SARBENES OXLEY- RESULTS OR BEAUROCRACY??

[carol ann parisi]

FEI’s 12 Recommendations for Improving Financial Management, Financial Reporting and Corporate Governance

In the wake of the Enron accounting scandal, FEI released a set of 12 recommendations developed by a member task force to facilitate industry and accounting reform. The report, issued in March 2002, was shared with leaders on Capitol Hill, at the U.S. Securities and Exchange Commission and the stock exchanges, and was instrumental in helping shape the Sarbanes-Oxley Act signed into law four months later. Here are proposals for reform as offered by FEI:

1. Have financial executives adhere to a specialized code of ethical conduct. The revised FEI Code of Ethical Conduct now calls on financial professionals to acknowledge their affirmative duty to proactively promote ethical conduct in their organizations.

2. Provide means for employees to surface concerns and actively promote ethical behavior. Mechanisms should include a written code of conduct, employee orientation and training, a hotline or helpline that employees can use to surface compliance concerns without fear of reprisal and procedures for voluntary disclosure of violations.

3. Designate the principal financial officer and principal accounting officer as defined in the Securities Act of 1933. The principal financial officer should report to the CEO and the principal accounting officer to the principal financial officer. One or both should meet periodically (quarterly) with the audit committee to review significant financial statement issues, including key judgments, estimates and disclosure matters.

4. Create a new oversight body for the accounting profession. The SEC should sponsor an independent body with members experienced in accounting and finance but independent of public accounting firms or other accounting industry organizations.

5. Place restrictions on certain non-audit services supplied by the independent auditor. Any instance where services could present conflict-of-interest questions should be avoided. In addition to internal audit and consulting on computer systems used for financial accounting and reporting, these would include services where the audit firm could be put in a position of relying on the work product.

6. Restrict hiring of senior personnel from the external auditor. Corporations should adopt policies restricting the hiring of engagement audit and tax partners or senior audit or tax managers.

7. Reform the Financial Accounting Standards Board (FASB). Form a blue ribbon committee to recommend within three months FASB reforms in the areas of organization, financial statement content and timeliness of standard setting.

8. Modernize financial reporting. Steps here include developing best practices for Management Discussion and Analysis (MD&A), implementing plain English financial reporting and providing website access to key performance measures.

9. Require the stock exchanges to include in their listing agreement a mandate that at least one member of a public company's audit committee be a "financial expert," as recommended by the 1999 Blue Ribbon Panel. In setting higher standards for "financial expertise," the NYSE and NASDAQ should require explicit knowledge of GAAP obtained through education or experience and require experience in the preparation or audit of financial statements for a company of similar size, scope and complexity.

10. Require continuing professional education for audit committee members. Companies should disclose in the audit committee report statement whether members have undertaken such training.

11. Periodic consideration of rotation of the audit committee chair. Corporations should evaluate the need to rotate the individual holding the audit committee chair approximately every five years.

12. Disclose corporate governance practices. Public companies should provide a report of key corporate governance practices. Current best practice is to have a governance and nominating committee made up of independent directors.

Sarbanes-Oxley By the Numbers

In its Audit Fee survey this year, Financial Executives Research Foundation asked FEI members about their company’s compliance experiences with Section 404 of the Sarbanes-Oxley Act of 2002.

Question: Has your company experienced an increase or decrease in its internal costs of compliance with Sarbanes-Oxley Section 404 within the past three years?

29% Increase

48% Decrease

Question: If an increase, check all the reasons why (some respondents gave more than one answer):

47% The company has completed a large acquisition with additional systems.

43% The company has implemented a new IT system.

7% The company experienced a material weakness or significant deficiency, requiring additional Section 404 testing.

40% Other

                • Total hours are higher because of PCAOB interpretations of rules.

                • In reaction to prodding by the PCAOB, our auditors have requested we expand the scope of our work.

                • Increased audit fees, personnel costs and new systems and processes included in scope as the company continues to grow.

Question: If a decrease, check all the reasons why (some respondents gave more than one answer):

47% The company has implemented more automated controls.

41% The company has restructured its business and financial systems.

12% The company has sold a significant segment of the business.

41% Other

                • Previous material weakness has been remediated; overall ICFR environment improved; shift of resources back to internal.

                • Drive efficiencies through testing and better compliance.

                • The company outsourced its internal audit function two years ago at a cost savings.

Question: How would you best describe your company’s compliance with Section 404?

51%  Better internal control, worth the added expense.

37%  Better internal control, but not worth the added expense.

5% No increase in internal control.

7% Cost of compliance far exceeds any additional internal control.