Is Sarbanes-Oxley sinking your Company?

FOR IMMEDIATE RELEASE
Boca Raton, Florida, United States of America (Free-Press-Release.com) November 9, 2011 -- Public Company officers have the huge task in terms of cost of both manpower and actual financial resources of complying with the act, especially for Small Cap public companies. Recently, Financial Executives International, a professional organization serving chief financial officers and other senior financial executives, recently conducted a survey of 321 companies on their estimated costs for first-year compliance and, according to the survey; total costs could exceed $4.6 million for each of the largest of the survey.

The added costs are driven by a projected investment of 35,000 hours of internal manpower, $1.3 million in spending on external consulting and software, and additional audit fees of $1.5 million (a 35 percent jump). For all participating companies in the survey, the costs are projected at just under $2 million for roughly 12,000 hours of internal work, 3,000 hours of external work, plus additional audit fees of $590,000 (a 38 percent rise).
Management Responsibilities

Basically, Section 404 of Sarbanes-Oxley requires every public company's annual report to contain a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and management's assessment of the effectiveness of the company's internal control structure and procedures for financial reporting. Section 404 also requires the company's auditor to attest to and report on management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting.
These companies are at risk of either not completing their 404 preparations or ending up with major deficiencies that could result in qualified attestation reports. Specific observations include: At present, a majority of companies are either in the planning or control/process documentation stages.

Internal staffing is an issue as many Small Cap companies operate with a lean or scaled down staff, and regulators haven't sufficiently figured how the required segregation of duties necessary to achieve an effective internal control system can be accomplished in a Small Cap company environment.
There is some concern within these companies about the cost of adding on supervisory or management layers that produce no incremental revenue. Additionally, the expectations for increased senior management oversight, in some cases requiring management to sign off on all significant transactions, is also perceived as a burden that distracts them from other critical aspects of running the business such as sales, finance or operations.
More Questions than Answers

The question being raised in boardrooms across the country is: "When is it acceptable to allow organizational structures to operate without optimal segregation of duties?" Auditor relationships may be impacted Accounting firms' expectations regarding 404 scope, format, content and depth of required documentation continues to evolve. Without final rules for performing audits and internal control, auditors are faced with more questions than answers, for example:
What testing methods, sample sizes and over what periods should companies test their controls? Most of the historical guidance relates to external auditors performing tests of internal controls in a financial statement audit.

Expectations vary among partners in the external audit firms. We have participated in many discussions with financial executives and their auditors who are totally evasive, essentially providing little or no guidance to their clients. While larger companies may have the resources to re-deploy staff into the field when more process/system specifics are needed, small-sized companies most often don’t have the people or cannot afford to hire new staff.
Few internal financial accounting resources are available to work on Sarbanes-Oxley projects in addition to their normal day-to-day functions such as closing the books or preparing materials for the disclosure and audit committees. Many companies lack fulltime Sarbanes-Oxley project managers to run a 404 project and may also lack sufficient internal audit resources to perform independent testing and documentation.

Many CFOs are frustrated that the initial estimate of the hours required to get ready is significantly short of the mark and yet their audit committees and chief executive officers have memorized and sometimes budgeted based on estimates.
Many small-sized companies outsource many functions to third parties, and it is often difficult to get SAS70 Type II reports, especially from small third party organizations where the customer has no contractual right to audit. The problem is exacerbated if the CFO is being told to immediately upgrade to a new payroll package because the legacy version will no longer be covered within the scope of the SAS70.
Evolving Standards

Companies have typically relied on their external auditor for guidance and knowledge regarding the latest accounting pronouncements and their impact, providing internal control recommendations, and reviewing tax accruals. The constantly evolving standards and regulatory interpretations can lead to confusion on both sides of the table about who can help who do what.
Given the unique challenges faced by small-size companies in implementing all standard and new requirements, a requisite implementing of permanent governance and control improvements is needed to avoid future loss of needed capital to sustain the already huge burden put on public companies.
First Equity Group, Inc. a highly specialized financial shareholder consulting firm has helped many public companies increased market capitalization and are the creators of Accelerated Investor Relationship Development™
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