A
lthough it still hasn’t pinned down a final date for the unveiling of a revised Auditing Standard No. 2, the Public Company Accounting Oversight Board has been working on “a new standard to replace current AS2,” Board Chairman Mark Olson said during a recent speech—hinting at just how far-reaching the amendments to the much-maligned standard are likely to be.
Speaking at a conference on Nov. 17 hosted by Financial Executives International, Olson said the PCAOB will publish its draft “shortly.” Most observers translate that to mean sometime in the first half of December, to coincide with the Securities and Exchange Commission’s plans to publish new guidance about Sarbanes-Oxley compliance at its Dec. 13 meeting.
Paulson
Both moves are intended to alleviate the burden of SOX compliance. In a separate speech in New York last week, U.S. Treasury Secretary Henry Paulson made a similar promise, saying SEC Chairman Christopher Cox “recognizes the severity of this problem and is providing strong leadership to address it.” Paulson said the market doesn’t need new legislation to change Sarbanes-Oxley, but rather it requires new guidance from regulators to change its implementation.
In May, the PCAOB and the SEC promised to help Corporate America in its compliance with SOX by revising AS2, which governs how external auditors inspect a company’s internal control over financial reporting, and by issuing new guidance to help managements with their own audits of internal controls. The goal is to establish a management-centric, risk-based assessment of internal controls that will achieve the objectives of Section 404 of Sarbanes-Oxley, but make the process more efficient and more achievable for companies of all sizes.
Olson
In his address to the FEI, Olson reiterated earlier promises that the new AS2 will be easier to read and to implement in smaller companies, and that it will reflect earlier guidance calling for a risk-based audit approach. The Board also is working separately on guidance and training specifically focused on how to scale the audit toward smaller companies, Olson said.
He also took the opportunity at the podium to offer plenty of defense for internal control reporting requirements, which critics say has prompted an exodus in initial public offerings from the United States to nations with less difficult regulatory burdens.
“Studies of these issues are difficult to conduct, and as a result the conclusions can be misleading or contradictory,” he told the FEI audience, according to his prepared remarks. Olson suggested that factors such as fear of litigation and high underwriting fees might also drive IPOs to non-U.S. markets.
“It is important for regulators, including the PCAOB, to achieve the right balance of oversight and regulation,” he said. A copy of the speech, as well as related coverage, can be found in the box above, right.
Study Links Option Backdating To Aggressive Management
T
hree academics studying the escalating backdating scandal have asserted that there is a connection between the occurrence of backdating and an environment of aggressive management and poor controls.
“Our results identify a link between grant manipulation and factors associated with higher influence of the CEO over directors, such as lack of board independence and long CEO tenure,” wrote co-authors Lucian Bebchuk of Harvard University, Yaniv Grinstein of Cornell University, and Urs Peyer of the University of Chicago. “Backdated grants were not provided as a substitute for other forms of compensation, but rather conferred extra benefits on executives already receiving higher pay relative to their peers.”
The study focuses on “lucky” grants, or grants that are given at the lowest price of the month. The researchers say lucky grants were more likely when the company did not have a majority of independent directors on the board or when the chief executive officer had a long tenure. Both of those factors are associated with the CEO being heavy-handed with the board on setting pay and making decisions.
The study says lucky grants were more likely when the potential payoff was high, and that the chance of getting a lucky grant increased when an earlier grant was also lucky. The researchers estimated that about half of all lucky grants were the result of opportunistic timing, not pure luck, and that about 10 percent of all CEOs received or provided lucky grants as a result of opportunistic timing.
In related news, the number of companies now caught in some sort of backdating probe—either by the Securities and Exchange Commission, the Justice Department, or the company’s own internal investigators—has hit 205, according to the latest research by Glass, Lewis & Co.
Turner
“This scandal has now touched perhaps more companies than any other single scandal, except for the one involving illegal payments and bribes during the Watergate era,” says Lynn Turner, managing director of research for Glass Lewis.
The firm says backdating concerns have so far led to 107 investigations at the SEC and 55 investigations at the DoJ; 80 planned restatements of financial results; at least 84 shareholder lawsuits; and two criminal cases. Executives and directors at 32 companies have resigned or have been fired or demoted as a result of backdating concerns, Glass Lewis adds.
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