of entity level controls, in which organizational managment sets a very clear and visible agenda for ethical and appropriate business practices. Despite so much discussion of "risk adjusted" reviews, the current guidance has hampered the reliance on these broad control environment attributes, making them a distant second to the control activities at the very discrete process level. And this is where the expense occurs - crawling through the minutiate of a company's processes, control by control. I can't think of a single scandal that would have been prevented by the painful and time-consuming monitoring of discrete processes in any one aspect of the business. A strong tone at the top coupled with objective, informed outsiders at the board level in most cases would have gone much further toward preventing these horrific crimes. This isn't to say that the material weaknesses that have been uncovered should be minimized. I too take issue with improper revenue recognition, sloppy inventory management, and improperly trained personnel. I would just expect management to do a more effective job of finding this rather than external auditors. I believe that competent performance of tasks is a critical component of organizational design, and is central to the role of managing and leading. I am guardedly optimistic that the PCAOB and SEC meetings and proposals to be released in December will begin this shift toward a more effective and efficient version of our current governance standards.
Who cares about fraud anyway if the shrinkage is still reported in the financial statements?I recently had an external auditor tell me that management has a custodial duty to shareholders to protect both their assets and interests, and that he viewed his work as not only the assurance of financial accuracy, but confirmation of management's appropriate custodial duties in action. After 10+ years in industry, working across finance and IT functions alike, I never dreamed of the weak and illogical practices occurring in the next cubicle. While I still expect the best of professionals I work with, I have adopted a "trust but verify" attitude - appropriate for SOX professionals and management alike. I expect professionalism and a personal accountability in those I work with, but SOX gives reviewers a series of specific vantage points from which to observe. SOX is not a meaningful grade unto itself, but an indicator for the observant as to the health and maturity of an organization. I appreciate the newly discovered tone at the top, and think that entity level controls play a larger part in good business practice than are given credit under SOX. And it is here that fraud is the significant issue: if stealing isn't the most base of crimes against another, and management is failing in their fundamental custodial duty to shareholders to detect and deter such behavior, what other tasks are being overlooked by management? Fraud gets at the agency cost of management - an indication of investor wealth that is being given away through apathy, ignorance, or laziness. If you can't readily measure and monitor integrity, expert competence, or good judgment, it seems we are left to look to the processes by which these things are exercised. Whew. I've been digging about a bit for details on teh implications for SOX now that the Dems have the House, and maybe even the Senate (some are repeats from past weeks, but I resubmit them collectively). My favorite read has been not only the article, but the rants from readers at The New Republic. Clay Risen really stirred it up in this Oct 17 article, looking forward to possible implications of the election. I'm sure more will be said in the coming weeks as spectators and wonks alike start guestimating on the implications from a change in congressional composition. One of the most promising articles I found that may give an indication for where the Dems will head was found at the Competitive Enterprise Institute, "CEI Praises Nancy Pelosi, Others For Recognizing Sarbanes-Oxley's Burden", published March 8, 2006: The Competitive Enterprise Institute applauds the House Democrats’ Innovation Agenda for calling on Congress to take action on some of the burdens of the Sarbanes-Oxley Act of 2002.I've now read the Innovation Agenda (Contract with America, v2?), and don't really get what is being proposed. Maybe that's just me being slow, but it reads like non-partisan baseball and apple pie. Global competitiveness, technical research, small business innovation... all good by me. For my $.035 cents, I just hope to see changes in control requirements that acknowledge -
(Please forgive my compounded metaphors, I'm off coffee today).
If you thought your flavor of accountability was unique, recognize that the landscape has shifted for finance leaders. This may be a useful point of reference for up-and-coming leaders looking to recruit stronger SEC-reporting, CPA-certified professionals into their ranks. Another point that has been recurring - stronger communicators and controls oriented professionals are going to increase in demand. Best, tl
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