Sarbanes deadline testing business
Accounting firms gain from companies' pain
chicagobusiness.com
May 26, 2003
By Sandra Jones
It's been almost a year since President George W. Bush signed into law sweeping regulations designed to crack down on corporate fraud in the wake of the Enron and Andersen scandals.
Corporate America has passed the time by focusing on corporate governance issues at the board level. It's been work, but it hasn't cost much time or money — yet.
Now, businesses are gearing up to meet the most cumbersome and costly part of the Sarbanes-Oxley law. The paper chase it requires is expected to be so intensive that Boston-based AMR Research Inc. estimates it will create a $2.5-billion industry — possibly exceeding the business generated by Y2K preparations.
Companies are required to document and test the business processes used to create their financial statements. Beginning Sept. 15, when a company files its annual report, it must guarantee that its internal controls have been written down and tested by outside auditors.
The controls cover steps as simple as entering an order and as complex as hedging foreign currency.
"This is an immense job," says William Cernugel, chief financial officer of Alberto-Culver Co., a Melrose Park-based consumer products manufacturer. "This is going to be very expensive. It's really a burden, but we will make it work."
Alberto-Culver will be among the first companies to comply with the new financial reporting regulations, since its fiscal year ends Sept. 30. The Securities and Exchange Commission (SEC) has yet to release final details of the new regulations, and is considering extending the initial Sept. 15 deadline. But Mr. Cernugel isn't waiting.
Like many CFOs, he is setting up internal project teams, hiring consultants and earmarking at least $250,000 for documenting and testing the company's business systems before auditors arrive to certify the books — and the internal controls — at yearend.
Companies don't want to be surprised by glitches that could force them to disclose an unsolved problem. With investors so skeptical these days, any hint of trouble could send stock prices tumbling and taint a company's reputation.
"As a company CFO, if you don't treat this as a significant project, you're making a serious error," says Charles "Randy" Whitchurch, chief financial officer of Vernon Hills-based Zebra Technologies Corp., whose fiscal year ends Dec. 31.
Cost-benefit analysis
Experts say that executives, already struggling to meet financial targets in a down economy, are grumbling over the onerous and still-unclear financial reporting requirements known as Section 404.
Small- and medium-sized companies in particular are having a tough time coping with the cost of compliance, according to Edwin Mason, a partner in the Chicago office of law firm Foley & Lardner. Companies will have to spend a minimum of $100,000 to comply with the requirements, and the price tag could easily soar into the millions for larger firms with more complex operations, he says.
"There is a real concern that the cost of compliance may outweigh the real benefit we see," says Mr. Mason. "(Compliance) means formalizing, or putting in writing, procedures and processes that may already exist. Some public companies may need the discipline that this law requires, but there is a question as to whether this is just creating busywork."
Zebra began preparing its plan two months ago and has a project team of 14 people ready to begin work in June. Mr. Whitchurch says the company's internal controls are in good shape, but he still expects the project to take six months.
"For us it's a pain in the neck because we've got good controls systems," he says. "It's a cost we don't need, but we've got to do it. It's like eating your spinach."
Whether this massive undertaking is going to help protect investors is debatable. But, it's certainly a boon to the accounting industry.
Sarbanes-Oxley bars accountants from engaging in certain lucrative consulting agreements with the companies they audit, a practice that contributed to Chicago-based Andersen's downfall. But it doesn't bar them from selling software and services to help companies prepare for this compliance deadline. Many companies, eager to avoid the appearance of conflict of interest, are hiring one Big Four accounting firm to help set up their systems and another to do the auditing.
At the same time, mid-sized accounting firms are seeing a client windfall as companies split the work among auditors or call in a back-up auditor as the deadline approaches. "Many companies have a Big Four firm and us," says Frederick Julien, a partner at accounting firm Crowe Group LLC in Oakbrook Terrace. "It's an expense that wasn't budgeted for in most organizations, so the challenge, with the economy the way it is, is how to balance complying with the regulations and running the business."
Call for IT help
Since the final rules aren't written yet — the SEC could release them as early as June — Mr. Julien says that most accounting firms are recommending companies follow a methodology established by an accounting industry organization after the 1980s insider trading scandals.
Because much of the work involves updating computer systems, technology experts predict greater demand for temporary information technology employees — similar to the tech call-up that occurred earlier this year when health care organizations had to begin complying with the Health Insurance Portability and Accountability Act (HIPAA).
"We had seen a huge surge in hiring (at) health care companies with HIPAA, and we're starting to see exactly the same thing on the financial side," says Gregory David, a recruiter and president of Gregory Laka & Co.'s Chicago office. "Call it human nature, but because most firms wait until the last minute, all of a sudden, we're hearing from firms telling us, 'We need to get this going.' "
©2003 by Crain Communications Inc |
