SOX Center

While Sarbanes-Oxley Act compliance costs decreased overall in 2006, the out-of-pocket costs associated with compliance rose from 2005 to 2006, according to a study planned for release on Thursday.

Foley & Lardner’s fifth annual study measuring the financial impact of Sarbanes-Oxley on public companies finds that the cost of audit fees, board compensation, and legal fees continue to rise, despite an overall plateau in compliance costs that companies tend to see following initial implementation of Section 404 financial controls.

The burden of compliance is prompting an increasing number of respondents at the 93 public companies surveyed to consider going private or selling the company. This year, 23% of those answering the survey said they’re considering transactions to take their company private, 16% said selling their company was a possibility, and 14% said they were considering a merger.

esm.com: Sarbanes-Oxley drives away IPOs

Two separate oversight bodies responsible for financial reporting and auditing rules under the Sarbanes-Oxley Act (SOX)–the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board–took steps in late May to streamline and clarify the act’s requirements.

On May 23, the SEC approved new guidelines for interpreting section 404 of SOX, instructing companies to focus their controls on those issues that present the greatest risk of affecting their financial reporting. According to the SEC, those changes will allow companies to eliminate unnecessary controls while tailoring their efforts.

On May 24, the Accounting Oversight Board, which reports to the SEC, approved a new standard for outside auditors that mirrors the SEC guidance approved the day before. The new framework, known as Auditing Standard No. 5, directs these outside firms to take a risk-based approach in determining what aspects of a business must be included in their audits. The new standard must now go to the SEC for final approval.

CRN.com: SOX Appeal

Jack Ciesielski submits: CFO.com reports that Senators John Kerry (Massachusetts) and Olympia Snowe (Maine) have sent another letter to SEC Chairman Christopher Cox requesting further delay in the implementation of the Sarbanes-Oxley Act’s Section 404 for small companies.

It’s deja vu all over again: they sent a letter to him last February on the same subject.

Here’s a link to the letter. The senators didn’t ask for a specific extension - but wanted an answer from Chairman Cox in 30 days. Last time, the specifically asked the SEC to give small firms until the end of 2008 to have management report on their internal controls, and another year afterwards for the auditors to report on the same.

Yahoo.com: The Protected Class: Senators’ Request For Sarbox Delay - Part II

Almost three-quarters of the chief financial officers in the US believe that Sarbanes-Oxley should be “repealed or reformed” as the costs of the 2002 compliance law have outweighed the benefits, according to a survey.

The findings underscore the scale of frustration over the costs associated with implementing “Sarbox”, even as regulators said that costs were expected to fall as new guidelines for the law were finalised.

In a survey of 484 chief financial officers by Duke University and CFO Magazine, almost 70 per cent said the costs of adhering to Sarbox requirements - principally its section 404 provisions on checking internal controls - “greatly outweigh its benefits”.

A total of 35 per cent said repeal or reform of the law was “badly needed”, although no distinction was made in the survey questions between repeal or reform.

Most business groups and US law makers believe the law does not need to be repealed, although a majority believe that reform of the way it is implemented is needed.

Such reform is already being carried out. The Securities and Exchange Commission has just provided executives with new guidance on Sarbox implementation.

The Australian: CFOs call for Sarbanes repeal

Securities and Exchange Commission internal control reporting requirements because smaller banks are already required to report to their bank regulators.

Testifying before the House Small Business Committee, Diane Casey-Landry, ACB president and CEO, said: “Community banks are part of a highly regulated industry subject to alternative requirements, heightening the need for relief from the unnecessary and duplicative burdens they face.” ACB was the only banking group to be invited to testify.

Casey-Landry explained that banks have 11 years of experience in filing internal control reports with their primary regulator and the FDIC, but now face the additional burden of costs and a second layer of internal control financial reporting required by section 404 of the Sarbanes-Oxley Act. “No other publicly traded company is subjected to the same scrutiny as a publicly trade bank,” she declared.

Yahoo News: ACB Calls for Exemption of Community Banks From Requirements of Sarbanes-Oxley Act

CCH principal analyst and leading author on securities law, Jim Hamilton, JD, LLM, has released a white paper on the long-awaited Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) issuances on internal controls over financial reporting under section 404 of the Sarbanes-Oxley Act.
CCH, a leading provider of securities law information, is part of Wolters Kluwer Law & Business.

Reporting on the adequacy of internal controls was a significant element of the corporate reforms embodied in the Sarbanes-Oxley legislation. Hamilton can explain and comment on the new regulations, including:

• Why regulators felt a new approach was necessary;
• The broad principles behind the guidance; and
• What the new issuances mean in practice for auditors.

“The issuances emphasize a ‘principles-based’ and risk-based approach,” said Hamilton. “This allows for greater discretion and judgment in assessing the effectiveness of the company’s internal control over financial reporting.”

Yahoo!Finance: New CCH White Paper Covers SEC, PCAOB Internal Controls Guidance

When the U.S. Securities and Exchange Commission moved last week to relax a provision of the Sarbanes-Oxley Act, it signalled the end to what could be called the Great Audit War.

Ever since U.S. lawmakers passed the corporate reforms in 2002, legal and financial executives have been waging a behind-the-scenes war with external auditors over the staggering costs and management burden stemming from what surely has been the largest corporate list-making exercise in history.

The culprit is a four paragraph passage in the now infamous Section 404 of Sarbanes-Oxley which requires thousands of U.S. and about 200 Canadian companies listed on American stock exchanges to “review and assess” the controls they have in place to detect financial reporting errors or fraud. The kicker is a requirement that outside auditors test and deliver an annual opinion about the effectiveness of the corporate safeguards.

With no guidance from the SEC about how to arrive at the annual opinion, the accounting police went, well, berserk demanding exhaustive tests and reports so auditors wouldn’t be liable if financial shenanigans were exposed.

globeinvestor: Bid adieu to the Great Audit War

The Office of Advocacy today praised Securities and Exchange (SEC) Commissioners Paul Atkins and Kathleen Casey for their willingness to reconsider the SEC decision not to extend the deadline for small public firm compliance with section 404 of the Sarbanes-Oxley Act. Advocacy wrote to the commissioners in the wake of the SEC’s decision not to grant postponement of deadlines for public firms with less than $75 million in market value.

In the letter Chief Counsel for Advocacy Thomas M. Sullivan asked the SEC to revisit the issue of compliance deadline extensions for smaller public firms. This request mirrors that of recent letters to the SEC by Senators John Kerry (D- Mass.), Chairman of the U.S. Senate Committee on Small Business & Entrepreneurship, and Olympia Snowe (R-Maine), the Ranking Member.

Kansas City infoZine News: SEC Should Reconsider Sarbanes-Oxley Extensions for Small Business

The financial burden of Sarbanes-Oxley Act (SOX) compliance is slowly, but surely starting to ease.

The cost of compliance with Section 404 of the SOX declined by 23% in fiscal 2006, according to a survey by Financial Executives International.

The Florham Park, New Jersey-based organization found the average company spent $2.9 million on SOX compliance in 2006, versus $3.8 million in 2005 and $4.5 million in 2004.

“Technology has a lot to do with the cost reduction,” said Sanjay Anand, chair of the Sarbanes-Oxley Institute. Public companies “are actually automating their controls. A good 20 to 30%, even as much 40%, of the cost reduction is actually coming from automated controls rather than manual controls.”

These cost reductions have come despite the fact that auditors’ fees have remained relatively steady, the research revealed. External auditor fees dropped by just 11% in 2006, from $1.35 million to $1.2 million.

ComputerWeekly: Sarbanes-Oxley compliance costs drop, better processes credited

To help CFOs of smaller companies navigate wisely through the Sarbanes-Oxley compliance process, Lord & Benoit has published a study, “10 Threats to SOX Compliance for Smaller Public Companies.”

The study comes on the heels of actions by the SEC and PCAOB to require smaller public companies to comply with SOX this year.

In summarizing the results, Lord & Benoit suggests this list should be used by CFOs as a starting point for a macro-level risk assessment at smaller public companies. Identifying potential concerns, developing action plans to remediate these risks, and taking quick action can minimize the likelihood of an adverse Section 404 report at the end of the first year of compliance.

SmartPros: Study Outlines SOX Threats for Smaller Public Companies