Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Tuesday, November 08, 2005

Delayed Sarbanes implementation AND implementation costs on the way down.

For the 250 European companies with a listing on a US exchange, there are changes in Sarbanes Oxley, and uncertainty as to whether compliance costs are falling as expected.
First, the SEC has announced that they are extending the compliance dates for foreign issuers in meeting the provisions of Section 404 on internal compliance. The SEC has delayed their mandatory introduction by a year to July 2007. This will be good news for foreign issuers, and give them time to ensure their systems are compliant.
This is significant, as it is the second time the SEC has delayed implementation – originally slated for July 15th 2005. As a practical matter, those non-U.S. companies which have a calendar year end, will first need to comply with the SOX Section 404 internal control requirements in their 2007 annual reports filed during 2008.
The delay is good news, given the uncertainty over whether costs are falling. First, according to a survey by KornFerry International, the average cost for large US companies to comply with provisions that include auditing accounting internal controls and certifying their systems’ ability to detect fraud is $5.1 million. Ongoing compliance is costing big businesses an average of $3.7 million annually, the survey found.
However a separate survey - conducted by the Nasdaq Stock Market and the American Electronics Association - has found that public companies anticipate slight cost reductions during the second year of implementing the governance and financial reporting practices required by the Sarbanes-Oxley Act. Companies expect the costs of implementing SOX 404 to decline 7.4% this year. Smaller companies, as defined as having market caps less than $120 million, will see virtually no change in their costs.
Executives from 298 companies of all sizes and from various industries responded to the survey, which was conducted in early August 2005. It focused on the second year costs of implementing SOX 404 and streamlining its implementation. The survey also found that auditors have improved their performance since SOX was first implemented. Companies believe their auditors are well-trained and qualified to complete the implementation of 404.
However, the SEC itself is disappointed that costs have not fallen further. “The costs of businesses complying with the Sarbanes-Oxley Act have not declined in the past year as much as hoped”, said Cynthia A. Glassman, a Securities and Exchange commissioner, said this week adding ‘‘We should not do controls for controls’ sake.”

Meanwhile, the PCAOB plans some further changes, especially in the area of communications between auditors and audit committees, where changes are needed to bring the existing ground rules into compliance with new requirements for audit committee communications imposed by the Sarbanes-Oxley Act.

Still another PCAOB agenda item resulting from Sarbanes-Oxley compliance involves strengthening the existing requirements governing audit quality control. In addition to focusing on the supervision of audit work, professional development and advancement of audit personnel, and the monitoring of professional ethics, this project may also result in the development of separate standards on independence quality controls.

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