A study sponsored by the Institute of Management Accountants indicated that some of the problems with the Sarbanes-Oxley Act might stem from a professional bias that emphasizes public accountancy over management accounting.IMA president and chief executive Paul Sharman said that the public, professional and governmental assumption that public accountancy is the only accountancy has resulted in regulation that cannot be implemented, and the use of an auditing standard as an accounting standard.

"We've finally got the weight needed to rebalance the profession," Sharman said of the association's study. "It's no longer rhetoric. It's clear evidence, fact-based stuff."

The auditing standard that became a management accounting standard is Auditing Standard 2 of the Public Company Accounting Oversight Board. Sharman said that using AS 2 for management purposes has proven awkward, inefficient and expensive.

"Not only did our survey demonstrate conclusively that there are serious problems with the implementation of Sarbanes-Oxley, but now the SEC has come out and agreed with that position, saying that the existing guidance was written by auditors for auditors," Sharman said.

Sharman attributed the Securities and Exchange Commission's implicit agreement to Chairman Christopher Cox's opening remarks at a May roundtable discussion staged by the PCAOB and the SEC on business' second-year experience with SOX Section 404's internal control reporting requirements.

"Auditing Standard 2 gives guidance to independent auditors tasked with determining whether a company's internal controls are effective," Cox said. "No similar guide, however, exists for companies and their management, and in the absence of direction from us, companies have been basing the assessment of their controls on AS2... . Wouldn't management benefit from having guidance from the SEC on what constitutes adequate controls?"

A concepts release issued by the SEC in July is further evidence that the commission has recognized that difficulties with the implementation of SOX Section 404 on internal controls are partially attributable to a lack of guidance for corporate accountants.

Asking for recommendations on management guidance, the document acknowledges that the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - the IMA is one of those organizations - provides "components and objectives of internal control; it does not set forth detailed guidance as to the steps that management must follow in assessing the effectiveness of a company's internal controls over financial reporting."

Testing, testing, testing

Jeffrey C. Thomson, IMA vice president of research and practice development, reiterated the SEC's implicit message, as well as the IMA's findings.

"In essence, external auditors have guidance that results in over-auditing," Thompson said. "Poor management, the folks stuck in the trenches, had no practical guidance. That resulted in the finding that management is clueless in determining how much control is enough. When should they stop testing and testing and testing?"

Sharman said that the IMA is not only formulating a detailed comment on the release, but devising an assessment methodology based on the internal control experience of 600 companies in several countries.

Kris Brands, director of financial systems at Inamed, a division of Allergan Inc., was one of the study's respondents who said they needed more methodology, that processes were too vague and that there was too much influence from auditors.

Brands also participated in a COSO research effort, polling companies to learn of their experience with SOX compliance. She found them expressing the same frustrations.

"[Managers] felt that AS 2 was being followed from an auditor's perspective. These people were business-process owners, and they felt there was an undue amount of focus and attention on auditing practices as they were trying to evaluate and measure internal control," Brands said. "They cited that COSO's framework was out there, but that was not what was prevailing."

Sharman said that the problem goes beyond Sarbanes-Oxley and AS 2. He sees it deeply rooted in the profession.

"Auditing Standard 2 is symptomatic of systematic institutional bias," Sharman said. "The people who have influence in the accounting profession in the United States are all products of the same educational system. This is where the bias occurs. The definition of the term 'accountant' is established in undergraduate education ... . Undergraduate universities ignore the needs of industry and governmental accountants. They stamp out the notion that the CPA defines what accountancy is. And that's how we get AS 2 and unimplementable regulations from government."

The study, titled "COSO 1992 Control Framework and Management Reporting on Internal Control over Financial Reporting: Survey and Analysis of Implementation Practices," will be available online at the IMA's Web site, www.imanet.org.

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