SEC Approves PCAOB Auditing Standard 5

As expected, the U.S. Securities and Exchange Commission (SEC) voted unanimously July 25 to approve the proposed Public Company Accounting Oversight Board (PCAOB) Auditing Standard 5 (AS5). This action finally gives companies the power that they have wanted since the Sarbanes-Oxley Act (SOX) was passed in 2002: the unassailable right to take a top-down, principles-based approach to SOX, rather than the costly and time-consuming documentation free-for-all that characterized the first five years.

AS5, which replaces the PCAOB’s previous Auditing Standard 2, was created in concert with new SEC guidance to give the regulators’ official blessings to a risk-assessment methodology. The new streamlined standard, approved days before the fifth anniversary of SOX, will be effective for fiscal years ending after Nov. 15, 2007.

“We are pleased with the SEC’s approval of AS5,” said Mark W. Olson, PCAOB chairman, in a statement. “However, this does not mark the finish line for the PCAOB.”

Following the vote, the PCAOB said it is planning to undertake initiatives to support successful implementation of the standard. These include working closely with the audit firms, early in their process, as they evaluate how the new standard will affect their firms’ audits of internal control. Other initiatives include continued outreach to public companies and smaller audit firms regarding the new standard.

Many finance experts expect the SEC’s endorsement to lead to lower costs for SOX 404 compliance. “With AS5, we now have clearer more substantial support for a risk-based approach,” says Brett Curran, vice president of governance, risk and compliance (GRC) and privacy practices at Axentis Corp. "It will be a catalyst to help auditors rely more on their judgment and that will cut costs.”

AS5 was approved over last-minute requests for reforms by NASDAQ, which echoed the concerns of others who felt AS5 didn’t go far enough in providing a workable definition for “materiality,” an important component necessary to determine which risks have the greatest potential to impact the bottom line. NASDAQ also wants to see an ombudsman established at the PCAOB to advocate for issuers who feel their internal controls are being overaudited, and also permission for companies with no material weaknesses one year to skip the auditor portion of 404 the next. These reforms could work their way into future PCAOB comments and standards.

Finance, audit and information technology professionals were mostly enthusiastic, though that was tempered by some irritation that it took so long for the SEC and PCAOB to finally give their stamps of approval to what managers have said all along: It was a waste of time and money to test audit controls for uncritical processes such as, say, petty cash and the company coffee budget. “It came four years too late, but it's essentially an admission that the delay has contributed to the extensive costs associated with Sox Section 404 compliance," says John McLaughlin, senior managing director of advisory business services at Smart Business Advisory Consulting LLC, based in Devon, Penn.

Some companies, perhaps 10% of all the large public companies covered by SOX, have been assertive in adopting a risk-based approach before AS5 was cast in stone. It wasn’t easy, though, because external auditors, in many cases, refused to veer from the strict SOX doctrine despite PCAOB hints that risk-assessment was a reasonable approach because, perhaps, the pendulum had swung too far in the direction of overauditing.

Celebrate Sarbanes-Oxley’s fifth anniversary with Treasury & Risk magazine. Read “Finally, the Party Can Start”, the Cover Story of T&R’s summer double issue.

No matter what you think, CFOs and controllers are happy

CFOs and controllers are feeling mighty happy with their jobs, according to a recent survey of 2,149 executives in a variety of professions by ExecuNet, an executive career recruiting and business network. In fact, CFOs and controllers, 63% of whom said they were satisfied with their current job, were second only in satisfaction to human resources professionals, who topped the list of contented executives with 67%. At the bottom of the list were general management (47%), marketing (44%), sales (42%) and information technology (41%) executives. “We found that in this survey, CFOs and controllers exhibited a greater degree of satisfaction in their jobs than they have in the recent past,” says Lauryn Franzoni, vice president of ExecuNet. “There was a great deal of unhappiness in the early days of SOX, and as a result there was a great deal of churn in the marketplace.” Some of that discontent, remarks Franzoni, may have had something to do with the fact that SOX-savvy CFOs and controllers were getting a 24% pay premium for their experience. Of course, a robust economy and strong stock market also help lift the spirits.

Among the top reasons why executives are not happy with their current jobs include: limited advancement opportunities (13%); lack of challenge and/or opportunity for personal growth (13%); differences with culture (10%); a poor fit with a boss (10%); and compensation (9%).

ExecuNet conducted the survey initially in January 2007 and then followed up again in July 2007.

Some things depend which side of the pond you are on

When it comes to talking about risk, U.S. and U.K. risk managers speak a different language, according to London-based insurance broker Miller Insurance Services Ltd. In a study of 115 U.K risk managers, some 41% believe that carbon emissions risk is worthy of high-level boardroom consideration. This stands in stark comparison with only 7% of U.S. managers who said that this was a board-worthy issue in a study commissioned by Miller in April 2007. Nearly a third of U.K. risk managers believe that carbon emission risk is an insurable risk.

But there are areas of agreement. Both U.S. and U.K. risk managers are satisfied with insurance products, with 72% and 69%, respectively saying that the insurance industry is delivering the right products. But while a similar percentage of U.S. (28%) and U.K. (32%) managers currently use captives, 50% of U.S. risk managers say they are planning to increase or establish a captive insurance company, versus only 26% of U.K. risk managers.

CFOs weigh in on the economy

CFOs are cutting back on expectations for capital spending, hiring and prices, according to a survey of CFOs by Financial Executives International (FEI) and Baruch College’s Zicklin School of Business. Companies are projecting average increases of 2.3% in capital spending, 4.1% in hiring and 1.9% in prices, down from first-quarter projections of 7.9%, 5.2% and 2.1%, respectively. “While CFOs were a little more downbeat, they were neither outrageously optimistic nor outrageously pessimistic about the economy,” says Zicklin dean John A. Elliott. There’s good news on the issue of outsourcing: While 73% say they outsource, more than half outsource to U.S. firms. “We often talk about outsourcing as if everything is going offshore,” says Elliott. “But there’s also a lot of efficient contracting for everything from accounting services to benefits to manufacturing where they’ve found specialists to do the work for them, often here in the U.S.”

CFOs are split over letting U.S. companies choose between using International Financial Reporting Standards (IFRS) vs. U.S. Generally Accepted Accounting Principles. But 55% would support a proposed change by the Securities and Exchange Commission allowing foreign private issuers to choose between GAAP and IFRS.

People on the Move

McDonald’s Corp. has announced the retirement of current CFO Matthew Paull, of the $21.6 billion corporation that franchises and operates McDonald’s restaurants, with headquarters in Oak Brook, Ill. Paull, who has served as CFO since 2001 has decided to pursue a career in teaching. The company will begin its internal and external search in the near future. Paull has agreed to stay through the end of the year to ensure a smooth transition.

Circuit City Stores, Inc. named Bruce Besanko CFO and executive vice president of the $12.4 billion retailer of consumer electronics and related services, with headquarters in Richmond, Va. Besanko joins Circuit City from The Yankee Candle where he served as CFO and senior vice president since April 2005. From 2002 to 2005 he assumed the role of vice president of finance for Best Buy Co., Inc. Prior to that he spent 6 years with Sears Roebuck’s & Co. performing various financial leadership roles. From 1992 to 1996 he assumed finance, accounting and treasury positions with Atlantic Richfield Co.

The Hershey Co. the $4.9 billion manufacturer of chocolate and sugar confectionery products, with in headquarters in Hershey, Pa., appointed Bert Alfonso CFO and senior vice president. Alfonso joined Hershey in July 2006 to assume the role of vice president of finance and planning of U.S. Commercial Group. Prior to Hershey, he was named vice president of finance, global supply chain for Cadbury Schweppes Americas Beverages and was later promoted to CFO and executive vice president of finance. Before Cadbury, Alfonso was CFO and vice president for the Adams division of Pfizer, Inc. And from 1983 to 2000, he held numerous financial positions of increasing responsibility at Warner-Lambert Co.

Jones Apparel Group Inc., the $4.7 billion designer, marketer and wholesaler of branded apparel, footwear and accessories, based in New York, named John T. McClain CFO. McClain replaces Wesley R. Card who has been promoted to President and CEO. McClain began his career with Arthur Andersen as audit manager and then from 1993 to 1998 he was with ITT Corp., where he held various roles including assistant controller, director of accounting and manager of financial reporting. He then moved on to Sirius Satellite Radio Inc. and assumed the roles of vice president, controller and chief accounting officer. Most recently he served as chief accounting officer of Avis Budget Group Inc.

Wachovia Corp. named Pete Carlson corporate controller and principle accounting officer of the $46.8 billion diversified financial services company, based in Charlotte, N.C. Carlson has acted in this capacity since October 2006. He came to Wachovia in 2002 and has served as both co-director of accounting policy and director of external reporting. Before coming to Wachovia, he was an audit partner with Arthur Andersen LLP.

Marvell Technology Group Ltd. announced the appointment of Michael Raskin as interim CFO of the $2.2 billion developer of storage, communications, and consumer silicon solutions. Raskin most recently served as vice president and general tax counsel for Marvell Semiconductor Inc., a subsidiary of the company, in 2007, he was named special assistant to the CEO and vice president of strategic development of MSI. His experience extends over three decades with global technology companies establishing international tax structures. Before Marvell, Raskin spent 13 years at Apple Inc., where he served as general manager of Asia and Latin America, director of marketing for Apple Japan, director of international legal, director of international business development, and director of taxes, customs and export licensing. Prior to Apple, he was responsible for tax planning at Digital Equipment Corp. for six years.

Northwest Airlines Corp., the $12.6 billion airline with headquarters in Eagan, Minn., named Terry Mackenthun vice president of financial planning and analysis. Mackenthun succeeds Barry Hofer, who has been promoted to vice president of facilities and airport affairs. Mackenthun came to Northwest in 1994 and has assumed numerous key financial and marketing roles and appointed managing director in 2005. Prior to joining Northwest, he was a senior auditor for Ernst & Young LLP.

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BPM learns Chinese

Applix Inc., a $52.2 million business intelligence and performance management software provider based in Westborough, Mass., has released Applix 9.1 Unicode in simplified Chinese, thus allowing global companies to perform business analytics across operations and finance. Applix 9.1 enables businesses to perform reporting from the Web, configure planning applications and create custom dashboards and scorecards; now, 9.1 Unicode will provide visibility into business performance beyond finance and operations departments to include business units overseas and subsidiaries, creating a seamless experience for users despite the language barriers. Applix occupies a niche in the marketplace in providing BI and BPM software to small and midsize companies, notes Michael Rasmussen, an analyst with Forrester Research. One of Applix’ key strengths, explains Rasmussen, is that its software offerings are all on a single platform, unlike some of the larger and better known BI and BPM providers, which have assembled their suites through acquisitions. “Unicode 9.1 is designed to appeal to those small and midsize companies with operations in China,” says Rasmussen.

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Concur Takes Automated Reporting a Step Further

Expense report filing just got a whole lot easier. Concur Technologies Travel 2.0 Smart Expense Tool lets business travelers electronically collect receipts and automate expense report procedures on the go, according to the Boston-based provider of on-demand Employee Speed Management services. The click that books the reservation initiates the process that will match and tally three key sources of data—itinerary information captured at the time of booking, corporate card charges incurred by the employee and e-receipts captured directly from the supplier—and then reconcile all the data. As a result, Concur claims that employees don’t have to edit reports, and companies don’t have to audit them—saving time and money. It didn’t provide examples of cost savings.

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