AS5

Materiality concept still evolving

Jim Kim — Thu, 17 Jul 2008 08:41:08 -0400

Recall that AS5 changed the concept of the "likelihood" of material misstatement, adopting the phrase "more than remote" likelihood from "reasonable possibility." That was part of a larger effort to make Sarbanes-Oxley more principles-oriented. In that vein, the larger accounting concept of material weakness is also morphing. An SEC advisory group is looking into the issue. According to CFO.com, the group will stop short of changing the existing guidance, but will issue complementary guidance that will push auditors and issuers to embrace qualitative factors, not just quantitative factors, from the perspective of a "reasonable investor." The hope is to inject judgment into the picture, not more rules. This is a tricky area. My sense is that this will not radically alter the status quo. True, restatements are rising. But most of this is at the smaller company level, where the Sarbanes-Oxley process has yet to take full effect. Restatements by larger filers have fallen off impressively.

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

So is AS5 really working?

Jim Kim — Thu, 03 Jul 2008 09:30:26 -0400

There was some skepticism when AS5 was released by the Public Company Accounting Oversight Board (PCAOB). There were lot of benefits on paper, and the changes seemed significant in areas related to materiality, walkthroughs and the like. But you can never tell how specific audits will go. Protiviti has just released a survey that has found "approximately four in 10 internal audit departments have been able to decrease the amount of time devoted to Sarbanes-Oxley compliance activities since the new guidance and standard were announced." This has allowed companies to use the compliance process to more strategic ends. Obviously, there's a marketing component here, but it does seem that AS5 is working pretty much as advertised. Still, that doesn't mean the process will be all smooth sailing. I maintain that IFRS represents some Sarbox challenges that may be more than trivial. And smaller companies, despite the most recent 404(b) reprieve, will face some big challenges.

For more:
- here's a copy of the survey

How to work with your auditor

Tue, 20 May 2008 06:59:59 -0400

Here's a minor surprise: The auditor-auditee relationship seems to be improving, after some really tough years. A survey by CFO found that more than 60 respondents said the relationship is better than it was three years ago. And still, you get some grumbling. To hear the auditors tell it, clients are prone to being unprepared, dismissive, and just plain slow. To her the clients tell it, auditors are even slower and overly focused on the details. The cozy pre-Sarbanes-Oxley days are over, CFO notes, but there's reason to think a new era of cooperation is possible. AS5 certainly makes a difference; people are breathing a bit easier. It comes down to common sense and simple respect for others, which is easier said than done.

For more:
- here's the CFO article

Auditors can't lose if they jack fees

Tue, 06 May 2008 06:59:59 -0400

A new study from Financial Executives International has found a steep drop in the costs of Sarbanes-Oxley Section 404 compliance. The average cost was $1.7 million during fiscal 2007. It's hard to compare precisely, but the reported figure in 2006 was nearly $3 million. It's fair to say that companies are getting sharper about compliance. Of course, AS5 helped tremendously. Companies are relying on fewer controls, and generally taking a risk-based approach. Respondents (185 companies) reported needing an average of 11,100 person-hours internally to comply, an 8.6 percent drop. External hours needed dropped nearly 14 percent. Offsetting the savings? A 5 percent hike in hourly auditor fees. The bottom line is that total audit fees rose nearly 2 percent.

For more:
- here's the release

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

Sarbox fails to ignite as campaign issue

Tue, 04 Mar 2008 06:59:59 -0500

The presidential campaign is already heated, but not because of Sarbanes-Oxley; that has failed miserably to even spark interest as a campaign issue. In fact, the term has rarely, if ever, has come up. The candidates say they are aware of the issue, notes Politico. Clinton supports the law. McCain is taking a wait-and-see approach. Obama thinks changes could be effected via the SEC. Somehow, I think this is the most we're going to get. I just can't see anyone debating the merits of AS5 in front of national audience.

For more:
- here's the Politico article

Related Articles:
Will hedge funds enter the political debate? Article
Wall Street gearing up already for elections. Article

Bank showdown with auditors looming

Tue, 13 Nov 2007 06:59:59 -0500

The worst job in the industry right now: Auditing the books of top banks, the likes of Citigroup and JP Morgan Chase. The stakes are really high. The New York Post notes that little-known law, passed in the spirit of Sarbanes Oxley, that now prohibits banks from indemnifying auditors against mistakes. Most other companies can do this, essentially holding them blameless of mistakes that leads to suits. So if the accountants botch, there could be some real costs. Unfortunately, there are lots of hard-to-value assets and related balance sheets issues that will not easily be grappled with. Auditors will be in full cover-your-butt mode--AS5 be damned--and might press for additional write downs and other measures. Signing off on controls will likely not be easy.

For more:
- here's the New York Post article

Related articles:
- Sarbox and Merrill Lynch's audit committee
- Bar rises for internal auditors

The litmus test for AS5's value

Tue, 30 Oct 2007 07:59:59 -0400

Most of the talk about AS5 has noted the many hoped-for benefits, a streamlined, less confused approach. But there is an obvious litmus test: audit fees. One would expect a fairly dramatic decline. In a speech in Japan, SEC commissioner Paul Atkins put it bluntly: "If auditing fees do not come down as a result of these changes, then something is terribly wrong with the interpretation of Audit Standard 5 and perhaps with the competitive landscape in the auditing profession itself." So you have to ask, is there a way that costs will not come down? At individual companies, there could be a spike in complexity due to growth or diversification or something else. And you would have to think that audit firms are not keen to be giving up revenue. It may be that they find ways to mute any cost cuts. Still, we should see lower audit fees generally. Stay tuned.

For more on Atkins:
- here's a brief on WebCPA.com

Related articles:
- Will AS5 really make compliance easier?
- Can AS5 really trim audit bills?
- As expected AS5 becomes law, what to expect

Paulson will take a look at audit industry

Tue, 09 Oct 2007 06:59:59 -0400

Blue ribbon-type committees are usually formed in the wake of some perceived crisis, like the nation's financial competitiveness. Sarbanes Oxley has been one reason for the spate of committees that we've seen recently. And now there is one more. This one will take a look at the accounting industry. Henry Paulson, Treasury Secretary, has been concerned that the system places perhaps too-heavy a burden on accounting firms to sniff out problems. That has led to the cover-your-butt approach that AS5 is trying to undo. In light of AS5, it will be interesting to see what more specific steps the Treasury committee can come up with. For what it's worth, Arthur Levitt and Paul Volcker are on the committee.

For more:
- here's an article from the AP

Related articles:
- More AS5 tips for small companies
- Will AS5 finally ease the tense standoff?
- Will AS5 really make compliance easier?

KPMG training in overdrive

Tue, 18 Sep 2007 06:59:59 -0400

We've spoken a bit about the need to make sure your people are trained on all the new compliance nuances. And there are many. The more training mantra is gripping tight is KPMG, which is proud of its ability "turn on a dime." Manage Smarter profiles some of the audit firms steps: virtual classes, Web-based initiatives, AS5 champions, supplements to existing training material and more. It's pretty impressive. I am sure the other top audit firms are doing the same. It's nice to have those kinds of resources. But even if you don't, you still have the training issue to grapple with. Better to worry about it now than when it's borderline too late.

For more:
- here's an article from Manage Smarter