WILL CRITICS BE SATISFIED?
Now that regulators have released their proposals for overhauling compliance guidelines for Section 404 of the Sarbanes-Oxley Act, the real work begins as auditors, consultants and corporate executives pore over the details during the comment periods. Following years of complaints about excessive compliance costs and redundant testing, the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) are finally tackling the problems by issuing both new guidance for company executives and a revised rule for auditors. But will the changes bring sufficient relief from high audit costs?
James Clendenen, engagement director for the risk and consulting section of Parson Consulting, contends that the vast majority of his clients already use the top-down, risk-based approach to their 404 assessments that the SEC is calling for in its new guidance. "It is beneficial in that it will allow companies to look to the SEC for guidance in how it performs its management assessment, but I don't think it's going to be a dramatic decrease in cost or workload," says Clendenen. The SEC had not issued the final written guidance at press time.
John White, director of the SEC division of corporate finance, says the SEC acknowledges the "overkill" in testing internal controls and contends that the SEC is addressing the problem by telling companies to stop relying on Auditing Standard No. 2 as the basis for their internal controls assessments. "That's the kind of thing that will make the assessment process easier for all companies, large and small," White told Treasury & Risk. "The view has been that 404 [compliance] was too expensive and cumbersome and many were not looking at the right things. We're telling both company management and auditors they were often engaged in overkill and they can focus their efforts in a more efficient way."
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The PCAOB did release all of its details and so far seems to be garnering praise from governance experts. Nell Minow, editor of The Corporate Library, says the PCAOB has managed to "rationalize without weakening" the rules. She singles out how the new proposals are guiding auditors to rely more on managements, obviously mirroring the SEC's guidance on AS-2.
AT-RISK CREDITS INCH UP
The number of issuers downgraded to junk from investment grade status has continued to inch up, rising to 46 as of Dec. 6, Standard & Poor's Corp. reported. That represents an increase of six companies from the month before. The downgraded companies represented a cumulative debt worth $67.1 billion. Moreover, another 43 companies were poised to join them. The report exposes cracks in the economy. "As GDP slows, our rating actions have always been a leading indicator of GDP," says Diane Vazza, managing director at Standard & Poor's. "Fallen angels [represent] a microcosm of the ratings universe, with a negative watch for potential downgrades into junk status. The flip side of the coin is that [growth in] rising stars has slowed, too. So those go hand in glove at the cusp." The sectors most vulnerable to downgrades were utilities, homebuilders and consumer products. Nine of the 10 utilities on the watch list had been affected by the Illinois rate freeze.
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