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Retired Congressman Michael Oxley blames the PCAOB for starting "all the problems" with the Sarbanes-Oxley Act.
Stephen Taub, CFO.com | US
April 6, 2007
This one act has cost companies untold millions and the author of the bill thinks its working well. Given he is a politician and all that infers, one can gain deep insight into his qualifications to regulate business. I bet if he actually owned a company or was the CFO, his take would be different. The Big 4 have no clue what they are doing in terms of how to audit now and the auditor/client relationship from my experience is far from cozy. On more than one occasion I wanted to kick them out of the building, off the engagement and out of their profession. Their materiality thresholds were 7 digits and I would have a senior asking me to justify a 40K reserve through detailed backup. I have been around the block as an accountant more than once. The bottom line is this: You can't legislate morality. Either senior management has ethics or they don't. There is nothing in Sarbox that will ultimately prevent malfeasance if that is what management wants to do. SARBOX is a huge failure.
Posted by Will Ferneau | July 17, 2007 01:21 pm
I agree with Bernard Boona. The lawmakers are so quick to point fingers. I have yet to see a politician take responsibility for their actions. Such narcissism is incredible! Also, politicians' knee-jerk reactions to a major financial crisis shows that the first thing on their minds is "how can I use this to get re-elected?" I have lost faith in self-serving, elected officials.
Posted by James McMonagle | April 19, 2007 01:49 pm
Great article, right on the nose.
Posted by ERIC MITCHELLETTE | April 14, 2007 12:52 pm
Sarbox was about down-the-nose lawmakers/regulators moral superiority over rich businesses plundering the masses, and lawmakers/regulators riding white chargers to right wrongs. Everytime this mentality takes over, bad law and regulation will destroy more wealth than if they had done nothing at all, a concept alien and foreign to these self-righteous types. Absolutely applicable and adequate laws were already on the books to handle matters. These pius pretenders want to be seen as rubbing the noses of business managers in messes, and in so doing, causing reaching hundreds of pages of obtuse law and regulation, wreaking damage near and far without limit including to themselves. In truth, these types are business-hating anti-capitalists pretending to do all these things for our own good. Few over-reaches of government have had such costs so obviously and suddenly. Can lawmakers admit their failure and do the right thing? Repeal Sarbox now.
Posted by Wayne Price | April 12, 2007 07:18 pm
It is not the law that's the major issue. The problem executives don't want to face is the new accountability score-card resulting from the law. Cost of compliance is a red-herring more than a real cost issue. The score card mandates the company to run in an integrated, disciplined manner. Many large companies ran 157 different accounting systems before SOX?! Imagine how effective that was? The new World order requires competition with leaner companies that don't have sunk costs and bottlenecked infrastructures. To compete and win Globally, the SOX requirements template is excellent for running a good business. Rajeev Rawat Founder and CEO, BI Results, LLC
Posted by Rajeev Rawat | April 12, 2007 02:10 pm
I have become an expert on SOX, but am not a fan of it. The current argument seems to be about small company compliance and the costs they will incur. I think we are missing the boat. I come out of operating companies, and yes, was burned in the dot com boom because I wanted to implement sound business practices. As I see it, no one wants to say Enron, Worldcom and subsequently SOX happened because auditors were not doing their jobs. However, it really is that simple. In my experience audit firms send in "kids" without experience in how businesses run, most are unsupervised. CPAs are not trained or educated in business, but claim they are. Accounting is a technical field which has merit, but partners have chosen not to roll up their sleeves and do the work, plus CPA firms started giving out audits as a bonus for clients who bought consulting services which is more profitable and a lot more interesting to practice. Most auditors do not know what it takes to run a business. All along they should have been auditing internal controls, but they did not and now we are all paying. SOX is easy, but auditors are more concerned with covering their fanny so they will not just use their brains and apply sound business, accounting and finance practices. Public companies have a responsibility to shareholders, so a CFO "knowing" how something operates internally is not acceptable. I run into this more often than not, but auditors will not say anything about an incompetent CFO. Sound business practices, auditors who understand business and can apply accounting standards in a pragmatic way are needed. The focus has moved from operating a business in an efficent and effective manner to worrying about complying with abstract regulations and keeping billable hours as high as possible. I think CPA firms and many CFOs of public companies need to just learn how to do their jobs and not rely on credentials or being "nice guys". In other words, if we as finance and accounting professionals grow up and take the responsiblity implied in our positions be it auditor or CFO, we can instill confidence in financial reporting and the market then SOX and more regulations will not be necessary. In short, I think audits are necessary, but only if they reflect accurate business practices and numbers.
Posted by Cate Gilman | April 12, 2007 12:42 pm
From the interview, it appears that Representative Oxley was surprised that a government agency cahrged with enforcing a two-paragraph law acted like a government agency, and the private sector entities who have to comply with the law spent all that time and money in order to comply. If there is a lesson to be learned here, perhaps Congress should provide closer monitoring of how laws are enforced after Congress passes them. It's simple to blame somebody else because what seemed like a good idea at the time turned into 404.
Posted by Bernard Boona | April 12, 2007 11:54 am
It would be ideal for investors if the U.S. could reach the middle of the fairway on accomplishing the goals of the Sarbanes-Oxley Act (the “Act”). Canada has taken a middle of the fairway approach, by imitating the Act’s requirements with one major difference; there is no involvement by external auditors. Could this approach work for the U.S.? In both countries, managements of public companies are one hundred percent responsible for effective internal controls over financial reporting, U.S. companies just pay for the evaluation twice. To accomplish the middle of the fairway approach, the U.S. Congress would need to strike out the Act’s Section 404(b) that specifically requires attestation on internal controls by external auditors. Doing this removes some value, but this is fallacy because the struggle is not how to keep everything that adds value but rather how to achieve the best value. If the Act’s Section 404(b) were amended Section 404(a) remains unchanged as does the Act’s requirements for auditor independence, corporate responsibility, and enhanced financial disclosures. The costs of compliance with the Act would drop by at least fifty percent. More importantly, the Act’s provisions on corporate criminal fraud accountability and white-collar crime penalty enhancements remain intact, promoting assurances to investors for accurate and reliable financial information. If par for the course is an agreeable score to all parties (most especially to investors and those charged with protecting them), the middle of the fairway is an excellent place to be. So far, I have not heard this option seriously discussed by those with the power to get us there, the U.S. Congress.
Posted by Thomas Stuart | April 12, 2007 11:44 am
There are some investments carried on the balance sheet for which a fair market value can be determined using market prices. I realize that in reality, the quantity times the last closing price, will not be the amounts realized in an actual purchase or sell by willing parties, but it provides a reasonable estimate of the value in the marketplace. However, when a market is not readily available, selling/purchasing the asset, or trading the liability can easily result in a price significantly different than what has been estimated for disclosure on the balance sheet, and reflected in the income statement under 157 and 159. 157 definition results in "unfair values" because of the necessity of deriving assumptions to be used in determining the values used. So I guess we are in agreement that "unfair values" is not the measure to use. What is the fair value of an office building, in a city where the likelihood of finding a tenant is remote? I can assume that the going lease rate per square foot, times my office building's square footage is the fair value, but may find that I cannot get a buyer for that much square footage when I decide to sell my building, so the "fair value" on my balance sheet becomes incorrect, and I must disclose that that estimate was way off, and the shareholders start yelling fraud. At historical cost, the value is known to be wrong, but is accepted as at least being conservative in its book valuation. Measuring the assets at the historical transaction cost, with adjustment for the depreciation, or aging, is far superior to inflating the balance sheet because the assets are believed to be of some other value. As to the combination of companies, at least there is a value established for the transaction, so allocating that value among the assets/liabilities is appropriate in my view. I however do think that "Goodwill" should not be carried on the balance sheet. Take a loss and let your shareholders know you overpaid with respect to the actual assets identified, net of liabilities, but that continuing business should more than make up for the loss in future years. Obviously, this discussion could take, and haas taken stacks of paper. I am of the opinion that the 157 definition and rules will bring results that are not intended. I'm for more conservative accounting concepts.
Posted by Charles Smith | April 10, 2007 08:51 am
Charles, what would you propose we replace fair value with? Should financial instruments be carried at unfair values? zero? never remeasured? What do you think would be the cost of defending these alternative measurement methods? Also--Do you want to eliminate the requirement to value the assets acquired and liabilities assumed in a business combination? Roll back the clock on valuing publicly traded investments like investments in shares of IBM? Do you think FIN 46 is wrong to require fair value at consolidation and to require consolidation of VIE's? Do you think SFAS 157's definition of fair value, meant to harmonize definitions and provide a foundation for verifiability, is restrictive or permissive? Do you believe that no definition of fair value is needed? That fair value should not be used?
Posted by Billy Freer | April 09, 2007 03:47 pm
What was it about the Enron and WorldCom deals that causes such heartburn, when the FASB has now come out and mandated Fair Value Accounting? Wasn't the key behind ENRON's fraud, the fair value determination of the VIEs? I think we'll be seeing a lot more disputes arise as a result of SFAS 157, and SFAS 159. SOX 404 will seem like shooting fish in a barrel compared to the expenses incurred to defend the valuations assigned in the financial statments mandated by fair value accounting rules.
Posted by Charles Smith | April 09, 2007 09:03 am
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