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February 9, 2005
Crunch Time
Today's Financial Times includes a front page story about the effect of Sarbanes-Oxley on the fees companies are paying to external auditors: On the average, they have doubled this year. Yow !
The FT story emerged from a study of large company spending on SOX compliance published earlier this week by the Corporate Executive Board, a consulting firm. The same study reported that, in addition to the higher fees for auditing, the companies surveyed spent an average of $5 million to $8 million on SOX Section 404 compliance work in 2004.
The numbers are in the news because companies with fiscal years ending December 31 will be releasing their annual reports over the next few weeks. This will be the first year that these companies will have to report on the effectiveness of their internal controls, as required by Section 404 of the Act. After the companies make their own assessments of internal controls, the auditors are required to render an outside opinion on the internal controls. In a related story in today's Financial Times, titled "Crunch Time," sources from the Big Four accounting firms estimate that perhaps 10% of the companies will report that there are material weaknesses in their system of controls.
It appears that we will find out how the markets react to reports of material weaknesses.
The FT reports that companies typically have three questions for their auditors:
- Are we in the clear? Are our controls effective?
- How can we make SOX compliance less expensive?
- How can we turn this into something we can do year after year?
In diagnosing the sources of "material weakness" in internal control systems, auditors put problems with information technology systems at the top of the list. The problems take different forms, but include difficulties in controlling access to data and difficulties associated with the project-oriented focus that has been characteristic of initial compliance efforts.
The companies that reveal material weaknesses over the next four weeks will almost certainly stay in "project" mode -- they will have no other choice. But, for the 90% of the companies that successfully make it through the first year of Section 404 testing and evaluation, the real challenge will be how to turn this from "crunch time" into a normal part of business -- a part that supports, rather than subtracts from, the rest of the business.
Are there readers of this column who can share, in general terms, the steps that their companies are taking to make this transition? It seems reasonable to expect that increased use of content-based technologies to automate parts of the internal control system would be part of the solution. Is that turning out to be the case? Send me an email or post a comment.
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Posted by Bill Zoellick at February 9, 2005 4:06 PM
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