At a CFO Summit held last week in Boston, SEC Commissioner Roel Campos confirmed that the SEC is considering a delay of the internal control provisions of Sarbanes-Oxley for smaller issuers. "Relief for small business is being looked at," said Campos. "We’re asking questions like, ‘What exemptions are deserved?’ and, ‘If you give too many exemptions, will people take it seriously?’”

Campos' comments were in line with those of SEC chief accountant Donald Nicolaisen, who told Compliance Week Nov. 9 that the Commission was indeed considering a delay for small companies. "If it looks like a large number of companies won t be able to comply," he said, "we will consider whether there is some relief we can make available to limited segments of our registrant community" (see original article in box at right).

Campos

The keynote speech, delivered at an event hosted by the alumni association of MIT's Sloan School of Management, also urged executives to stick with SOX 404, and that ultimately the benefits would outweigh the costs. “I ask you all not to give up on 404," said Campos.

The former federal prosecutor touched on such topics as companies’ relationship with their outside auditor, tax shelters, whistleblower programs, internal controls, and the importance of honesty and integrity.

Here are some of the key takeaways from Campos’ address, categorized by topic:

Section 404

Costly: “All public companies are struggling with 404. It’s safe to say it’s the single most costly part of SOX.”

Transition Period: “It’s a time when the accounting profession is especially conservative. I’m working on the accounting profession. SOX never set out to take away accountants’ judgment. That’s what professionals do—they make judgments, and we need to get them back in the framework. They’re shell-shocked right now. They no longer regulate themselves. It’s a tough period of transition.”

Benefits: “I ask you all not to give up on 404. I honestly believe 404 will prove to be beneficial and it will outweigh its costs, even though admittedly it’s very costly right now. That will change. Also, the SEC has not been deaf to this. We recently announced another extension, as you probably all know.”

Comments: “Your suggestions are welcome at the SEC. Chief Accountant Don Nicolaisen and his staff are open for business, ready to take your comments.”

Auditor Independence

Relationship: “CFOs need to make it part of their mission to make sure your relationship with your outside auditors works. You can’t approach it with any resentment.”

Records: “Clear records of the independent selection of auditors need to be maintained.”

Checks: “Have a series of ingrained checks and test to make sure outside auditors stay independent. Remember in the past how much independent auditors performed other services in the company. As soon as you go down that road, the relationship can get contaminated. Preparing tax returns is OK, in fact getting a separate firm to do it would be prohibitively costly.”

Ethics

Integrity: “Honesty and integrity need to be your refrain, and the company needs to believe that you mean it.”

One, Two, Three: “For a CFO to be successful, I think he or she needs three qualities: 1) integrity; 2) integrity; and 3) integrity. The strongest and most valuable asset you have is your honesty and integrity. A good half of what you do should be to promote a culture of honesty and integrity.”

Rules: “I don’t believe in creative accounting. Accounting is a reflection of operations, and you have to enforce the rules.”

Whistleblower Programs

Preventive Medicine: “Pay attention to your grievance procedure. It should be very clear. You’ll find out where the tensions and problems are. It’s not a checkbox thing. Be active and read complaints and have records of how you dispose of them. Work with the audit committee and outside auditors. Set up an aggressive plan dealing with types of fraud that are prevalent in your industry. Every industry has them, for instance in biotech, it’s channel-stuffing. Identify potential risks, prioritize, create an action plan, train employees, evaluate your plan, and keep it current. If something happens and you had no idea it was going on, that excuse starts to be a little weak and lame. Preventive medicine is the key.”

Relationship With Audit Committees

Participation: “You need to have active participation with members of the audit committee. They should know the staff and the processes. Schedule walkthroughs of the companies, and keep records of all these things. It could be valuable in case of a lawsuit.”

Advisors: “Be empathetic if your audit committee wants a staff of advisors. Negotiate the cost. It’s not a reflection on you. They’re allowed to do this under 301.”

Relationship With General Counsel

Work On It: “One relationship you ought to foster is between the CFO and the general counsel. Lots of work can be done together. Look at that relationship. Work on it.”

Small Businesses

Relief: “I have a soft spot in my heart for small companies, from my entrepreneurial years. Relief for small business is being looked at. We’re asking questions like, ‘What exemptions are deserved?’ and, ‘If you give too many exemptions, will people take it seriously?’”

Other Speakers

In addition to Campos' keynote the MIT event featured a number of CFOs at public companies, including Google CFO George Reyes, PeopleSoft CFO Kevin Parker, American Tower CFO Brad Singer, and others.

Some of the sessions, which covered topics including risk management and globalization, also touched on topics like executive compensation and "lessons learned" from Sarbanes-Oxley. We've excerpted some of the most interesting comments from the sessions, below:

Sarbanes-Oxley

Lack Of Clarity: “This whole [SOX] process is too much. It’s definitely important and some good things will come out of it … but a lot of the rules are just not clear enough.” –Gail Mann, chief legal officer and secretary, Forrester Research

Cynicism: “I’ve sworn off cynicism—otherwise it’s a downward spiral. It’s brutally hard, and we lose perspective and get caught up in details.” –Frank Edelblut, president and founder, Control Solutions International

Just The Beginning: “It’s not like Y2K where you get it done and it’s over—it’s just the beginning in some aspects.” –James Barratt, senior managing director, FTI Consulting

Non-Compliance: “I heard the accounting board estimate that 15-20 percent of public companies in the U.S. won’t be able to comply by the calendar end of this year. What effect will that have on the financial markets? I think there are probably positive things coming, but whether it’s worth the price, I don’t know.” –James Hogan, chief financial officer, Sovereign Bancorp

Cooperation: “Communication and a good understanding with auditors will go a long way. It’s a difficult situation, and auditors are feeling it as much as corporations, so cooperate as much as you can.” –Baratt

Internal Controls, Section 404

Manageability: “Some companies out there have 10,000 financial controls. We’ve got to get this down to a more manageable number and focus it considerably.” –Edelblut

Deficiencies: “The reality is, probably 10 percent of the financial controls you identify will constitute deficiencies. They might not rise to the level of significant deficiencies, but they will happen.” –Edelblut

Weaknesses: “The number one type of weakness I’ve seen is developer access to production systems, or IT. It’s probably a weakness for just about everyone. Second is probably taxation systems, followed by HR systems. It’s hard to get the HR folks on board—their mindset is not about controls.” –Edelblut

Auditors

Buried: “The Big Four are buried right now, and very nervous about liability.” –Mann

Shortage: “There’s not enough accountants to go around. January and February will be incredibly busy months, and I’m not quite sure how it’s going to work out.” –Edelblut

Interaction: “Be careful with the relationship you have with your outside auditor. You have to be cautious about how you’re interacting with auditors, and make sure you have the right people in there talking to them.” –Baratt

Changes: “The relationship with the auditor has changed. The auditor used to be a trusted advisor, and it used to be that if we found a problem, we’d fix it and write a letter, show it to the auditor, and be done with it. Now, anything we find goes to the national office.” –Hogan

Structured: “Discussions with auditors have absolutely changed. The days of meeting in the hall and informally solving problems then and there are over. You have to make it more structured. There are no off-the-record conversations anymore.” –Edelblut

Audit Committees

Meetings: “Our audit committee met 21 times last year. We’re doing our best to cut that down. Our folks took their assignments very seriously.” –Hogan

Executive Compensation

Accountability: “Compensation awards need to be three things: efficient, transparent, and they must have accountability.” –Michael Krebs, partner, Nutter McClennen & Fish

Categories: “I like to think about it like this: Compensation can come in four types of packages: 1) direct pay; 2) cash bonuses; 3) longer-term awards, like stock and stock options; and 4) benefits and perks. It’s easier to deal with them separately so you can keep better track of them.” –John Kreick, non-executive chairman, Pennichuck Corporation

Stock: “I don’t think using stock is going to go away, because stock traces directly back to shareholder value, and it’s a compelling argument to directors. How it’s awarded will change.” –Kreick

Incentives: “Paying for failure drives me over the edge. I just hate it. There are always going to be bad apples, but at least people are beginning to look more at the process of compensation.” –Robert Gore, principal, Towers Perrin

Restricted Stock: “Restricted stock has become the Mary Magdalene of executive compensation. Restricted stock will be prominent, but not as prevalent as stock options.” –Gore

Sloppy: “There are a lot of egregious behaviors going on out there. A lot of them are not criminal, but sloppy. It’s very hard to change—I’m unclear about how to get the horses to move in the right direction.” –Michael Scott Morton, Jay W. Forrester Professor of Management (Emeritus), MIT Sloan

Variables: “Most companies believe in paying for performance. You won’t get there just with flat pay. You’ve got to introduce variables. It comes back to stock in some format. Part of running a business well is knowing where to invest, and that applies to awarding executive compensation.” –Kreick

Chairman/CEO Separation

Standard: “I’m a big believer in the chairman/CEO split. It’s standard practice in European firms. I don’t understand the resistance in the U.S. to it.” –Morton

Right Way: “I’m on several boards. Every one has a separate chairman and CEO, and that’s the right way to do it.” –Kreick

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