Execs Sound Off On SOX At Senate Hearing

Corporate executives and international securities experts testified before a Senate committee hearing last week on the impact of Sarbanes-Oxley, and developments concerning international convergence.

At the session, the recurring themes of expense and "prescriptiveness" were emphasized by those in attendance.

Shelby

"Although I acknowledge increased compliance costs associated with implementing Sarbanes-Oxley," stated Sen. Richard Shelby (R-Ala.), who chairs the Senate Committee on Banking, Housing, and Urban Affairs, "I also recognize that certain costs were necessary to restore investor confidence and address the surprising erosion of business principles."

Douglas Flint, Group Finance Director at HSBC Holdings, estimated that somewhere between $30 million and $50 million had been spent at his firm "to compile the database of financial reporting controls we know we have but were not originally documented to describe specifically the financial statement control assertion they address."

"Unfortunate Consequences"

Flint also outlined five "unfortunate consequences, perhaps unintended," which have frustrated the overriding objective of Sarbanes-Oxley. His points, which were repeated by others who testified, included:

Too Prescriptive

Flint stated that the way SOX being implemented by the accounting profession has become "meticulously prescriptive" and detailed. The danger, noted Flint, was that the SOX 404 process (e.g., documentation) "becomes the objective rather than the means to the end."

Hanish

The testimony of Eli Lilly Chief Accounting Officer Arnie Hanish echoed those sentiments. According to Hanish, who also serves as vice chairman of Financial Executives International, SOX has created "an overemphasis on certain additional or duplicative levels of documentation, with a declining value in terms of how much that additional documentation would add to the effectiveness of internal control."

"Make no mistake about it," Hanish went on to say, "documentation for documentation’s sake will not deter financial fraud."

No Confidence

According to Flint, SOX was written in general terms, yet is being interpreted to mean or require all manner of things, "and there is no one who can challenge an interpretation with confidence."

Risk Aversion

"In a world where directors are rightly subject to increased accountability and greater scrutiny it is worth challenging whether the impact of the independent audit opinion on financial reporting controls improves the process or serves to discourage directors from exercising a judgment that shareholder interests are properly served by expanding/acquiring a business with weak formal financial reporting controls mitigated by sound business model profitability."

Governance Penalty

According to Flint, there is a "governance penalty" now for being a U.S. public company "which is significant in terms of time and money where the cost benefit is difficult to see."

International Complications

Flint noted that SOX was drafted with a U.S. governance framework in mind, which complicates international application due to different models and legal frameworks, "which can act to frustrate the detailed requirements of the Act but without necessarily impairing the overriding objective."

Flint also noted that accounting firms have been threatening to withdraw certain services if they are not provided unlimited liability. According to Flint, that's a real problem, considering the fact that there are only four global accounting firms left. "It is with deep concern that we see the auditing profession flexing its muscles currently within the protection of a statutory and regulatory monopoly for auditing services by threatening withdrawal of service provision to key sectors including banking if they do not receive protection from unlimited liability."

Rules Or Principles?

Flint also noted challenges with the convergence of U.S. GAAP and international accounting standards promulgated by the International Accounting Standards Board. Specifically, he noted that the construction of the international financial reporting standards are "increasingly rules- rather than principles-based."

The SEC has stated that it "supports ongoing convergence initiatives" between FASB and IASB, and last year submitted a study on the adoption of a principles-based accounting system.

At the Senate hearing IASB Chairman Sir David Tweedie acknowledged similar challenges. According to Tweedie, the standard-setting bodies are "tackling difficult conceptual issues, on which there is little or no consensus." Some of the more challenging topics include insurance accounting, leasing, pensions and financial instruments.

Like Flint, Tweedie singled out the question of rules- versus principles-based standards. "Internationally there is a clear desire to maintain a more principle-based approach to accounting," noted Tweedie, while in the U.S. "I sense a similar desire to reduce the complexity and sheer volume of accounting literature."

Despite the challenges of uniting international financial reporting standards with those of U.S. GAAP, Tweedie stated the IASB and FASB are moving ahead quickly. "Without putting a specific date on convergence," he said, "both the IASB and the FASB hope that the major differences between US GAAP and IFRSs will be eliminated in the next few years."