Complying with Section 404 of the Sarbanes-Oxley Act of 2002 will cost public companies an average of 35 percent more in audit fees. This according to a recent survey by Financial Executives International (FEI).
FEI surveyed 83 of its members at public companies with average revenues of $3.3 billion. Fifty of the respondents are listed on the New York Stock Exchange.
On average, public companies expect to spend more than 6,000 hours—including internal resources, external resources, and attestation time—and an additional $480,000 in software and IT consulting to comply with Section 404. In terms of the manhours required for compliance, responses ranged widely, from 80 hours to 65,000 hours.
“Strong internal controls are a hallmark of a well-managed company and an essential component of a sound corporate-governance structure within the company,” said Colleen Sayther, president and CEO of FEI. “Hopefully, the documentation required by Section 404 leads to stronger internal-control systems across companies, and not inefficient use of corporate resources.”
Section 404 requires that managers state their responsibility for establishing and maintaining adequate internal controls for financial reporting. It also requires auditors to attest to and report on management’s assessment of corporate performance, in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).
(Editor’s note: The passage of Sarbanes-Oxley and the advent of the PCAOB are changing the nature of external audits. How will the auditor/client relationship change in the next few years? To find out, read “The New Rules of Engagement.”)
SEC to Exchanges: You Protect the Analysts
The Securities and Exchange Commission has already stepped up its battle to reduce conflicts of interest involving Wall Street stock analysts. Now the commission is working the other side of the street, pledging to target corporations that retaliate against Wall Street research analysts who issue negative stock recommendations.
Rather than launch an investigation, the SEC is asking the major stock exchanges to consider rules to address the issue, according to the Wall Street Journal. In April the commission sent a letter to the New York Stock Exchange, the Nasdaq Stock Market, and the American Stock Exchange asking them to consider drafting new standards that would prevent corporate executives or investment-banking customers from pressuring analysts.
Securities regulators recently reached a $1.4 billion settlement with major securities firms and instituted structural reforms to end stock-research conflicts. The settlement, however, did not address situations in which companies restrict information to analysts who issue negative reports.
In its letter, the SEC’s director of market regulation, Annette Nazareth, said listing standards “may provide the simplest remedy for this problem” and asked for a response by the end of July. Listing standards require issuers that list their shares on a stock market to follow certain rules or face delisting. The NYSE, Nasdaq, and Amex set their own listing standards, but the SEC must approve them.
Ahold’s New Executive Suite from Ikea
In a bid to regain investor confidence after a marring accounting scandal, Dutch food retailer Ahold is on the verge of appointing a new finance chief.
Hannu Ryopponen, who is currently finance director at private equity group Industri Kapital Group in London, is expected to become the company’s new finance chief. According to press reports, Ryopponen’s nomination only needs shareholder approval to go through.
From 1985 to 1998, Ryopponen worked at Ikea, the Swedish furniture company. Ahold’s new chief executive, Anders Moberg, also previously worked at Ikea.
Dudley Eustace, Ahold’s interim CFO, will stay with the company until all 2002 accounts are complete. Analysts expect that massive goodwill write-downs—something on the order of $2 billion—will result in a net loss for 2002. Meanwhile, operating income is under pressure due to the global recession, according to Reuters.
Ahold has been embroiled in an accounting scandal ever since the company admitted it overstated profits by more than $900 million. That admission triggered the resignation of then-CFO Michael Meurs in February. (The company’s CEO, Cees van der Hoeven, resigned in May.)
On Wednesday Ahold management announced the buy-back of some $250 million in debt of Argentinian subsidiary Disco. The deleveraging of Disco is intended to help Ahold sell the Argentinian company. Ahold is looking to sell assets to help cut its staggering debt load, which tops 12 billion euros.
Analysts say they expect a return to financial conservatism at Ahold under the new management team. That would be some change. Ahold went on a decade-long acquisition spree in the ’90s, including acquiring U.S. supermarket giant Stop & Shop.
The Other White Meat
Three senior executives at LaGrou Cold Storage have been indicted for allegedly hiding rat-infested meat and other contaminated food, according to USA Today.
Federal authorities seized 22 million pounds of infested meat in the largest impoundment of contaminated food in U.S. history, government officials said. The food was being stored by more than 100 wholesalers and was meant for sale to restaurants and food retailers throughout the Midwest.
The executives charged: LaGrou president Jack Stewart, sales director Michael Faucher, and former warehouse manager David Smith. Each face four felony counts and could get up to 14 years in prison if convicted. Steve Schuldt, CFO at the company’s parent, LaGrou Distribution System, declined to comment other than to say: “We don’t agree with the findings.”
According to the grand jury indictment, contamination at the warehouse was so severe that executives met weekly to devise ways to cover up and deal with the problem. They allegedly sent employees on regular “rat patrols” to remove rodent droppings and carcasses, according to the indictment. Some of the bills of lading were marked “MM” (Mickey Mouse) to denote rodent-contaminated products, the USA Today report said.
- Robert Korkuc, former chief accounting officer at Symbol Technologies, a maker of bar-code scanners, is expected to plead guilty to charges of accounting fraud. Court papers allege that Korkuc and other unidentified top Symbol executives “engaged in a scheme to defraud the investing public” by recording tens of millions of dollars in false sales between 1999 and 2001 to ensure that the company met its earnings targets. Korkuc, who left the struggling company in March, also faces an SEC civil lawsuit.
While Korkuc isn’t being charged with insider trading, the SEC maintains that he exercised Symbol stock options in 1999 and 2000, when the stock price was artificially inflated by accounting tricks. Another former Symbol executive, Robert Asti, is awaiting sentencing after pleading guilty in March to both securities fraud and conspiracy to commit securities fraud.
- Managers at E-Trade announced that board director Vaughn Clarke—who recently stepped down as chief financial officer at Freddie Mac—has resigned. Clarke left the mortgage-financing company as part of a management shake-up following an accounting scandal that broke last week. Management at Menlo Park, California-based E-Trade didn’t disclose the reason for Clarke’s departure in the company’s SEC filing. We could hazard a guess or two.
- A federal judge has ruled that Martha Stewart’s trial for securities fraud will start on January 12. Stewart’s lawyers pushed for more time to review the government’s evidence against her and Peter Bacanovic, her former stockbroker at Merrill Lynch. If convicted, Stewart could face up to 30 years in prison and $2 million in fines. Her next court hearing is slated for November 18.