Reducing complexity: FEI's Michael Cangemi envisions a future with simplified financial reporting and a single set of worldwide standards

Internal Auditor, Dec, 2007 by Tim McCollum

IT'S BEEN A TURBULENT FEW YEARS for the world's top financial executives. New financial reporting requirements and ever-changing accounting standards have made their jobs increasingly complex. That's not to mention the specter of globalization, converging U.S. and international standards, and an evolving concept of internal control. What's needed now isn't more rules and standards--it's clear consensus rules that are easier for companies to follow, says Financial Executives International (FEI) Chief Executive Officer (CEO) Michael P. Cangemi.

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Five years after the U.S. Sarbanes-Oxley Act of 2002, large companies are getting a better handle on compliance and reigning in costs, but Cangemi says that the act's complicated requirements are threatening the competitiveness of U.S. businesses--especially for small firms. Cangemi, who took over at FEI in January, has seen these reporting and control issues from many perspectives over the past three decades: as an internal auditor, chief financial officer (CFO), CEO of women's leather-goods designer Etienne Aigner Group Inc., and head of his own consulting firm. He also wrote the book--literally--on managing the audit function. Now Cangemi has a plan for fixing the complexity problem, beginning with taking a "time out" from making new accounting rules until regulators and standards bodies agree on basic global standards. He recently discussed his proposals with Internal Auditor.

Q. What are FEI members telling you about their experiences with Sarbanes-Oxley?

The total cost of compliance with Sarbanes-Oxley seems to be coming down, so our members are pleased with that. Our members are pleased with the recent U.S. Securities and Exchange Commission (SEC) guidance, with Auditing Standard No. 5 (AS5), and the coordination between the SEC and the U.S. Public Company Accounting Oversight Board (PCAOB).

Q. According to a recent FEI survey, most U.S. CFOs still believe the costs of Sarbanes-Oxley Section 404 compliance exceed the benefits. Why is this?

With Sarbanes-Oxley, not only do you have to have an internal control system, but it has to be audited by management and by the external auditors. That was a huge leap. What's been happening in the last five years is a rationalization of that process.

Financial executives want, and believe in, good systems of internal controls, just like internal auditors. There was never a question about the principle of having a good set of controls. Cost-benefit issues are driven by the extent to which the law requires you to document it, and the extent to which the law requires you to audit it internally and externally. What we had was a pretty aggressive initial approach of two audits; we've cut it back down to one.

Q. If compliance costs are going down, why aren't external audit costs following suit?

FEI basically has the same question, and one of the answers we get is that audit fees are going up because of inflation, so there is to some degree an offset in the reduction of the work that's being done for Sarbanes-Oxley. But underneath it all is the litigation environment and concerns about the PCAOB review process. Basically, the auditors are taking a very conservative view toward how much work they need to do to make sure that they satisfy Sarbanes-Oxley. Over time, after people get used to the PCAOB rules, and with the new Advisory Committee on the Auditing Profession launched by U.S. Treasury Secretary Henry Paulsen--which will look at the audit industry and some of its liability issues--they may be able to relax some more.

Q. So FEI members got what they wanted from the SEC guidance and AS5?

We got a lot of what we asked for in our original comment letter because we wanted the two documents to be coordinated. The documents are shorter. They allow a little more ability to use judgment.

These are fascinating times because we are still defining terms that we were trying to define when I first came into the accounting profession--like judgment and materiality. But we are hopeful, and many of our members are reporting that they are seeing some easing back of the audit related to Sarbanes-Oxley. Whether or not external auditors will increase audit time in other areas or fees to offset it, that's still an open question.

Q. Half of FEI's members are from private companies. Are they concerned that they might be dragged into Sarbanes-Oxley-like requirements?

I think that's a very real concern. Requirements on smaller companies in general should be evaluated as to scope because of the complications of trying to put a good system of internal control in a smaller company. They have a whole different kind of control structure. We need to be careful of what we establish with these companies because private companies and smaller companies are a very large part of the American economy. We should be careful not to put them in a competitively disadvantaged position as they try to achieve a goal of internal control that is difficult to define.

Q. FEI has been taking on the complexity of financial reporting. Why is it such a problem?