"The benefits of Sarbanes-Oxley are only just starting to show up," insists Richson. "The business community is really pushing hard on this, and I understand why. It's an expensive change. But just focusing on the dollars is really shortsighted." As for changes, Richson is unequivocal. "At a minimum, the SEC should leave everything alone for at least the next year."
Donaldson's and McDonough's public comments to date suggest they intend to respond rapidly to the comments delivered at the roundtable. But they seem far more likely to offer additional guidance and clarifications than to alter or eliminate existing requirements. Even before the roundtable, there were hints that the SEC and the business community may have very different expectations. CSC finance chief Level initially wrote to the SEC that "we are encouraged" by the SEC and PCAOB's decision to solicit feedback, as well as by statements from Donaldson and his staff. In a follow-up letter written after Donaldson's Wall Street Journal op-ed appeared, Level insisted that CSC does not want nor expect a legislative rollback. But, he worried, the op-ed "left us with the impression the commission may not be fully receptive to constructive suggestions regarding refinements and improvements."
Then there is the question of the commission itself. In a February 24 speech, Republican commissioner Cynthia Glassman noted, "I have been concerned from the beginning that Section 404 would become an expensive, short-term, check-the-box exercise." By contrast, at the March 7 event at Harvard, Democratic commissioner Roel C. Campos was far more sanguine, noting that he expected the cost of 404 compliance to go down in subsequent years. "We're not at all certain that's the case," says the Business Roundtable's Lehner.
The business community may well be out of luck if Donaldson is less receptive to suggestions than it hopes. Not only is he the SEC's chairman, he's also the swing vote between the two Republican and two Democratic commissioners. And while McDonough has made sympathetic noises, any changes the PCAOB makes must be approved by the commission.
"I was skeptical that we would even get any movement on this," says AMB's Coke. "But I actually am hopeful that they may listen and say let's do version 2.0."
If not, there's always Capitol Hill. Says Lehner: "If these [cost] numbers continue to increase, that's something we would revisit." Echoes Bartlett of the Financial Services Roundtable, "Our focus for 2005 and 2006 will be on regulatory and implementation changes. When we get closer to completion on that, we can revisit the legislation."
Tim Reason is a senior writer at CFO.
The Coming Tax (Department) Hike
Of the 223 companies that have so far reported material weaknesses in their internal controls, more than a third — some 88 companies — cited tax as the area of deficiency.
Unlike accounts payable or other system-driven processes that are easy to document, notes Brad Brown, KPMG's national tax leader for Sarbanes-Oxley 404, "tax is a nonsystem-driven, nonroutine activity that is highly open to human error."
While some of Enron's schemes involved dodgy tax treatments, tax is not traditionally considered a likely source of financial-statement manipulation. "It's not a high fraud area," notes Brown, "but it is high risk. In many companies, the tax charge will be a third of the cost basis."
With a 40 percent effective tax rate, says Urban Outfitters controller Bob Ross, "if there were an error in tax, it would definitely have a material impact." That, he says, makes auditors jumpy. State tax departments and the IRS, "who look at taxes in their own interest, have given us a clean bill," he says, "yet we do see an awful lot of recommendations for deficiencies in this area." His response? "I go back and say, 'Your recommendations don't mirror real life.'"
Ross has yet to receive a final list from his auditors, but many of the tax-related deficiencies already reported for other companies revolve around lack of skills and resources within the tax department. Ironically, this is partly caused by Sarbanes-Oxley itself, with auditor-independence rules severing many existing relationships between companies and their traditional tax advisers. The bottom line? "Often there's a business case that wasn't there before for increased head count or more resources for IT" in the tax department, says Brown. —T.R.
What CFOs Want
The Securities and Exchange Commission received a variety of suggestions aimed at reducing the cost and burden of Section 404 of the Sarbanes-Oxley Act. Many were general criticisms of 404's perceived failings, such as suggestions to focus testing on high-risk controls, create a tiered compliance system for companies of different sizes, and improve integration between financial and control audits. Below is a sample of various concrete suggestions pulled from comment letters submitted to the SEC by CFOs or other financial executives.
The Common Suggestions:
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