Audit

Compliance with Section 404 of the Sarbanes-Oxley Act has become a far more expensive proposition than originally thought, as the average cost of complying with the internal controls mandate has hit $4.36 million, a 39 percent jump from 2004 estimates, according to a recent survey from Financial Executives International. The organization of financial professionals, which surveyed 217 public companies with average revenues of $5 billion and asked them to gauge their Section 404 compliance costs, said that the out-of-pocket increase stems from a 66 percent leap in external costs for consulting, software and other vendors, and a 58 percent increase in the fees charged by external auditors. In a breakdown, FEI said that 404 compliance averaged $1.34 million for internal costs, $1.72 million for external costs and $1.30 million for auditor fees. The auditor fees are in addition to companies' financial statement audit fees. Some 55 percent of the participants in the FEI poll indicated that Section 404 gives investors and other external audiences more confidence in a company's financial reports. However, 94 percent of all companies surveyed said that the costs of 404 compliance exceed the benefits. In order to improve the effectiveness and efficiency of the Section 404 compliance process, the companies participating in the poll issued the following recommendations: o Allow for a more risk-based audit approach (71 percent); o Reduce the degree of documentation (66 percent); o Provide flexibility for remediating control problems in the fourth quarter (60 percent); o Increase the judgment allowed in aggregating deficiencies (55 percent); and, o Permit roll-forward procedures (54 percent).

The Securities and Exchange Commission appointed New York attorney Lee S. Richards III as the independent examiner for Islandia, N.Y.-based software manufacturer Computer Associates. Richards will serve as examiner for a minimum of 18 months. His appointment was part of an agreement that CA signed in September to end an investigation onto accounting fraud. In his new role, Richards, a partner in the New York law firm of Richards Spears Kibbe & Orbe LLP, will oversee compliance with the settlement, make best practices recommendations to the board, and revamp the company's finance and accounting departments. The SEC settlement stems from a $2.2 billion accounting fraud that ultimately led to the ouster of several top managers, including chief executive Sanjay Kumar. The company had been backdating purchase orders and keeping the books open past the period close.

Internal audit and risk-consulting firm Protiviti Inc. has partnered with Tibco Software -- a provider of business integration software -- for a Sarbanes-Oxley Section 404 solution. Terms were not disclosed. Under the agreement, the companies have co-developed a SOX 404 product that integrates Protiviti's SOX portal application with Tibco Staffware Process Suite. The resulting product is a framework to assist users with documenting, testing, assessing and monitoring their internal controls. The companies said that the co-branded SOX solution would help user companies reduce compliance costs and improve transparency.

Deloitte Touche Tohmatsu chief executive William G. Parrett has been named chair of the United States Council for International Business, a pro-trade group with 300 company members. Parrett will begin his two-year-term April 15. He becomes the 20th chairman to lead the organization, which lobbies for a pro-America stance on an array of global business and policy issues. "I am excited about the prospect of leading the USCIB on the international stage," said Parrett in a statement. "Like the Deloitte organization, with member firms around the world, the council is truly multinational, with a worldwide network that reaches into all corners of the world."

Dallas - High-profile Texas investor and entrepreneur Sam Wyly has filed an $80 million suit against Big Four firm Ernst & Young, charging that the firm's audits of troubled Computer Associates influenced his decision to sell his company, Sterling Software, to CA in a stock transaction.Wyly's suit, which was filed in Texas District Court here, said that he relied on E&Y audits for CA's fiscal 1999 to sell his company to the concern for stock. Roughly one month later CA's shares plunged some 12 percent when its earnings reports were delayed, and then fell further when the company failed to make its earnings forecast. Computer Associates replaced E&Y in 1999 with Big Four rival KPMG.

Just weeks after a report by New York State Comptroller Alan Hevesi charged three former officials of the Roslyn N.Y. School District with plundering more than $11 million over an eight-year period, a new investigation is examining the district budget, as well as the former supervisor for construction and repair projects. The probe by prosecutors for Nassau County, as well as Hevesi's office, centers on Thomas Galinski, who resigned last year after questions arose surrounding trips to Las Vegas and Atlantic City that were billed to the district. At issue is a $23.9 million bond issue approved five years ago to expand the district's middle school. However, district residents have labeled the work substandard, as evidenced by such things as leaking roofs. The former superintendent, Frank A. Tassone, assistant superintendent Pamela Gluckin and clerk Debra Rigano, who were alleged to have siphoned the money from district coffers, are currently awaiting indictment by the Nassau County Grand Jury. In addition, the state probe has implicated an additional 26 people involved in the audit scam. Meanwhile, the accounting firm that audited the district, Miller Lily & Pearce, which audited over 50 additional school districts and whose affiliate sold financial software to some 250 districts across New York state, recently shut its doors.

Washington - Regulators at the Public Company Accounting Oversight Board are wrestling with proposals to abandon the current "pass/fail" auditor reporting model for informing investors of the accuracy of corporate financial statements - a move that could require independent accountants to provide considerably more information about the veracity of their clients' financial reports.Whether the additional work and information will translate into more useful data for investors was a matter of considerable debate during the latest meeting of the PCAOB's Standing Advisory Group.

Auditor General David M. Walker said that, while Social Security is staring at a long-term financing problem, the 70-year-old program does not face an "immediate crisis." In testimony before the House Ways and Means Committee, Walker told lawmakers that it would be "prudent" to address the Social Security problem "sooner rather than later." Walker also took President George W. Bush to task for his aggressive selling of his privatization plan, where younger workers would be able to divert a portion of their payroll taxes into private investment accounts. Walker testified that private accounts by themselves would "exacerbate the solvency problem" that Social Security faces, and suggested that Congress first focus on improving the program's financing. The private accounts plan faces stiff opposition from Democrats and even some Republicans. Rep. Charles B. Rangel, D-N.Y., ranking Democrat on the Ways and Means Committee, was quoted as telling Walker that, "Private accounts will not be on the table if you are looking for bipartisanship.''

As part of a deal reached Monday with its regulator, mortgage giant Fannie Mae agreed to a number of corporate governance and management changes. The new practices, which supplement an earlier agreement meant to satisfy the Office of Federal Housing Enterprise Oversight regarding Fannie Mae's governance, include: * Separating the duties of the chairman and the chief executive officer; * Establishing a compliance and ethics office that can communicate directly with OFHEO; * Strengthening accounting rules; and, * Implementing policies to prevent the falsifying of signatures. Last year, OFHEO discovered significant problems with the mortgage giant's practices, including juggling the books to meet targets that triggered executive bonuses. The revelations led to the resignation of chairman and CEO Franklin Raines and chief financial officer Timothy Howard in December. The Securities and Exchange Commission said that from 2001 to mid-2004, Fannie Mae's accounting practices didn't comply with the requirements related to accounting for deferred purchase price adjustments and for derivatives and hedging activities, and advised the company that it should, among other things, restate its financial statements to eliminate the use of hedge accounting. In February, SEC chief accountant Donald Nicolaisen announced that the commission would conduct a thorough, top-down examination of the mortgage financing concern.

Accounting irregularities have brought a flurry of troubles down on Delphi Corp., the world's largest maker of auto parts, leading to the need for a $200-plus million restatement and a host of corporate changes, including the departure of its chief financial officer. In a filing with the Securities and Exchange Commission, the company, based here, said that it had overstated its cash flow for 2000 by about $200 million due to improper accounting for prior transactions involving the receipt of rebates, credits and lump-sum payments, as well as certain off-balance sheet transactions. It also said that improper accounting regarding rebate transactions lead to a $61 million overstatement of income in 2001. The company discovered the irregularities in an ongoing investigation that was prompted by an SEC inquiry last July. Following the filing, Delphi's board expressed a lack of confidence in vice chairman and chief financial officer Alan Dawes; he resigned last Friday. Chief accountant and controller Paul Free also resigned, and John Blahnik, vice president of treasury, mergers and acquisitions, and new markets, was re-assigned to a lesser position. Chief accounting officer and controller John D. Sheehan is acting as CFO for now, reporting to chairman and chief executive J.T. Battenberg, who will retire later this year. The company's stock suffered this week as a result of the news, and on Tuesday Moody's cut Delphi's debt rating to junk. Also on Tuesday, the company announced that it would cut health benefits for retirees by dropping coverage once they are eligible for Medicare, starting in 2007. The cuts could save the company half a billion dollars over time.

Fast-food titan McDonald's Corp. said that it would pare down its equity-based compensation, such as stock options, and replace it in some cases with cash-based incentives, The Wall Street Journal reported. In its annual report, the global burger chain said that its decision stemmed in part from the options expensing rule adopted by the Financial Accounting Standards Board in December. McDonald's said that it will start complying with the options-expensing mandate during the current first quarter, and added that it would have to restate its financial results from some prior periods to reflect the previously unrecognized compensation expense.

Ending its competitive bidding process, retirement services provider TIAA-CREF appointed Big Four firm PricewaterhouseCoopers as its auditor for its 2005 fiscal year. PwC succeeds Ernst & Young as the company's independent accountant. Separately, TIAA-CREF said that Martin Gruber resigned as a trustee of the College Retirement Equities Fund and the TIAA-CREF Funds. Gruber's resignation marked the third resignation of a trustee over the past several months, after regulators launched an inquiry into E&Y's independent relationship with the benefits provider. Two former trustees, William H. Waltrip and Stephen H. Ross, resigned Nov. 30 after a conflict of interest with E&Y was discovered. Ernst will complete CREF's 2004 audits. TIAA-CREF said that it expects no qualified opinions or disagreements on accounting matters with E&Y.

Like a mammoth iceberg where just a fraction lies above the surface, the scope of the audit fraud at the Roslyn, N.Y., School District has, incredibly, passed the $11 million mark. A report on the fraud, released by New York State Comptroller Alan Hevesi, documented a far bigger plundering by former officials that previously thought as recently as late last year, when the losses at the Long Island district were estimated to be roughly $3 million. The report showed that former district officials siphoned funds from district coffers for items such as payments on personal mortgages on homes in New York and Florida, $609,000 spent at Home Depot, over $200,000 on lease payments for luxury cars, and more than $100,00 on trips to Las Vegas, San Francisco and a flight to London on the Concorde. Charged in the scandal are former Roslyn Schools superintendent Dr. Frank Tassone, former assistant superintendent for business Pamela Gluckin, and a former clerk, Deborah Rigano. All three are waiting indictment by the Nassau County Grand Jury. In addition, the state probe, which combed over district audits over an eight-year-period, has implicated an additional 26 people involved in the audit scam. The firm that audited the Roslyn Schools, Miller Lily & Pearce, which audited over 50 additional school districts and whose affiliate sold financial software to some 250 districts across New York state, recently shut its doors.

The Securities and Exchange Commission unanimously approved the 2005 budget for the Public Company Accounting Oversight Board, which requested $137 million for the body charged with policing the accounting profession. Initially, the board submitted a 2005 budget request of $152.5 million, a dramatic increase from the $103 million it had been allocated in 2004. However, when its hiring goals for 2004 fell short, it slashed that request by roughly 15 percent. The SEC approval, however, did not come without controversy, as two commissioners -- Paul Atkins and Cynthia Glassman -- reportedly ignored the objections of their boss, SEC Chairman William Donaldson, and extended an invitation to PCAOB Chairman William McDonough to attend the budget meeting. An invitation was also extended to Robert Herz, chairman of the Financial Accounting Standards Board. Neither attended the meeting. Last year's approval of the PCAOB budget had been done behind closed doors.

As expected, the Securities and Exchange Commission granted a one-year extension on Sarbanes-Oxley 404 compliance for small companies and foreign issuers that trade in the U.S. Under the SEC's revised guidelines, those firms that fall under those categories -- U.S, firms with a market cap of less than $75 million -- would have to be in 404 compliance for their first fiscal year ending on or after July 15, 2006. Section 404 of SOX requires that a company certify their internal controls and have an attestation to that effect from their outside auditor. Larger U.S. companies are required to be in 404 compliance for the first fiscal year ending on or after Nov. 15, 2004. In April, the SEC has scheduled a public roundtable to discuss concerns about SOX 404 and its time and cost impact on smaller companies.

National consumer electronics retailer Best Buy has hired Big Four firm Deloitte & Touche its new auditor, according to a federal filing. Best Buy had previously reported that it would jettison its independent accountant, Ernst & Young, following the audit of its financials for the year ended Feb. 26. Best Buy's new fiscal year began Feb. 27.

The board at financial and credit card services conglomerate American Express Co. engaged Big Four firm Ernst & Young as the auditor for its American Express Financial Advisors unit. The company, headquartered here, said that the board's decision was fueled by the planned spin-off of AEFA to shareholders, which the company announced earlier this month. Minneapolis-based AEFA came under fire recently when the New Hampshire Bureau of Securities Regulation filed a petition for relief in the amount of $17.5 million against it, after an audit revealed a disproportionate amount of American Express funds in clients' financial plans. An investigation revealed management's support of advisors that promoted the firms' poorer-performing funds, as opposed to those of competitors, and backed it up by offering more lucrative incentives for Amex products. PricewaterhouseCoopers will remain the independent accountant for American Express Co. for fiscal 2005.

The Securities and Exchange Commission will convene March 3 to consider approval of the 2005 budget for the Public Company Accounting Oversight Board. The oversight body has proposed a 2005 budget of $137.1 million, a figure roughly 10 percent below its initial 2005 request of $152.5 million. The regulator trimmed its initial budget request after it fell behind on its anticipated hiring volume for the coming year. The board said that the $15 million reduction reflected the subsequent reductions in salary, benefits and payroll tax expenses. In addition to okaying the accounting oversight board's 2005 budget, the commission is also expected to discuss issues related to mutual fund redemption fees and credit rating agencies.

The Securities and Exchange Commission has named Joseph A. Hall to the post of managing executive for policy and Martha B. Peterson as counselor to commission chair William Donaldson. Hall will assist Donaldson with enforcement policies, as well as procedures governing both the markets and SEC issuers. He also will serve as Donaldson's main liaison to other SEC commissioners and departments. Hall succeeds Patrick Von Bargen, who recently announced that he would be leaving the regulator for a post in the private sector. Hall joined the SEC in 2003 as senior policy fellow in the Office of the General Counsel, and later served as counsel to Donaldson. Prior to coming aboard at the commission, he was a partner with the firm of Davis Polk & Wardwell in New York. In her new post as Donaldson's counsel, Peterson will advise him on rulemaking and other initiatives. She originally joined the commission in 1987, serving in the Office of the General Counsel and later as counsel to then-chair David Ruder. In a statement, Donaldson said, "Joe and Martha each bring a wealth of experience and knowledge to their positions. I look forward to continuing to work with them to further the best interests of America's investors."

The U.S. Supreme Court agreed to hear arguments on the appeal of the obstruction of justice conviction of former Big Five firm Arthur Andersen. The arguments are scheduled for April 27. In 2002, Andersen was convicted in a Houston courtroom of obstruction of justice charges related to its now-famous shredding of documents for audit client Enron, the Houston-based energy trader. The 5th U.S. Circuit Court of Appeals subsequently upheld the obstruction conviction. The issue before the Supreme Court will be whether the instructions to the jury at the Andersen trial were too vague and broad to determine correctly whether the audit firm obstructed justice. Enron -- once ranked as the country's seventh largest company -- collapsed into bankruptcy in December 2001. Andersen is asking that the high court either acquit the company or grant a new trial with new jury instructions.