AS2

Survey on AS5: Have Sarbox process gains peaked?

Tue, 11 Mar 2008 07:59:59 -0400

A new survey from Compliance Week has found that many companies have been paring back a number of key controls significantly. Almost 15 percent say they have cut key controls by 60 to 80 percent, which is what AS5 was supposed to do. While this suggests a more streamlined process--a good thing--not all think that this will yield a lot of procedural gains and savings. The number of controls that can be eliminated from here, it seems, will be harder to reduce. So it seems like the progress of AS5 may well be limited, though it's still an improvement over AS2.

For more:
- here's the survey results

Related Articles:
A litmus test for AS5's value. Article
Can AS5 really be enforced? Article
Will AS5 finally ease the tense standoff? Article
Finally, new Sarbox rules are approved. Article

COSO issues guidance document for comment

Tue, 25 Sep 2007 06:59:59 -0400

The one thing that vexed people in the AS2 era was a lack of implementation guidance. That contributed a lot to the overly conservative approach that frustrated so many companies. The PCAOB and the SEC have pledged to do better. And they have issued more guidance. And now, COSO has followed that same suit. I am not sure how many companies still rely on COSO, but it is certainly an opportunity to stay relevant. Some might see that as a lost cause. In any case, COSO has released a discussion document that contains preliminary guidance on internal controls monitoring. It is asking for public comment before Oct. 31. It developed the document with Grant Thornton. It could prove valuable. The final publication currently is due in the first quarter of 2008, still in time perhaps for many audits. It promises tools, case studies and examples narrowly focused on internal controls.

For more:
- here's the release

Related articles:
- Finally, new Sarbox rules approved
- COSO aims to provide Sarbox guidance soon

What exactly is material from a Sarbox perspective?

Mon, 25 Jun 2007 20:01:39 -0400

One of the big complaints about AS2 was about the way it defined materiality. It's "more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected" resulted in rigidly conservative approaches by audit firms. One that has been disavowed now. Many were expecting AS5 to weigh on this and provide just a bit more guidance. They got their wish to an extent. The "remote" language is now a "reasonable possibility." But the issue for some is how to define materiality in terms of a percent of pre-tax earnings. That has never been defined, and some find that vexing. So what to do. One might just adopt the long standing convention of assuming that 5 percent is the magic number. This was proposed by the Committee on Capital Markets Regulations. In the absence of specific guidance, it's as good as any other number.

- here's an article from CFO.com

Finally, new Sarbox rules are approved

Mon, 28 May 2007 20:01:39 -0400

Well, it has come to pass. The new guidance from the SEC and PCAOB will almost certainly be officially stamped in time for the guidance to apply to 2007 audits. So good luck. The new rules will mean different things to different companies. My guess is that the internal process may not change dramatically this year, though everyone should breath easier. The new guidance does not require an opinion on the effectiveness of managements' risks review process--that sort of sets the tone for compliance under AS5. Even though the document is a lot shorter than AS2, it contains an awful lot. There aren't any huge surprises. My short list of notable items: The guidance aims to ease the transition for small-companies, which have been exempt until now, including lots of notes on how rules apply. The text is a lot easier to understand. It does not, unfortunately, provide a very specific definition of materiality. Still, Sarbanes-Oxley is here to stay, and this clears the air some.

As for the larger effects, they are being debated. The early take is that the new rules are great for large companies--one analysts says corporate earnings will rise by 2 percent--while vendors, staffing firms and maybe the Big Four suffer. Others aren't so sure.

For more:
- here's an overview
- here's the quick take on the new standard
- here's the whole enchilada with some added sauce
- even more guidance coming from COSO via grant Thornton

Can AS5 really trim audit bills?

Mon, 07 May 2007 20:01:39 -0400

The conventional wisdom on the new 404 guidance that so many people are eagerly anticipating is that it will not lead to meaningful change at the large-company level. Many are planning on basically doing the same thing they have the past 3 years. But because many have already moved so far down the learning curve, there could still be some cost savings. Some have suggested reduced costs of about 10 percent, a figure that some at the PCAOB agree with. AS5 should allow people to breath easier in areas that do not pose major risks. So that's good news--for big companies. For small companies, given that another delay doesn't appear to be forthcoming, the big hit may have to be taken for the next fiscal year. The new standard is still in the works. But it looks like it will be only 60 pages long, about one-third of AS2's length.

For more:
- here's the article from cfo.com

Efficiency of audits could still be improved

Mon, 23 Apr 2007 20:01:39 -0400

So how efficient are auditors when they audit internal controls? Obviously, it's a huge issue. The entire debate over costs in a sense comes down to efficiency. A year ago, the PCAOB said it would it would examine the issue with regard to AS2. Well, the results are now in and it appears that implementations in the second go-round of Sarbanes-Oxley audits went a lot better than the first, even though there is a lot of room for improvement. For one thing, auditors could have more completely integrated their audits of financial statements and internal controls; at the least, they could have used the same engagement team. They could have used a more to-down approach. They could have limited their efforts to high-risk areas. And they might have increased their use of already done work by management or consultants. Now, AS5 is being designed to encourage all of the items mentioned in the report. In year three, we should expect better, less costly, less time-consuming audits.

For more:
- here's the report
- An idea whose time has come: Provide a reason when an auditor changes. Article

Strong advice on AS5 to PCAOB

Mon, 26 Feb 2007 19:01:39 -0500

AS5 is shaping up as quite controversial, as you now. A bevy of comments hit the PCAOB just as the 70-day comments period was closing. And then there's the PCAOB advisory panel, which also delivered an ear-full. It is clear that there are many who wonder if the net result will be less effective audits. The goal is solid: A more efficient approach to audits and controls. But will that amount to mere watering down? Well, it's really a matter of semantics. Companies clearly think accounting firms have gone overboard, and welcome anything that limits their attention. Other issues also percolated: The advisory board would rather use complexity, not asset levels, to determine the scope of Sarbox work. It's unclear on whether accounting firms should be able to use the work of others, something banned by AS2. And the board would like a list of the principles that the PCAOB would like all accountants to keep in mind. Basically, all these issues will need to be cleared up if managers and accountants are to get on the same page.

For more:
- read this article from cfo.com
- check out this round-up of organizations commenting on the new standard
- view the comments here (.pdf)

Related Article:
Will AS5 really make compliance easier? Report

PCAOB not going quietly

Mon, 19 Feb 2007 19:01:39 -0500

The Public Company Accounting Oversight Board has been much maligned recently. The constitutional attacks, the fiasco of AS2, the semi-confusion over AS5 are big problems. But the board is not going quietly. In fact, Charles Niemeier, a member of the board, has warned that rolling back Sarbox might damage the reputation and competitiveness of U.S. markets, which raises a damned-if-you-do or don't debate. Perhaps Sarbox is just right. Now that's a position that won't fly. Obviously, the answer is to tinker in a way that doesn't affect the competitiveness of the capital markets but keeps investor protections strong. That's hard to do, but one could make a case where that is exactly what is happening in the long arduous process.

For more:
- here's a CFO.com article

Will AS5 really make compliance easier?

Mon, 22 Jan 2007 19:01:39 -0500

We've discussed before that there are always unforeseen consequences when it comes to Sarbox. Well, no sooner has the PCAOB released AS5--the updated AS2--and already people are foreseeing some big downsides. You do have to wonder if things are really going to improve, procedurally and from a cost perspective. The critics are out in force and make some good points. Some think the new latitude is increasing the risk for auditing firms, which will force them right back into the overly conservative behavior the update was designed to prevent. Does the change from "more than a remote likelihood" to a "reasonable possibility" make a difference pragmatically speaking. This might result in even more strained relationships between management and auditors. You can see the argument: "You're focused on too many issues. Stick to the following," rebutted by, "It's our butt on the line. We'll get back to you." Another issues is technology-driven IT-related controls. As of now, auditors still examine the systems. Critics have argued they do not have the expertise. But the new standard doesn't seem to address this. We'll undoubtedly hear more about this.

For more:
- here's an article from cfo.com
- PCAOB gives top accounting firms poor grades. Article

ALSO NOTED: More on the fate of the U.S. as a financial center; Canadian companies have compliance issues as well;

Mon, 01 Jan 2007 19:01:38 -0500

> This column discusses the already old issue of where the U.S. stands as a financial center in the post-Sarbox age. The author argues that scraping reform efforts is a misguided way to preserve our standing. As background, recent data indicates that Hong Kong and London are tops when it comes to IPOs. The U.S. fell to third place.

> The new AS2 from PCOAB is being pitched as a "repeal" of the old rule. That may be a bit of PR positioning at work. But the new standard does comport well with the SEC's newly stated views on materiality and a risk-based approach. The proposed standard is in a comment period. Article

> The SEC's reversal on exec comp reporting rules has been called a gift to corporate America. No doubt, this is what companies wanted: To be able to report the value of compensation options in steps, as they vest, instead of all at once. Article | Criticism of new exec pay rules. Article

> Forbes has a column supporting a lightened up Sarbox, which lays out the broad case for reform. Not a lot of new stuff, but interesting. Article

> Not that this will make you feel any better: Canadian companies appear to have even more internal control problems. Article

> The backdated options scandal has engulfed Apple's Steve Jobs. Article

> Some ideas to better handle exec pay. Article

And Finally ... Are stock returns linked to lunar cycles? Article