VideoIf all goes well, FirstEnergy Corporation just might dodge a major financial reporting bullet. All management needs to do is meet its planned June 1 deadline for overhauling the company's computer system.
That's because the Securities and Exchange Commission isn't likely to have gotten around to defining "internal controls" under Section 404 of the Sarbanes-Oxley Act by then.
If the SEC comes out with a definition before FirstEnergy's conversion, the electric utility holding company would find itself under a crushing reporting burden. To comply with the section, FirstEnergy — and every other public corporation — must include an annual assessment of its "internal control structure and procedures for financial reporting" in its annual report.
The issue is: How broadly do you define financial controls? For instance, when FirstEnergy switches its ERP software from Oracle to SAP in the next few months, the change will affect a bevy of functions, including supply-chain management, human resources, work-order management, and general ledger. David Richards, the company's director of internal auditing, says some of those functions — like general ledger — are clearly within the financial purview. Others, like work-order management, might not be.
Right now, it's up for grabs whether the SEC would require only information about FirstEnergy's finance function in the company's internal controls report. It's possible government regulators might want the company to cast its net over operations as well in the report. Richards says some auditors are expecting the commission to lay out broad requirements for internal controls reports. "They're talking about the whole enchilada," he says.
Lucky for First Energy that it's likely to avoid the possibility of such a definitional nightmare. Even luckier for the company: By coming in on deadline, the company can sidestep documentation of its internal controls under both Oracle and SAP. Such documenting would involve a massive boost in record-keeping, the internal auditor thinks.
Many companies won't be so fortunate, however. Now that the dust has settled on some of the more obvious tidbits of Sarbanes-Oxley (the requirement that CFOs and chief executive officers certify company financials, for example), a slew of disclosure concerns is emerging to trouble the sleep of finance chiefs.
Like the internal-controls provision, parts of Sarbanes-Oxley — and the SEC's implementation of rules related to the act — threaten to spread far beyond finance and accounting, spilling over into operations reporting as well. For instance, a pending commission requirement would force companies to disclose a burgeoning menu of material events in just two days.
The real-time rule would put "pressure on the operational side of the business," says Rick Fumo, a senior vice president with Parson Consulting, a financial management advisory firm.
One for-instance: If a company truck delivering toxic chemicals springs a leak, operations employees might have to speed that news up the chain of command to the comptroller so that an 8-K form could be filed. To grease the wheels, companies will need to tool up their reporting software and train line managers to communicate faster, Fumo says.
The act also has surprises in unexpected areas, things like compensation, executive relocation, and overseas operations. And contrary to popular belief, private companies aren't entirely immune to the provisions of Sarbox, as some finance managers have come to refer to the law.
Indeed, if you thought the provisions of Sarbanes-Oxley only concerned corporate finance, independent auditing, and equity research, you've missed the fine print. Sarbox also covers such disparate corporate functions as information technology, human resources, compensation, and environmental compliance.
Why? Because these areas — and a host of others — affect company financials.
In fact, after the SEC gets finished implementing the provisions of the bill, Sarbanes-Oxley might be a whole lot more far-ranging than its proper title suggests. That moniker? "Public Company Accounting Reform and Investor Protection Act."
Here, then are five of the more nettlesome — and less publicized — edicts of the Sarbanes-Oxley Act of 2002.
1. Material changes must be reported at lightspeed.
Most CFOs are aware that they now must provide the SEC with an 8-K form within five business days if their company issues an earnings release.
They also know that if they follow up an earnings release by dishing up important new details in a conference call, they might need to issue another 8-K.
Such requirements could make it "difficult to have open discussions," says Brian Jarzynski, CFO of Comshare Inc. It could also make it harder for finance chiefs "to get people listening" by holding out some of the good stuff for the conference call.
Still, that five-day 8-k isn't expected to produce all that many ripples.
What might spawn bigger waves is the realization that companies will have to issue 8-Ks in real time when something big and unexpected happens. Under Section 409 of Sarbox, companies must report material changes in the financial or operating condition of the company "on a rapid and current basis."
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