Sarah Johnson, CFO.com | US
December 19, 2006
In the frenzy to 'fix' accounting and audits to prevent frauds, the profession seems to be digging a deeper hole.
There is no doubt that they have increased the complexity of implementing the accounting pronouncements - so much so that they have had to back off several times on the implementation date for parts of SarBox.
The same seems to be true in auditing. AS2 is found to be inefficient. I hoped that this really didn't surprise anyone. If it did it can only mean that the people creating the rules lack practical experience.
And at the end of the day what do we have? Better reporting? I doubt it. As the recent article in the New Yorker concerning Jeffrey Skilling's conviction points out, all the ugly details were laid out in Enron's financials. But the facts are buried in the blur of dozens of detailed footnotes.
I think we are missing the overall objective - fair presentation of financial position and results of operations - in a mindless quest for perfection.
And as the comment for the ex-felon CFO describes, even the biggest firms are going to miss the evidence of fraud in an attempt to make an increasinly complex cookbook fit.
And then try to explain to the client that there is any value to the extra work and cost.
Posted by Tad DeOrio | Jan 16, 2007 12:35 PM ET
There may be more instances of material misstatements than we would imagine within public companies, but it is likely a relatively small percentage.
There are top down "tone at the top" indications that can identify most of the higher risk companies. The auditors did not do their jobs at ENRON and WORLDCOM under the pre-Sarbanes-Oxley rules. The Sarbanes-Oxley law without Section 404 has done a lot to keep CEOs, CFOs, audit committees and auditors responsible and highly focused on not allowing material misstatements to occur in financial reporting.
I agree that SOX 404 was designed for situations involving fraud, incompetence and dishonesty as well as honest mistakes. However, the rules, without SOX 404, are present to encourage auditors to do everything possible to protect the public and themselves from crooks or incompetent management and financial processes.
Companies nor there auditors need over-the-top rules like AS2 that severely penalize the 95 percent plus of competent, honest companies who have or will have adequate financial reporting controls to prevent and detect material financial reporting misstatements.
Posted by Robert Briscoe | Jan 15, 2007 5:43 AM ET
As a mid-level accounting analyst I would like everyone to think about the purpose of section 404 and the problems it was meant to address. In a previous job, I had to deal with a corrupt management team. After many small non-material issues, I was finally asked to make a material entry that was completely improper. I refused to make the entry and even took the matter to internal audit. The problem is that the manager of internal audit was the one that created the problem to begin with (in a previous role). Long and short of the story is that the entry was made and I had two choices; either make an issue and probably loose my job, or keep my mouth shut and try to find another job. I took the second option.
Bottom-up audits dictated by section 404 were put in place to catch these type of problems. They were put in place because the top-down approach was not working (Enron, Worldcom). Bottom-up audits were dictated by congress and the SEC should not have the power or authority to change that direction.
There is a lot more corruption out in the business world then most people want to admit. I am fortunate that I have found an excellent company to work for. People in similar situations should keep site of the reason that section 404 was adopted by congress. Section 404 is meant to protect investors. This is even more important today that more companies are moving towards 401K plans.
I wish more people would step up and say "GET REAL". Section 404 was a good thing!
Posted by Want_to Remain_Anonymous | Dec 22, 2006 8:56 AM ET
The winds of change are now truly blowing in the corridors of the rule writers. The recent moves by the PCAOB and the SEC are reflective of this change.
AS 5, if it happens as proposed, would incorporate many long awaited changes - a) top-down, risk-based approach;
b) Single opinion of external auditor on ICOFR;
c) dilution of 'work of every year should stand alone' fetish;
d) hopefully, more liberal use of 'work of others'.
Posted by Chandrasekar Venkataraman | Dec 20, 2006 7:00 AM ET
The SEC / PCAOB has heard our angst and written a new proposed AS5 that, if adopted largely in tact, will come much closer to implementing the SOX 404 legislation as intended by Congress as indicated by their original estimated average cost of $91,000 per company for all companies.
From my perspective as CFO of a smaller company accelerated filer, internal controls have always been reviewed and evaluated by auditors as part of their auditing standards. Materiality has always been a factor in the amount of audit work done. The reporting of material weaknesses in internal controls to the Audit Committee has been required for decades. The original intention of the 404 legislation was to add more focus on the specific internal controls over financial reporting. Congress envisioned more tailored checklists, some additional testing and a public reporting responsibility in Form 10-Qs and 10-Ks for material weaknesses that would put a lot of pressure on Audit Committees and CFO?s to get their financial reporting processes in order if they weren't.
The original staff at the PCAOB went extremely overboard in the AS2 implementation rules. Now, after three years, some people who understand the original intent of Congress have re-written the implementation rules to reflect a more reasonable standard of implementation for SOX 404. My sincere hope is that the PCAOB will do everything possible to expedite the review and consideration of the comment letters and recommend adoption of AS5 by the SEC as soon as possible. The current accelerated filers need relief from the erroneous, burdensome AS2 rules as early as possible in 2007.
Posted by Robert Briscoe | Dec 20, 2006 6:01 AM ET
This may be just semantics, but the wording used here could be a little confusing, "Non-accelerated filers?COMPANIES that have a public float of $75 million or less?will not have to comply with the standard until their annual reports are filed for fiscal years ending on or after December 15, 2008". However the COMPANIES do have to comply with Section 404 (and it will be to their benefit to use this new standard as a guideline) for year ends on or after December 15, 2007. It is just the OUTSIDE AUDITORS that don't have to comply til Dec 15, 2008.
Posted by Bob Benoit | Dec 19, 2006 9:05 PM ET
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