More on SOX
SOX 404 Triggering Delayed Filings and CFO Turnover
Excerpt of Analysis
Many Have Missed Filing Deadline-66% of the accelerated filers who had to file with the SEC by March 16 have done so, while 34% did not meet the deadline and late filing notifications have increased nearly 450% over the same period last year.
Mild Market Reaction-Large companies (greater than $500M in revenue) making weakness disclosures under perform the S&P 500 index by 2.9% fi ve days after disclosure.
Significant Impact on Careers-60% of CFO’s at companies making such disclosures are changing jobs either right before or within three months of the disclosure.
Weaknesses Disclosed at 11% of Companies-At the current pace of weakness disclosures, the final percentage of public companies disclosing weaknesses will be just in excess of the 10%estimate made by PwC’s CEO earlier this year.
Tax Accounting and Personnel Problems Widely Reported-The most common areas of weakness disclosures are in financial processes and procedures, tax, and personnel-related issues. Disclosures of Tax and personnel-related issues appear to drive the most negative market reactions.
Auditor Reinterpretations Triggering Weaknesses-External auditors appear to be increasingly re-opening long-accepted accounting practice and forcing companies to reinterpret, often leading to material weakness disclosures.
Open Your Wallet-Costs of ongoing compliance show no sign of abating. Leading companies are starting to measure management leverage regained-not compliance costs saved-to assess year two compliance success.
The SEC’s Roundtable on Implementation of Internal Control Reporting Provisions
Highlights and Perspectives
Management has recently been reluctant to discuss accounting matters until finalizing a position, out of concern that preliminary discussions may be perceived as a weakness in the entity’s ICFR. Conversely, many auditors have been hesitant to provide advice because of concerns that they might be considered to have impaired independence. Finally, audit committees feel frustrated when asked to act as an intermediary or a referee for discussions between managementand the auditor. We believe that this situation undermines, rather than enhances the quality of financial reporting, and that it should change. We support the concept that issuers must take responsibility for their application of generally accepted accounting principles (GAAP) and thus should have sufficient competent resources. However, the complexity of accountingstandards and business transactions mandates open and timely communication between management and auditors.
In addition, PCAOB AS 2 does not consider the fact that different controls may have appropriately different levels of expected precision. That is, process-level controls should operate with more precision than controls related to the application of GAAP in complex areas. Consequently, a company that has effectively designed processes and controls, but reaches an incorrect answer in a highly technical and judgmental area of GAAP, would get the same adverse opinion as a company with poor processes and controls. This result also highlights the discrepancy in the logic of stating that internal control is inherently unable to provide absolute assurance, but then insisting that any error demonstrates a failure in the internal control system since the system was never designed to prevent or detect all errors in the first place.