Sarbanes and Oxley nix changes

Strategic Finance, May, 2005 by Stephen Barlas

In March, Sen. Paul Sarbanes (D.-Md.) and Rep. Mike Oxley (R.-Ohio) made it clear they have no intention of acceding to business pressure to change the Sarbanes-Oxley accounting law, which requires companies to ensure the effectiveness of their internal controls. Companies have been arguing that compliance with Sarbanes-Oxley has resulted in unreasonable, additional accounting fees. Sarbanes warned that the public shouldn't fall victim to "collective amnesia" about "a systemic breakdown" in the recent past, a reference to the skein of accounting scandals that began with Enron. Oxley pointed out that disclosures about accounting irregularities persist. The number of company financial report restatements peaked last year at 414, he said, an indication that the new law is ferreting out problems. Oxley also cited fiscal mistakes uncovered by regulators that will result in Washington mortgage giant Fannie Mae restating earnings by more than $9 billion. "Just two months ago, earnings smoothing was confirmed at Fannie Mae," Oxley said. "This should be sobering news for those who think Sarbanes-Oxley is no longer needed." Earnings smoothing refers to a practice of shifting costs and revenue to produce the appearance of steady growth.

SEC to Issue Options Accounting Guidance

The Securities & Exchange Commission will issue guidance to help companies comply with new rules on accounting for stock options since the Financial Accounting Standards Board (FASB) said that companies will be allowed to choose among several models to value the options. Senators Wayne Allard (R.-Colo.) and Robert F. Bennett (R.-Utah) complained at a Senate Banking Committee hearing in March that this latitude is causing confusion. According to the Washington Post, Bennett told SEC Chairman William Donaldson, "You, sir, are the last gatekeeper against this kind of insanity. I'm pleading with you and your accountants to find some way through this thicket."

Donaldson responded by calling stock options a rather complex subject and noting that the SEC hopes "to be in a position to give guidance so people can deal with this." Donaldson assured lawmakers that if companies use an approved model and disclose their estimates and assumptions properly, "the chances of...litigation coming from us is zero."

SEC Clips PCAOB Budget

The SEC forced the Public Company Accounting Oversight Board (PCAOB) to cut its 2005 budget by more than $15 million, according to SEC Chief Accountant Donald Nicolaisen. The PCAOB, which rides herd over the accounting industry, was created by the Sarbanes-Oxley law and began operation in 2003. The PCAOB initially requested a 2005 budget of $152.8 million back in October 2004. Then Nicolaisen and his staff went to work. "During our consultations with the PCAOB staff we noted several areas where we thought the budget estimates could be tightened," he said. "Our discussions resulted in reductions in the personnel costs reflected in the PCAOB budget, including amounts for salaries and relocation and recruitment costs. Other areas reduced included the projected costs for hiring consultants and for travel, training, and technology expenses." Bingo, there goes $15.5 million in allegedly needed expenses.

IRS Getting Into Act, Too

Given all the publicity and coverage of the trials of former WorldCom and HealthSouth CEOs Bernie Ebbers and Richard Scrushy, respectively, someone could be excused for thinking that it's only corporate accounting malfeasance that can get a corporate executive into trouble. Not so. Now the Internal Revenue Service wants in on the enforcement act. Its criminal indictment of Walter Anderson in March served notice that it now will be looking much more carefully at how corporate chief executives and others slightly below that level report their income. The IRS said Anderson owes $210 million in back taxes. A few weeks before it indicted Anderson, the IRS made its last offer to nearly 200 executives from 42 corporations who had used an improper tax shelter, at least in the mind of the Service, to avoid paying taxes on $700 million in income. The IRS's decision to look closely at the tax returns of corporate executives came after a pilot program revealed too many inaccurate 1040s.