Whistleblower Protections under SOX

Valerie J. Watnick wrote an interesting paper titled, “Whistleblower Protections under the Sarbanes-Oxley Act: A Primer and a Critique.”

Sarbanes-Oxley is good?

If you caught the April issue of the Harvard Business Review you might have stumbled across an aticle titled, “The Unexpected Benefits of Sarbanes-Oxley.“

Sometimes more is less!

Frank Buytendijk at Gartner reminds us that sometimes more corporate regulations lead to less (not more) corporate transparency:

Royal Dutch/Shell Oil yesterday announced its annual results. It also decided not to report predictions anymore on future oil production and on anticipated return on average capital employed. Although that’s valuable information, the company decided to stop the practice because while the predictions come true in the long term (or so they claim), on an annual basis, they were too “volatile.”

I think there have been many examples the last six months of CEOs, accompanied by their chief corporate counsel, disclosing less nonfinancial information instead of more. I’m currently in a fact-finding mode to see a pattern exists. According to this article in CFO magazine, a survey of 600 investor-relations executives revealed that nearly a third said their employers are considering ending the practice of offering profit projections to Wall Street analysts. Stay tuned

Sarbanes-Oxley = increased directors fees

Sarbanes-Oxley (SOX) has turned corporate governance on its head, changing the way companies select auditing firms, assess internal controls and conflicts of interest.

Audit Committee Requirements

Does your audit committee have a charter? If so does it address these responsibilities?

• How financial statements are prepared and presented?
• Which accounting firm will audit financials?
• What system of internal controls will be used?
• Who will monitor compliance with laws and regulations?
• Who will be responsible for SEC compliance?

[via Theodore F. di Stefano]

Sarbanes-Oxley Act of 2002

Wikipedia describes the Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or SarbOx; July 30, 2002) is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, and WorldCom (now MCI). These scandals resulted in a decline of public trust in accounting and reporting practices. Named after sponsors Senator Paul Sarbanes (DMd.) and Representative Michael G. Oxley (ROh.), the Act was approved by the House by a vote of 423-3 and by the Senate 99-0. The legislation is wide ranging and establishes new or enhanced standards for all U.S. public company Boards, Management, and public accounting firms. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Some believe the legislation was necessary and useful, others believe it does more economic damage than it prevents and yet others observe how essentially modest the Act is compared to the heavy rhetoric accompanying it.

[via Wikipedia]

Sarbanes-Oxley Act History

The history of the act is fairly interesting.

Cost of SOC implementation

There is considerable debate over the specific requirements of the Sarbanes-Oxley act, as written. Some people in the business community have acknowledged that, as John Thain, CEO of the New York Stock Exchange states, “There is no question that, broadly speaking, Sarbanes-Oxley was necessary” [1]. However, the cost of implementing the new requirements has led some to widespread questioning of how effective or necessary the specific provisions of the law truly are.

For companies, a key concern is cost of updating information systems to comply with the control and reporting requirements. Systems which provide document management, access to financial data, or long-term storage of information must now provide auditing capabilities. In most cases this requires significant changes, or even complete replacement, of existing systems which were designed without the needed level of auditing details.

Costs associated with SOX 404 compliance have proven to be significant. According to the Financial Executives International (FEI), in a survey of 217 companies with average revenue above $5 billion, the cost of compliance was an average of $4.36 million. The high cost of compliance throughout the first year can be attributed to the sharp increase in hours charged per audit engagement. This has been a boon for the auditing profession, more than offsetting the reduced revenues arising from the Act’s restriction against those firms conducting various non-audit services for audit clients.

As more companies and auditors gain experience with SOX 404, audit costs have been falling. Audit firm revenues are still higher than they were prior to the Act, although audit fees were rising prior to the Act, partly as a result of the accounting scandals that prompted the Act.

[via Wikipedia]

10,000 seats per year

You might be suprised to learn that according to Marston Mills there are approximately 60,000 publicly traded companies and an additional 20,000 private companies with boards of directors in the United States. This results in a total of 80,000 boards nationwide. Experts estimate that the average board tenure lasts approximately eight years, meaning that in any given year, up to 10,000 board seats must be filled.

Major Duties of Board of Directors

Brenda Hanlon, in In Boards We Trust, suggests the following duties (as slightly modified by Carter McNamara to be “nonprofit/for-profit neutral”).

1. Provide continuity for the organization by setting up a corporation or legal existence, and to represent the organization’s point of view through interpretation of its products and services, and advocacy for them

2. Select and appoint a chief executive to whom responsibility for the administration of the organization is delegated, including:

• to review and evaluate his/her performance regularly on the basis of a specific job description, including executive relations with the board, leadership in the organization, in program planning and implementation, and in management of the organization and its personnel
• to offer administrative guidance and determine whether to retain or dismiss the executive

3. Govern the organization by broad policies and objectives, formulated and agreed upon by the chief executive and employees, including to assign priorities and ensure the organization’s capacity to carry out programs by continually reviewing its work

4. Acquire sufficient resources for the organization’s operations and to finance the products and services adequately

5. Account to the public for the products and services of the organization and expenditures of its funds, including:

• to provide for fiscal accountability, approve the budget, and formulate policies related to contracts from public or private resources
• to accept responsibility for all conditions and policies attached to new, innovative, or experimental programs.