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Tag: Sarbanes Oxley

President’s Council on Jobs Report Suggests We Should Try Sarbanes-Oxley Light for IPOs

Barbara Roper wrote a commentary piece in WaPo Capital Business over the weekend that suggests the unthinkable: softening hard ass SOX rules for IPOs could actually kill jobs. How is that possible? Aren’t IPOs great for the economy?

Well, not always. Case in point: Groupon. Healthy, financially strong businesses are good for the economy. Scams, frauds or even overambitious accounting tricks might temporarily get the economy’s spirits up like a few rails of coke but eventually reality sets in and the economy is left broken and penniless in the alley looking for its next hit.


The report is an effort on the part of the Obama crew, who surveyed 27 business executives (including AOL’s Steve Case… and we know how his business turned out) for ideas on how to get the economy moving again. Among the suggestions, the report recommends Congress make compliance with all or part of Sarbanes-Oxley voluntary for public companies with market valuations up to $1 billion or, alternatively, exempt all companies from SOX compliance for five years after they go public.

The report blames burdensome SOX rules for the sharp drop in small IPOs in recent years, writing:

In the aftermath of the dot-com bubble and unintended consequences stemming from the Spitzer Decree and Sarbanes-Oxley regulations, the number of IPOs in the United States has fallen significantly. This is especially true for smaller companies aspiring to go public. As noted earlier, the share of IPOs that were smaller than $50 million fell from 80% in the 1990s to 20% in the 2000s. Well-intentioned regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies.

That would totally work as a justification except the SEC already debunked this silly idea. In a report earlier this year recommending no new 404(b) exemptions, SEC analysis showed that the United States has not lost U.S.-based companies filing IPOs to foreign markets for the range of issuers that would likely be in the $75-$250 million public float range after the IPO. “While U.S. markets’ share of world-wide IPOs raising $75-$250 million has declined over the past five years, there is no conclusive evidence from the study linking the requirements of Section 404(b) to IPO activity,” the report stated.

And as we all know, companies under $75 million haven’t had to worry about the SOX burden at all thanks to Congressional intervention. So how could it be that the burden they haven’t had has somehow prevented them from going public?

New boogeyman, please. I’m no huge fan of SOX but you’re going to have to come up with something better than this to convince me it’s a good idea to can it.

Someone Is Curious About All Those KPMG Employees Working on General Electric’s Taxes

You may remember earlier this year when The New York Times broke a little story about General Electric’s tax savvy ways and the best tax law firm the universe had ever seen (aka the GE tax department).

The report�������������������� href=”http://www.goingconcern.com/2011/03/jon-stewart-reacts-to-ges-tax-savviness/”>a few people to get bent out of shape because the Times said GE was enjoying $14.2 billion in profit while “claim[ing] a tax benefit of $3.2 billion.” What that “benefit” really entailed was a mystery but many people jumped to the conclusion that it was a “refund” and ProPublica (possibly a little peeved that they got scooped) tried to set the record straight on the Times story.

Despite all the back and forth, everyone was pissed at GE. The company lost a Twitter joust with Henry Blodget and then a bogus press release went out claiming the company was returning the “refund” of $3.2 billion and the Associated Press ran it. Slightly awkward.

Francine McKenna also did a write-up on KPMG’s role in this little soap opera, as the firm has been the auditor for GE since Bill Taft was maxing out the White House bathtub.

The latest twist comes from a tip we received earlier about a “Preservation Notice” sent to all KPMG employees yesterday from the firm’s Office of General Counsel (“OGC”).

URGENT TARGETED PRESERVATION NOTICE: GENERAL ELECTRIC’S LOAN STAFF ARRANGEMENTS
Please be advised that until further notice from KPMG LLP’s (KPMG or firm) Office of General Counsel (OGC), you are hereby directed to take all steps necessary to preserve and protect any and all documents created or received from January 1, 2008 through the date of this Notice relating or referring to the loaning, assignment or secondment of tax or other professionals to General Electric Company and its direct and indirect subsidiaries, affiliates and divisions (collectively “General Electric’s Loan Staff Arrangements”).

As Klynvedlians know, these preservation notices come out so often that you barely even notice them. When you do notice them is when the partner in charge of your team informs you about it before it hits your inbox. What follows is basically the biggest CYA exercise you’ve ever seen. They roll in giant dumpsters and every last scrap of paper you’ve ever written on gets throw in and eventually it gets shipped off to OGC. Your life doesn’t really change all that much other than you’re not allowed to delete another email EVER. At least that’s how I remember it.

ANYWAY, this notice seems a little different. Why exactly? Here’s a excerpt from McKenna’s post:

In defiance of [Sarbanes-Oxley] provisions, KPMG – GE’s auditor – provides “loaned staff” or staff augmentation to GE’s tax department each year. These “temps” perform tasks that would be otherwise the responsibility of GE staff. Sources tell me KPMG employees working in GE tax have GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities. They use GE computers because the software required for their tasks is GE proprietary software.

This type of “secondment” to an audit client is never allowed. KPMG should know better.

YEESH. So any documents going back to January of 2008 that relate or refer to someone being assigned under this allegedly dubious arrangement must be preserved. You don’t have to be John Veihmeyer to know that’s a METRIC ASSTON of documentation. It’s not that GE’s tax needs are seasonal; they’re more like “perpetual” or “infinity times infinity.” A company with the best tax law firm already in house that also has an arrangement with a their auditor to throw a few more people at the problem indicates that they are working on this shit 24/7. For KPMG, it amounts to a nice little revenue stream and it keeps lots tax staff busy throughout the year.

But what caused the notice? That’s the question. Our tipster speculated that the PCAOB and SEC might be up to something but per standard operating procedure, neither will confirm nor deny the existence of any investigation or inquiry. KPMG spokesman George Ledwith did not respond to an email seeking comment.

Like we stated previously, these preservation notices are a dime a dozen but because this one deals with General Electric and presumably their tax compliance it qualifies as outside the norm. If you’re in the know or know of someone in the know or have anything else to add, email us or comment below.

Court Tosses Lawsuit Filed by Fired Tyco Accountant Who Wasn’t Interested in Being Responsible for Signing Off on a Party Featuring Mermaid Greeters, Wenches

Last summer we told you about a lawsuit that was filed by a fired Tyco accounting manager who claimed that he was let go after he refused to sign off on expenses related to an epic party in the Bahamas that had “Mermaid Greeters,” “Costumed Pirates/Wenches” a tatth “Limbo” and “fire” dancers and other, what some might call, “fun” or “awesome” things. The whole bash was going to run around $350,000 but Jeffrey Wiest wasn’t interested in being connected to another lavish party thrown by Tyco.

This is understandable because, as you well know, the AWESOME party in Tyco’s past was taped and it eventually wound up as evidence in a trial against Tyco Execs Dennis Kozlowski and Mark Swartz. Those two men are currently wards of the state and Tyco is, for AWESOME or worse, simply known as the company that threw the Roman Orgy Party:

Investors footed about half the bill for that affair, which was disguised as a shareholder meeting and is now widely known as the Tyco Roman Orgy.

The party featured such indulgences as an ice sculpture modeled after Michelangelo’s David urinating top-shelf vodka. Against this backdrop in 2008, Jeffrey Wiest said he “refused to process a payment [for] and sent a note to his management questioning the legitimacy of a $350,000 event being held at the Atlantis Resort in the Bahamas.”

“Wiest, as was virtually everyone else at Tyco and in the world, was cognizant of a similar party under Dennis Kozlowski’s management,” according to the manager’s July 2010 suit, first reported by Courthouse News. “He did not want to be any part of a repeat occurrence.”

As we mentioned, Wiest obviously had the foresight to conclude that news of a “Mermaid/Pirate/Wench Rape and Pillage Party” would not go over so well with anyone not in attendance and accordingly, refused to sign off on the expenses. Considering that there was “only one 1.5-hour business meeting during the entire five-day event,” it appears that Wiest made the right choice. However, Wiest claimed that the company started “investigating” him and shortly thereafter was told that his services were no longer needed.

Wiest took his story to the masses with an appearance on Fox Business where he showed how accountant-y (and unconvincing) he could be. The court that was hearing his lawsuit agreed:

“Mr. Wiest’s communications simply provided information and suggestions to ensure proper tax and accounting treatment of the Atlantis event expenses. As such, then, they did not rise to the level of ‘definitively and specifically’ conveying a reasonable belief that [a Sarbanes-Oxley crime] was taking place, notwithstanding Mr. Wiest’s conclusory assertion in the complaint that he had made ‘protected disclosures relating to fraudulent accounting practice, attempted shareholder fraud, and lack of compliance with United States Generally Accepted Accounting Principles.'”

Definitely a setback for Wiest who, it appears, won’t be recouping any lost income here and will forever have the reputation as a party pooper. And the latter could be a far worse fate.

Tyco Accountant Loses Retaliation Suit [CNS]

Center for Audit Quality Thrilled That SEC Study Recommends Auditors Continue Auditing

I am pleased that the SEC’s Office of the Chief Accountant’s thoughtful study recommends retention of Section 404(b) of the Sarbanes Oxley Act for companies whose market capitalization is between $75 and $250 million. Section 404(b) requires independent auditors to attest to management’s assessment of the effectiveness of its internal controls over financial reporting […]. The study concluded that costs of Section 404(b) compliance have declined and financial reporting is more reliable when the auditor is involved with ICFR assessments. Importantly, the study found that investors generally view the auditor‘s attestation on ICFR as beneficial. [Cindy Fornelli/CAQ]

Chief Audit Executives Like Sarbanes-Oxley…No, They Really Like It

A new survey of more than 300 chief audit executives (CAEs) by Grant Thornton LLP finds that while nearly half believe that the shifting regulatory landscape poses the greatest threat to their company, a vast majority (88%) do not believe that the Sarbanes-Oxley Act (SOX) should be repealed. Of those that believe SOX should be repealed, the cost of compliance is the main reason for doing so. “Since the passage of SOX, organizations have had to dedicate significant resources to comply with a host of new laws and regulations,” noted Warren Stippich, a Chicago-based partner and Grant Thornton’s national Governance, Risk and Compliance solution leader. “Based on discussions with various CAEs during the survey process, many believe that SOX brings a continued focus by management on financial and governance-related controls. However, CAEs believe that compliance audit processes are now well-defined and are currently exploring ways to contribute value creation to the organization well beyond compliance monitoring and reporting.” [GT]

Mike Mayo Is of the Opinion That Citigroup ‘May Have Violated Sarbanes-Oxley’

Last week we heard from a number of people on the topic of Citigroup’s internal controls that while it didn’t sound like they were quite up to snuff, KPMG was somehow cool with it and Vikram Pandit signed his name to it, saying that everything was hunky dory.

Now along with bloggers and journalists, the scourge of Citigroup, CLSA analyst Mike Mayo, has decided to get into the act:

Citigroup may have violated Sarbanes-Oxley with its 2007 10-K submission, in our opinion. The new information relates to letters from regulators that were only revealed earlier this year as part of the FCIC archive. We believe these letters between Citi and the Fed, Citi and the OCC, and the OCC with internal staff, imply that Citi should have known about internal control shortfalls for the year 2007 and was directly told about them by the OCC only eight days before the 10-K was signed. Also, Citi reported large unexpected losses with less than two months left in the year. Thus, the lingering question in our mind is why Citi signed off on its 2007 10-K as having effective controls in light of such problems. This information is still relevant today because it reflects on the magnitude of the risk shortfalls and what we feel is the higher-than-perceived task of turning them around.

That’s from Mayo’s update on the bank, dated today, and along with the “opinion” on a Sarbanes-Oxley violation, he has a few questions:

To what extent was the audit committee and board at Citi aware of the concerns voiced by various regulators at the time, and who gave the advice to sign the 10-K? To what extent has Citi’s board examined the issue since the release of letters from the FCIC? Has the SEC and DOJ looked into this matter?

We bolded that portion since it might – just might – be referring to KPMG and the apparent disregard everyone had for the letter sent to Citigroup from the OCC. Of course, not everyone always agrees with Mayo, namely Dick Bové who has gave HofK the thumbs up although it was obvious that he’d never heard of the firm. Bové hasn’t weighed in on this particular report but it’s only Monday.

Anyway, Citigroup remains steadfast in their thoughts on the matter, telling The Street’s Lauren Tara LaCapra that the “certifications were entirely appropriate,” although things increasingly seem to be pointing to the possibility that wasn’t the case. A message left for Marianne Carlton, a KPMG spokeswoman, hasn’t been returned.

There’s at Least One Interesting Theory Out There About the Wells Fargo CFO’s Sudden Resignation

Last week, we told you about Wells Fargo’s announcement that their CFO gave himself an early birthday gift by throwing a retirement party for himself. As previously mentioned, Howard Atkins’s departure was a little mysterio and no one had any theories (crackpot or otherwise) on the Atkins’s march in. That all changed yesterday when Christopher Whalen, an analyst at Institutional Risk Analytics issued a report that stated that he, for one, wasn’t buying the “personal issues” story put out by the bank:

“The departure of Atkins, we are led to believe, was not merely the result of personal issues, but reflects an ongoing internal dispute within [Wells Fargo’s] executive suite regarding the bank’s disclosure,” he writes.

Whalen then goes on to argue that Wells Fargo’s “public behavior suggests significant problems in the bank’s internal systems and controls as defined by the Sarbanes-Oxley law. We further understand that some officials of [Wells Fargo], increasingly uncomfortable with the bank’s aggressive public disclosure regime, have reached out to regulators because of concerns regarding accounting issues.”

The Stagecoach Gang, for their part, is sticking to their story citing the “personal reasons” and their spokesman dismissed Whalen’s report with “pfffft” and a wave of the hand, saying, “I haven’t heard anything like that. It’s speculation. I’m not going to comment on it.”

Wells Fargo CFO Exit Tied to Disclosure: Analyst [The Street]

This Is as Good as It Gets for Sarbanes-Oxley 404 Compliance

Six years and everyone pretty much has this down. Arthur Andersen (the man, not the firm) would be so proud.

Just don’t get lazy.

In the sixth year of compliance with Sarbanes-Oxley Section 404 requirements, companies with a public float greater than $75 million reduced their rate of adverse opinions from 5 percent in the fifth year to only 2.4 percent in the most recent year. Even if companies that have missed their filing deadlines turn in adverse opinions, it would bump the rate to only 2.8 percent, said Don Whalen, director of research for Audit Analytics.

Over the six reporting years that public companies have been filing the reports, adverse opinions have steadily fallen from a high of 16.9 percent for fiscal years ending after Nov. 15, 2004, to the current low of 2.4 percent, said Whalen. “It’s getting to the point where you wonder if it can even be reduced any more,” he said.

Here’s More Evidence That Complying with Federal Regulations Is a Pain in the A$$ for Small Businesses

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

If you’ve suspected that complying with federal regulations is particularly onerous for small businesses, a new report from none other than the US Small Business Administration will provide you with plenty of new ammunition.

The report, called the Impact of Regulatory Costs on Small Firms and written by the SBA’s Office of Advocacy, estimates just how much it costs very small, smallish and big companies to follow the rules. The conclusion is that businesses with under 20 employees pay the most per worker–$10,585 per employee each year. The cost for businesses with 20 to 499 employees is $7,454 and for firms with 500 and more employees, $7,755.

The reason, of course, is the matter of fixed costs. A small business incurs about the same expense as a larger one. But the big guys can spread the expenses over more revenue, output, and employees, resulting in lower costs per unit of output.

The report, which looked at data from 2008, found that small businesses with under 20 employees pay the most to comply with environmental, tax, and occupational safety and health and homeland security regulations. Most notably, the cost per employee for environmental compliance is $4,101 compared to $883 for the biggest companies.


Clearly the unequal burden of regulatory compliance makes life a lot harder for small businesses and, in fact, serves to undercut their ability to compete. “This potentially causes inefficiencies in the structure of American enterprise, and the relocation of production facilities to less regulated countries, and adversely affects the international competitiveness of domestically produced American products and services,” says the report. “All of these effects, of course, would have negative consequences for the US labor market and national income.”

Still the report didn’t comment on the benefits of regulations. That’s another issue entirely. In fact, just because they cost a lot doesn’t therefore mean the rules shouldn’t exist. It does, however, indicate that something is very wrong with the way they’re applied–and that, for small companies to thrive, change is imperative.

According to the report, economic regulations, which include things like rules related to tariffs, are the only area where large firms have the highest cost. That is due, in part, to the Regulatory Flexibility Act, which requires agencies “to assess the effect of regulations on small businesses and to mitigate undue burdens, including exemptions and relaxed phase-in schedules.” The RFA, says the report, has been particularly effective in shielding small businesses from the cost of complying with the Sarbanes-Oxley Act.

Seems there should be a significantly more concerted effort to exempt small businesses from certain regulations or, at least, to help with compliance efforts. Some 89 percent of all companies in the US employ fewer than 20 people. If the cost of complying with regulations is really egregiously high for the vast majority of companies simply due to their size, it’s incumbent upon the rule-makers to do something about it.