Techno Finance and Executive Diary...

Monday, November 13, 2006

Business wins its battle to ease a costly Sarbanes-Oxley rule

Business has won the battle to ease one of the most controversial requirements mandated by the Sarbanes-Oxley Sarbanes-Oxley corporate-reform law: that company first review their own systems for ensuring accurate financial reports and then have them tested by outside auditors.

The nation's business lobby, which says Sarbanes-Oxley is too burdensome, would like to see even broader changes in the law, which was passed in the wake of the Enron scandal to promote good corporate governance and prevent fraud.

But securities and accounting regulators are yielding to pressure for a more flexible reading of a provision of the law known as Section 404. Regulators have said they will propose guidance next month to help companies and auditors interpret Section 404 in a way likely to save them time and money.

That's a big victory for business, which has mounted a concerted push to alter the regulation. It could also be good news for U.S. stock exchanges, which in recent years have blamed Sarbanes-Oxley, and particularly Section 404, for discouraging companies from going public in the U.S. or listing stock here.

At issue is a four-paragraph section of the law that requires publicly traded companies to review and assess the controls they have in place to ensure reliable and accurate financial reporting. Companies must document such things as who can get access to their financial records and what procedures they have in place for recognizing revenue. The rule is intended to prevent any kind of fraud, manipulation or even error in a company's financial statements.

According to a study by one industry group, companies on average spent $3.8 million each in fiscal 2005 to comply with the rule. Some companies say auditors are interpreting the rules so literally that they are asking management to account for such things as who has access to an office key.

Besides the Big Four accounting firms, which provide the required audits, a variety of software products and consulting services have sprung up since the rule took effect in 2004. IBM Corp., Oracle Corp., SAP AG and Microsoft Corp. have added software to their lineups to help businesses adhere to the rule. Sarbanes-Oxley work has also increased the revenue of Movaris Inc. and Paisley Consulting.

Companies say auditors have become too conservative because they fear being sued by the SEC or investors if a fraud is uncovered at a company they advised. SEC Commissioner Paul Atkins, a Republican, often recites the tale of a European executive who identified 500 key internal controls while his firm's auditor found 60,000.

Companies may look for listing outside the U.S. because of the reasons including lower fees elsewhere, but many small and foreign businesses have complained loudly about Section 404. In an effort to reduce the loss of IPOs and foreign-company listings, the SEC recently proposed giving newly public U.S. companies and those based outside the U.S. that are listing for the first time on U.S. exchanges more time to comply with the measure.

Source: The Wall Street Journal

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Posted by "CPerformance" :: 12:02 PM :: 0 comments