Was Section 404 a Bitter Pill We Should Be Glad We Swallowed?

The UK government’s 2009 budget includes a provision requiring the chief accounting officers of major corporations to certify that they have adequate controls over their tax reporting. The UK press and certain accounting firms have seized on this — with great concern — as the imposition of Sarbanes-Oxley-like requirements on UK companies, with accompanying cost burdens. Now, as I commented in a May 4th article for the FSN online newsletter, it is not clear whether the requirement goes as far as Section 404, or is limited to the reasonable requirements of the Section 302 certification. We will have to wait to get clarification from the UK government.

But this outcry of alarm in the UK made me think (yet again) about the value of Section 404 in the United States. Certainly, the level of compliance work required of companies has been excessive and missed the overriding issue of corporate culture and the control environment. But have we actually benefited overall?

The level of financial restatements (once the restatements for trivia slowed) is down. While there have been a number of corporate frauds, how many accounting irregularities would have occurred during this period of pressure to make ever-increasing financial targets?

Was this a bitter pill that we are actually better off for having swallowed?

I welcome your comments.

 

Posted on May 6, 2009 by Norman Marks

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  1. Norman,

    You pose an interesting question.  If I was to take your hypothesis seriously I would be looking for a 'control' group - and a good proxy would be the SOX-less UK. Uk doesn't have the rigour of SOX and in the current climate its track record of fraud or misstatement doesn't appear that bad.  On the surface it suggests that SOX style legisaltion is unecessary as a preventative or perhaps just ineffective.  I imagine that's why many in the UK are anxious about new SOX-like legisaltion.

    What do others think?

  1. I attended a Center for Audit Quality dinner and roundtable last month. The CAQ is a group sponsored by the AICPA that tackles topics of interest and generates thought leadership for the external audit profession. The topic for discussion was financial statement fraud.

    I was there, representing the IIA, together with some CPA firm partners, board directors, business and law school professors, journalists, corporate executives, and the ACFE.

    In general, while the risk of fraud was thought to be higher in this environment, most of us (especially the CPA firm partners) thought that the additional controls implemented by companies had reduced the level and risk of material financial statement fraud.

    What do you all think?

  1. The biggest question for me is whether SOX would have stopped Enron, Worldcom, SocGen etc etc and I have to say my answer is no.  I did hope that SOX would at the very least make managers understand their responsibility and accountability for risk and control but even this appears not to have happened - there are too many layers between management and the actual testing that happens.

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