VideoHow rapid is rapid? In a footnote to a rule on non-GAAP financial reporting issued in January, the SEC said it plans to tackle that issue in the near future. Last June, the commission made it clear that it meant those 8-Ks to be filed in two business days. That's a big change from the five business days the commission now requires to report material changes — and the 15 calendar days it asks for others.
What's more, the topics deemed worthy of an 8-K filing would vastly expand. Currently, companies must file when they undergo nine specific events, including a change in control, a significant acquisition, or a bankruptcy.
To that, the SEC is proposing to add a whopping 11 triggering events. Among them: ending (or merely reducing) a significant business relationship with a customer; large write-offs and restructuring charges; material impairments; and a change in a rating agency's decision.
Because the SEC's policy was proposed before the passage of Sarbanes-Oxley and the ensuing brouhaha surrounding it, however, finance chiefs are only just now waking up to the implications of "a whole new disclosure regime," says Deborah Meshulam, a partner with Piper Rudnick in Washington.
One result could well be a dramatic change in the nature of the CFO job. Finance chiefs will likely have to dig much deeper into how their companies disclose their operations, says Meshulam, a former assistant chief litigation counsel with the SEC's enforcement division. "That's not a quarterly and annual involvement, with episodic 8-Ks," she adds, " but a steady stream — [or] a daily onslaught."
Finance chief will need reinforcements to cope with the flood of required filings. One solution: Hire a full-time disclosure-controls supervisor or manager with a direct report to the CFO or another top executive, says Kevin Lesinski, a partner with Seyfarth Shaw in Boston. Can a boom in Chief Disclosure Control Officers (CDCOs) be far behind?
2. "Internal Controls" could mean much more than getting the numbers right.
On the face of it, Sarbox seems to refer only to finance when it talks about the need for management to report on and assess internal company controls.
The SEC has made statements suggesting it agrees with such limits. In a proposed rule it published in October, the commission provided an unremarkable definition of financial controls. Essentially, the regulatory agency said such controls are there to ensure that transactions are properly authorized, recorded, and reported, and that assets are safeguarded against improper use.
Nevertheless, the SEC remains vague about defining what "internal controls" will mean under Sarbox 404. Remember, since the findings of the private-sector initiative known as COSO (Committee of Sponsoring Organizations) were issued in 1992, the term has included operations and regulatory compliance, as well as finance.
A broad definition could have CFOs brooding over regulatory matters that are a far cry from what's normally considered finance. FirstEnergy, for instance, is currently fighting Environmental Protection Agency charges that one of its plants is in violation of the Clean Air Act. But if the company is found to be out of compliance with the law, it faces heavy fines. Says Richards: "That's an operating issue that can sure have financial ramifications if we were wrong."
Further complicating matters is another feature of Sarbox 404: Auditors must attest to and report on management's assessment of internal controls. "That will lever [compliance] up into something that's going to cost a lot more time and expense," says Steve Clark, a partner with Chapman and Cutler, a Chicago-based financial services law firm.
One problem, for sure, is that auditors will have to piece together new procedures to assess client controls programs. That will make it tough for quantitative-minded accountants to gauge performance evaluations and other soft information provided in management reports, Clark thinks.
3. Sarbox doesn't stop at the shoreline.
Laws governing exports and imports and foreign-based bribes and money laundering don't seem to have much to do with the domestically focused act.
But the onus that Sarbanes-Oxley puts on audit committees and independent auditors to ferret out wrongdoing is spurring a closer look at global operations, says Sturgis Sobin, a partner and director of the International Trade Regulatory Practice for Miller & Chevalier in Washington.
Sobin offers a hypothetical: While performing an annual audit of a multinational, auditors find suspicious payments on the books of the company's Indonesian subsidiary that have all the earmarks of bribes. "The liability becomes very real," the lawyer says, "and the auditors, under pressure of Sarbanes-Oxley, have to recommend to the corporate client that they undertake a rigorous analysis" of the situation and disclose the results. The disclosure might then lead to heavy fines under the Foreign Corrupt Practices Act (FCPA).
That's a sea change from the previous way multinationals handled discoveries of baksheesh. Under FCPA and export/import rules, corporate executives don't have a duty to disclose questionable practices, Sobin says.
Instead, international business disclosure regulators tend to employ a "carrot-and-stick" approach involving incentives for compliance and penalties for transgressions.
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