SOX 404 A CFO Perspective

1
SOX 404A CFO Perspective

• Tom Madden

2
SOX 404 A CFOs Perspective

• Generally, a positive initiative
• However, some negatives encountered
• Focus on opportunities for the Future

3
SOX 404 Year 1 Observations

• Generally, a positive initiative
• Renewed intensified focus on internal control
• Corporate responsibility has been there since
  1977 (FCPA)
• Accounting firms largely utilizing substantive
  audits
• A broader team now focused on internal control
• Senior management
• Operating management
• Cross functional steering committee
• Board of directors and audit committee
• Internal control issues now more visible
• Reporting remediation processes more formalized

4
SOX 404 Year 1 Observations

• Generally, a positive initiative
• Provided an opportunity for enhanced
• Control documentation
• Employee training
• Communication as to importance of internal
  control
• Tone at the top
• Improved transparency as to internal control
  status
• Capital markets reaction
• Financial statements now more reliable

5
SOX 404 Year 1 Observations

• Generally, a positive initiative
• Control deficiencies identified
• Control deficiencies remediated
• Certifiers able to certify
• Regulation of accounting firms
• Appears to have resulted in more care and
  diligence in their work

6
SOX 404 Year 1 Observations

• Generally, a positive initiative
• Role of internal audit has been elevated
• External auditor involvement enhanced the quality
  of work performed
• Additional long term benefits expected
• Enhanced controls processes
• Transparency reliability of reporting
• Capital markets confidence

7
SOX 404 Year 1 Observations

• A positive initiative, however some negatives
• Implementation costs were high
• Internal external costs higher than expected
• Companies not happy, accounting firms not happy
• Reflects first year initiative evolving
  regulations and guidance
• Rules guidance evolved during the year
• But companies couldnt wait to get start, as a
  result
• False starts
• Control documentation testing probably more
  extensive than needed

8
SOX 404 Year 1 Observations

• A positive initiative, however some negatives
• Substantial attention devoted to 404 by
  managements boards
• Strategic and other issues may have received less
  attention
• 2005 financial statement and 404 audit planning
  needs to get underway
• First year implementation has diverted attention
  from this planning

9
SOX 404 Opportunities for the Future

• Find ways to unleash the full value of the 404
  investment
• Move from a project to a process orientation
• Develop more of a cost / benefit analysis
• Develop reliance on management oversight
• Audit firms will learn how to live in a regulated
  environment
• More judgment, less checklist completion

10
SOX 404 Opportunities for the Future

• SOX 404 Costs should go down
• First year activities wont repeat
• Learning curve
• Documentation
• Remediation
• People are now better trained
• Reductions starting at 50 may be possible
• Audit fees should go down
• Integrated 404 and financial statement audits
• More reliance on internal controls

11
SOX 404 Cautions

• SOX 404 has been positive helpful
• Strong companies are now stronger
• Weaker companies are significantly improved
• However, are costs benefits balanced?
• Will SOX 404 slow down or deter the following?
• Egregious abuses
• Enron, Tyco, Worldcom, Adelphia
• Collusive frauds