With most companies having completed initial Sarbanes-Oxley compliance efforts, Nasdaq recently launched an issuer survey to discover what its companies think of the implementation process, the performance of auditors and what the benefits of Sox are likely to be.
Auditing firms came in for considerable criticism. Perhaps the most surprising result from the April survey is that 70 percent of respondents do not feel the accounting and auditing industry has sufficiently well-trained staff to deal with Section 404. Furthermore, 61 percent feel their accountants are not qualified to certify internal controls. It is felt that many employees at the auditing firms are poorly informed of the changes to accounting and auditing requirements and how the latest rules should be applied. A number of firms believe their auditors employ a ‘learn as you go’ approach and as a result much of the advice and guidance received is too ‘top level’.
Part of the problem, as highlighted in a recent submission from PricewaterhouseCoopers (PwC) to the SEC 404 roundtable, is a lack of clear guidance from the regulator. Only 31 percent of Nasdaq respondents feel the guidance from the SEC and the Public Company Accounting Oversight Board (PCAOB) is clear and understandable.
Due to the lack of definition from the regulating bodies, it is generally felt that the accounting industry has erred too heavily on the conservative side. However, it is not just the regulators that have been inconsistent. Throughout most of the process there has been little consensus among the ‘big four’ accounting firms about implementation. As a result many survey respondents believe auditors would attempt to out-do each other in terms of what they required clients to disclose. This led to even greater time and expense at the beginning of the implementation process.
Nasdaq sent the survey to all 3,053 of its issuers in two rounds and received responses from 775. Of those, 70 percent were from either the CEO or CFO level. While the surveys covered all areas of Sox regulation, costs of implementation and Section 404 compliance were by far the areas that received the most comment.Â
On average, Nasdaq issuers spent $1.1 mn on the implementation of Section 404 alone. In almost all cases these costs were 2.5 times greater than financial audit costs. The burden of compliance falls hardest on the smaller firms in the survey, however: smaller issuers spent eleven times as much as their larger counterparts, according to the survey. (For the purposes of the survey a larger firm was defined as one with more than $2 bn in annual revenue.)
This figure reflects similar results from a North Carolina Bankers Association survey that discovered the cost of complying for smaller banks is 9 percent of earnings compared with less than 1 percent of larger banks’ earnings.
With figures like these it is not surprising that more than 90 percent of respondents feel the costs of Sox compliance are too high. The graph on page 42 displays a breakdown of some of the major concerns highlighted by the survey.
