Financial Executive: July/August 2012

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Cover Story

Sarbanes-Oxley — A Decade Later

At the time of its enactment — in the wake of corporate accounting scandals — the Sarbanes-Oxley Act of 2002 was the most sweeping financial regulation since the Securities Act of 1934. In hindsight, has the law achieved what was intended?

By Paul Sweeney

Remember the stock options backdating scandal? Reaching its apex in 2006, the scandal ensnared senior executives at more than 150 companies who engaged in the manipulation of stock-option grants. Taking advantage of lax reporting rules, grantees cherry-picked the lowest stock price during the previous 90 days before cashing out at higher stock prices and maximizing their take.

Using such methods, hundreds of top corporate officials at leading American companies were able to increase their income, in some cases by many millions of dollars. Several went to jail, including chief executives at Brocade Communications Systems Inc. and Comverse Technology Inc., and dozens more resigned or were sent packing.

But one little-noted feature of the scandal, notes Peter Henning, a Wayne State University law professor and an expert on white-collar crime, was what actually put an end to the practice.

The death blow to this particular activity, Henning reports, was dealt by reporting requirements contained in the Sarbanes-Oxley Act of 2002. Under Section 403 of the law, senior executives must notify the U.S. Securities and Exchange Commission within three days of receiving, buying or selling stock, including stock options.

“If you look at the cases of stock-option backdating,” Henning says, “they all occurred before 2002. It’s likely the practice would have continued had not Sarbanes-Oxley stopped it dead in the water.”

This important yet largely unheralded achievement of Sarbanes-Oxley is only one of many striking effects of the law described in interviews with a diverse array of sources, including financial executives, representatives of the Big Four accounting firms, former government regulators, forensic accountants, attorneys, academic experts and investor advocates, as well as one noted whistleblower. All were asked to comment on the major impact of the legislation as it turns 10 years old.

Despite criticism from free-market advocates and politicians of the conservative stripe that Sarbanes-Oxley has been costly to business and a poster child for regulatory overreach, a much-stated opinion of business and professional sources — including defense lawyers tasked with pleading the cases of alleged violators of Sarbanes-Oxley — is that the law has had a salutary effect on business, commerce, finance, the accounting profession and the United States economy.

“Regardless of which partner you talk to at our firm and probably at all the largest ones as well, most would say that Sarbanes-Oxley has been incredibly beneficial,” says Laura Cox-Kaplan, principal in charge of government and regulatory affairs at PwC and a former deputy assistant secretary for banking and finance at the U.S. Treasury Department.

Paul Regan, president of accountancy Hemming Morse in San Francisco and a pioneer forensic accountant, notes that “there’s still plenty of fraud. But if we didn’t have Sarbanes-Oxley, the misstatements would be significantly worse.”

Barbara Roper, director of investor protection at the Consumer Federation of America, expresses reservations about the law’s efficacy but only because of continued congressional tampering and persistent legal assaults from disgruntled parties.

“Sarbanes-Oxley has clearly enhanced the integrity of the financial markets and the quality of financial reporting,” she says. “My criticism is that the reforms are being eroded. It’s chugging along but still facing challenges.”

Signed into law a decade ago on July 30, 2002 by President George W. Bush, the Sarbanes-Oxley Act was enacted by spectacularly lopsided votes in both chambers of Congress: 423-3 in the House and 99-0 in the 100-member Senate. The 78-page document was designed to shore up the integrity of financial statements after accounting fraud and deceit at several brand-name companies had become public.

“Starting in the 1990s, there was a spate of corporate fraud and fraudulent accounting statements at Sunbeam, Waste Management, Rite-Aid and some others even before you got to the gargantuan cases in the early 2000s involving Enron, WorldCom, Adelphia, Qwest and Global Crossing,” recalls Lynn Turner, former chief accountant at the SEC.

To accomplish massive fraud, corporate schemers invented fictitious sales and bogus revenue streams, concealed losses, inflated inventories and manufactured phony profits.

Sarbanes-Oxley makes it far more difficult for such deceit to occur, especially at large public companies, says April Klein, an accounting professor at the Stern School of Business at New York University. “We don’t want another Enron or WorldCom and the law has been very successful at preventing that,” she says.

The act created the Public Company Accounting Oversight Board to police the accounting profession and set auditing standards. It shored up the role of the audit committee, making it independent and responsible for hiring, firing and overseeing external auditors, removing that authority from management.

Under Section 404, companies were required to establish internal controls and procedures for financial reporting. Another section mandated that both the chief executive and chief financial officer personally attest that they have reviewed the auditors’ report and that it “does not contain any material untrue statements or material omission” or anything that could be “considered misleading.”

Sarbanes-Oxley also instituted “clawback” provisions requiring CEOs and CFOs to return ill-gotten gains to their employer. In one notable case, Ian McCarthy, former CEO at Atlanta-based Beazer Homes USA Inc., and former CFO James O’Leary both agreed to return all of their cash bonuses, incentive and equity-based compensation for 2006. McCarthy had to relinquish more than $5.7 million in cash plus $772,232 in stock sale profits along with some 120,000 in restricted stock shares; O’Leary returned $1.4 million.

One wrinkle in the case: neither McCarthy nor O’Leary was directly to blame for the fraudulent financial reporting. The chief accounting officer, Michael Rand, was. He engineered the fraud and was eventually convicted of seven criminal counts.

Deborah Meshulam, a law partner at DLA Piper in Washington, D.C., and former SEC enforcement attorney, says, “Generally I think Sarbanes-Oxley has met its goals. But to me the concept that the SEC can claw back money from CEOs and CFOs who may not have been at fault for misstatements is troubling.”

The message has been sent. No longer can corporate chieftains plead ignorance, or say “I’m not an accountant,” as Enron’s former (and now-imprisoned) CEO Jeffrey Skilling claimed in congressional testimony. Says Les Brorsen, vice-chair for Public Policy at Ernst & Young: “The law was spawned by massive inaccuracies and massive restatements. So all the changes in the law were designed to improve — and have improved — the accuracy of financial reporting.”


Strengthening Financial Reporting

Toby Bishop, director of the Chicago-based forensic center at Deloitte, says: “From the perspective of someone who enjoys a nice big juicy fraud, life has become a little boring. What I am seeing, though, is that small- and medium-sized companies that have not been through the Sarbanes-Oxley process have weaknesses in their internal controls that can be exploited.”

Section 404 of Sarbanes-Oxley, which requires management to assess and disclose the adequacy of internal controls over financial reporting, has been the whipping boy of the legislation. So much so that it has twice been modified by regulators, most recently in 2007, and targeted for changes by Congress.

An in-depth examination commissioned by the SEC sought to determine whether Section 404 “imposed large out-of-pocket and opportunity costs without commensurate benefits” and “adds layers of financial reporting procedures to no avail.” After questioning 3,138 “corporate insiders” at 2,907 companies, the four-person research team concluded that this “common view” was “overstated.”

Gary Kabureck, vice president and chief accounting officer at Xerox Corp., an FEI member and a member of FEI’s Committee on Corporate Reporting, says of the changes wrought by Section 404: “It’s been good for us. We’ve got a robust set of internal control procedures and my closes go smoother, audits go easier and there are very few surprises that weren’t already observed.”

At Corning Inc., the costs of complying with Section 404 shot up by as much as 60 percent in the first year and persisted for another two years before returning to prior levels, reports Tony Tripeny, corporate controller and principal accounting officer.

“It took some additional spending but we took advantage of the law to look at our internal controls process and make it stronger,” he says. “We made the decision to get something positive out of it.” Tripeny, an FEI member, serves on FEI’s Committee on Corporate Reporting.

Meanwhile, many other public companies were forced to reckon with — and disclose — inadequacies, notes Turner.

A March 2006 report by corporate-governance research firm Glass Lewis disclosed that the number of restatements of financial reports by publicly traded companies ballooned to 1,295 in 2005, or roughly one in 12 U.S. companies. That record number was more than triple the total in 2002, the year Sarbanes-Oxley was enacted.


Sarbanes-Oxley Limitations

Sarbanes-Oxley is sometimes faulted for not preventing the financial crisis and the great recession of 2008-09, from which the U.S. economy has yet to recover. But defenders argue that it wasn’t designed to do more than insure that accounting rules were followed.

“If you’ve got employees who are stealing stuff out the back door of the warehouse, Sarbanes-Oxley would tell you whether you have inventory controls in place, not whether the door is locked,” Kabureck says.

Turner faults lax law enforcement as “the number one reason we had a financial crisis. We've got lots of laws saying, ‘You can’t rob a bank,’ ” he says. “But if people realize the cops won't do anything, they’ll do it anyway.” At mortgage lenders and financial companies where shady lending practices proliferated, Turner notes, “we really didn't see much in the way of prosecution.”

That also rankles Sherron Watkins, the whistleblower at Enron who was named one of three “Persons of the Year” by Time magazine in 2002. She questions, for example, why charges weren’t brought under Sarbanes-Oxley against top executives at the banks, mortgage lenders and Wall Street firms playing fast and loose with the law.

“Dick Fuld of Lehman Brothers Holdings Inc. was signing off on the financial statements,” she notes. “I fear that the Department of Justice was politicized.”

One consolation, says Turner, is that Sarbanes-Oxley no doubt mitigated the force of the financial crisis, which could have been worse. “We didn’t see the huge rash of fraudulent reporting like we saw in the 1996-2002 time period,” he says. “So that would tell you, ‘Yes, the legislation did accomplish its goal.’ ”

Ernst & Young’s Brorsen sees creation of the PCAOB to police the auditing profession — coupled with corporate governance rules’ putting a public company’s board-level audit committee, rather than company management, in charge of the auditing process — as “the top two fundamental changes” brought about by the act. “It’s fair to say that the largest single impact of Sarbanes-Oxley was to end 100 years of self-regulation,” he says.

Related to that, Brorsen adds, “Improved corporate governance is one of the hallmarks of the legislation.”

For several years, PCAOB operated under a cloud as it fended off a lawsuit challenging its existence. Filed in 2006 by the Free Enterprise Fund and a Henderson, Nev., accountancy, the plaintiffs challenged the panel’s right to exist under the U.S. Constitution’s separation-of-powers doctrine. Finally, in 2010 the board largely prevailed before the Supreme Court.

PCAOB has taken 47 enforcement actions arising from faulty audits and conflicts of interest, including several against Big Four firms, according to a report by a PCAOB advisory body. But it does not “name and shame” violators. PCAOB’s chairman, James R. Doty, told Congress in 2011 testimony that “inspectors have found deficiencies (in audits of public companies) to be on the rise and persist.”

And PCAOB member Jeanette M. Franzel recently declared in a speech, “I am troubled by the serious audit deficiencies that are found too frequently during the PCAOB inspections.” Franzel also said that “clearly improvements are needed in the audit process and audit model.”

But Congress has been moving in the opposite direction. Two recent laws — the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and this year’s Jumpstart Our Business Startups Act (the JOBS Act) — have largely served to weaken Sarbanes-Oxley.

Dodd-Frank exempted public companies with a “public float” below $75 million, thereby removing 42 percent of public companies, according to figures cited by the Council of Institutional Investors and Center for Audit Quality in a joint letter last November. The letter implored both the chairman and ranking member of the House Financial Services Committee to not further reduce safeguards, to no avail.

Similarly, a broad range of investor-protection groups and regulators have expressed alarm that the JOBS Act, signed into law by President Barack Obama in early April, “guts” Sarbanes-Oxley. Among other things, it exempts newly public “emerging growth companies” from meeting Section 404 obligations for five years following an initial public offering.

On balance, financial executives say that while law didn’t do everything it set out to do, the industry benefit overall has been substantial. “Sarbanes-Oxley didn’t achieve 100 percent perfection, which is impossible,” Kabureck says. “But it has made a big and positive difference.”

Paul Sweeney ( is a freelance writer in Austin, Texas.


Reaction to Sarbanes-Oxley ...Then and Now

BeresfordDennis_HiRes.jpgDenny Beresford, former Financial Accounting Standards Board chairman, who was named to the board of directors of WorldCom Inc. following its first major restatement (and who was an inductee in the first FEI Hall of Fame in 2006), comments.


What was your first reaction to the passage of Sarbanes-Oxley?

Having been named to the WorldCom board of directors immediately after announcement of its first major restatement, it was obvious that Congress would have to act quickly to restore confidence in financial reporting and auditing of public companies. I had earlier been asked to testify at one of Sen. Sarbanes’s hearings leading to the legislation (in response to the Enron matter) and my major concern at that time was whether a new PCAOB would be qualified to set auditing standards or whether that should be left to the AICPA Auditing Standards Board with PCAOB oversight.

I favored the latter but with hindsight it’s obvious that there needed to be more independence in the process and the right decision was made.

So, my first reaction was that the law was pretty much what had been expected when earlier discussions had taken place. Enron set the stage for the legislation but WorldCom was the “straw that broke the camel’s back” and caused Congress to act within only a month or so.


What was the general response at the company boards you served on?

I was on three public company boards at the time, one of which was WorldCom. While all three complained about the more rigorous and detailed auditing by our CPA firm at the time, I kept reminding my associates at WorldCom that we shouldn’t complain as we were the ones that caused the new law!

For the other boards, the feeling was that the accounting firms overreacted for a couple of years to the point that they were almost unwilling to give their advice on an accounting issue. That led to an unnecessarily adversarial atmosphere, but things settled down after a time and a more constructive working relationship now generally exists along with the necessary independence of the auditors.


In retrospect, has it accomplished what it set out to do?

From a company perspective, I think the two most positive things that came from Sarbanes-Oxley are (1) the required attestation by the CEO and the CFO; and (2) better internal control procedures and documentation.

While the CFO’s responsibilities for financial reporting always seemed clear, even that was more implicit than explicit in some companies. And adding the CEO’s sign-off means that he or she will insist on a rigorous process to ensure the highest possible quality of reporting.

With respect to internal controls, even those companies that considered themselves to be very well controlled prior to Sarbanes-Oxley found that documentation often was weak or that some parts of the system needed improvement. By now, most of that effort has become relatively routine but having strong controls is still essential if a company wants to ensure that it achieves its objectives.


We Were There - FEI’s Role in Shaping The Sarbanes-Oxley Act of 2002

By Philip B. Livingston

The Enron Corp. scandal put Financial Executives International front and center in 2001 and 2002. The criminal acts of Andy Fastow, Enron’s chief financial officer, blatant accounting manipulation and fraudulent financial reporting — as well as ineffective audit committee oversight and auditor Arthur Andersen’s failed audit — were all factors that called for a regulatory overhaul in areas central to FEI’s mission and purpose.

As president and CEO of FEI at the time, I believed the situation called for proactive leadership along with strong public advocacy on behalf of the membership.

In response, we put together a task force of leading chief financial officers and controllers from FEI’s membership. That group met regularly to develop draft recommendations. FEI’s prestigious Committee on Corporate Reporting added and amended the recommendations as they came into final form.

In the early days of the scandal, we emphasized the lack of ethical conduct and the inappropriate “tone at the top” as key causes of the Enron bankruptcy. The front line failure of the management team was so shocking and blatant that it drew highlighted attention to the complete failure of the external audits and board oversight.

We ultimately outlined 12 recommendations that included creating a new oversight body for auditor regulation (the eventual Public Company Accounting Oversight Board); restricting the hiring of senior personnel from the external auditor (Enron and Andersen had a revolving door of personnel and auditors from Andersen actively sought lucrative positions at Enron); reforming the Financial Accounting Standards Board; stronger qualification standards for public company CFOs and principal accounting officers; and recommendations to modernize financial reporting.

The full list of the 12 recommendations are below.

FEI’s Legislative Priorities

FEI lobbied for three major legislative priorities as the bill gained momentum. The first was to eliminate the provision that called for external audit of the internal control system. It was a provision that the audit firms had pursued since the 1980s, and one that corporate America had fought off successfully in the past.

Second, we called for the implementation of higher standards for financial experts on audit committees (which would eventually become Section 407 of the law). Finally, we felt that all companies should require senior management to sign a code of ethical conduct (the eventual Section 406), acknowledging their financial reporting obligations and agency duty while overseeing the corporation’s assets.

The internal control audit — the provision that became the infamous Section 404 — was especially troubling to our membership, and our letter to Congress and the regulators called for its removal. I recall the meeting of FEI’s Committee on Corporate Reporting in which one of our members was the first to point out that the onerous provision had been inserted into the earliest drafts of the bill. We pointed to the impracticality of the concept, as well as the cost it would create.

Looking back it provides little solace to know that we were among the few to object, given our ultimate inability to remove the provision from the final legislation.

And, though FEI opposed Section 404 during the drafting of the bill, since adoption the very large cap companies have found it useful in improving internal controls, while the mid-cap and small companies have struggled significantly from both a cost and usefulness perspective. Ongoing postponements and changes as how to apply the provision to smaller companies highlight these problems.

But our recommendation for higher financial expertise on audit committees did get into the bill as Section 407, much as we proposed it. In the final days of drafting and negotiation, the stock exchanges raised objections to this provision. In the end, the bill called for U.S. Securities and Exchange Commission registrants to disclose whether or not they have a qualified financial expert on their audit committee.

This allowed companies some leeway in compliance, but forced them to tell shareholders explicitly if they did not comply with the standard for financial experts. We drew this adjustment from the United Kingdom regulatory model that often uses a “comply or disclose” model.

It is my view that the financial expert provision has had a significant impact on the composition of boards, how boards conduct themselves and on the quality of financial reporting. Audit committee financial expertise was too often missing in auditor oversight, missing in setting the tone at the top and oversight of the financial reporting process.

Today, board members look to their financial expert when financial reporting and internal control issues arise. The external auditor is also empowered having a knowledgeable director to deal with.

Repercussions of Sarbanes-Oxley

The passage of the Sarbanes-Oxley Act in some form was unavoidable given the sequence of events that included the technology bubble collapse in 2000, the scandal of Enron in 2001 and then WorldCom’s failure in 2002.

In 2002 President George W. Bush publicly called for a bill to be delivered to his desk from a divided Congress. As public radio broadcast his speech to a national audience, I was asked to comment on his talk as it was delivered live. My comments noted the scolding tone of the president’s talk as if one CEO were talking directly to a large group of his peers.

For me (on behalf of FEI), the post-Enron period included many television and radio appearances, letters to the editor and op-ed pieces as well as countless speaking engagements before a variety of groups outlining FEI’s 12-point recommendations for reform.

The entire experience is without a doubt the highlight of my professional career. FEI members looked to us for leadership, and I believe we were proactive in support of change, but also clear that the front-line failures (the management teams) were principally due to unethical and illegal personal behavior.

Unfortunately, the intense media focus and the resulting legislative scramble to act on the public’s behalf led to a poor implementation of the provisions of Sarbanes-Oxley. Section 404 was never field tested or properly scoped. Initially, the auditing firms extended the reach of Sarbanes-Oxley to every miniscule part of the internal control system, rather than only those that impacted financial reporting.

Huge costs were incurred and many business priorities got pushed back as a result of 404 implementations. That provision is unfortunately what most executives think about when they think about the Sarbanes-Oxley Act.

But the most important and far-reaching provision of the bill, and the most important intent of the bill, was the formation of a new independent regulatory agency to oversee the public company auditors. The creation of the PCAOB is easily two-thirds of the bill. Prior to Sarbanes-Oxley, the audit industry had a peer-review quality control system that lacked the frequency, intensity and independence needed.

My view is that the PCAOB has been successful in improving audit quality. Auditors now know that their work has a significant chance of direct review by an independent third party, and that there are repercussions for poor financial statement audits. As a result of the recent Bernard Madoff fraud, the PCAOB’s powers were broadened to include all audit firms that opine on the financial statements of broker-dealers.


FEI’s Participation and a Past-President’s Personal Insights

Overall FEI played a significant role in the adoption of Sarbanes-Oxley. Sen. Paul Sarbanes (D-Md.) cited our group’s participation on CNBC the night his committee reported out the bill. Grace Hinchman — then FEI’s vice president of Government Relations and the key player in our lobbying efforts — and I attended the White House bill signing ceremony. The Washington Post ran a photo of Sen. Sarbanes and me speaking at the White House just after President Bush spoke and signed the bill. (Photo on page 42.)

Other memorable events from that time included an important meeting with SEC Chairman Harvey Pitt and his staff at the peak of the crisis. Phil Ameen, then-corporate comptroller of General Electric Co., David Shedlarz, then-chief financial officer of Pfizer Inc., and Pedro Reinhard, who was CFO of Dow Chemical Co., and I offered some practical recommendations and encouraged the chairman to be vocal and proactive to restore public confidence in the markets.

I also testified on the main panel when Rep. Michael Oxley’s (R-Ohio) House Financial Services Committee considered its draft bill. The reruns on CSPAN brought many phone calls from old friends. Appearing on “Moneyline” with Lou Dobbs was also an incredible experience.

My best memories though are still from the many FEI chapter meetings and financial reporting conferences in which I outlined FEI’s 12 recommendations. The questions and conversations that ensued were important to the public dialogue.

The corporate governance, auditing and financial reporting failures that happened during that time and that continue to occur periodically point to the critical and unique role that financial executives play in our economy.

While regulation and oversight can mitigate risk to some extent, it is still professionalism and ethical conduct on the part of front line corporate management that forms the trust that makes free markets work. CFOs and controllers have a tough job. They have to be savvy business partners, but they also have to be the “no” voice when lines get crossed. Enron and WorldCom put the spotlight on our profession, and Sarbanes-Oxley was tough medicine. But now — 10 years later — I believe we emerged stronger for it.

Philip B. Livingston is CEO of LexisNexis Martindale-Hubbell. He served as FEI president and CEO from 1999 to 2003.


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.