Sarbanes-Oxley: Little Time Left

Dec. 21, 2004

Companies confront November deadline to certify financial reporting controls.

Manufacturers don't have much time left. Not much time left, that is, to comply with some additional and particularly complex requirements of the Sarbanes-Oxley Act, the 2002 law aimed at changing the way U.S. industry accounts for itself in the wake of the corporate scandals of the first couple years of this decade. Management consultants and software providers, eager to capitalize on new market opportunities, have been sounding alarms for about a year, warning manufacturers and other businesses of imminent compliance deadlines and unprepared corporate staffs and, not surprisingly, offering their assistance. Actually, large publicly traded companies now have until Nov. 15 of this year, not June 15, to begin certifying the adequacy of their internal accounting controls and processes, including IT systems, in their annual reports. Smaller U.S. companies and foreign firms now will have to comply with the so-called Section 404 financial reporting certification beginning June 15, not April 15, of next year. Reason for the delayed deadlines: The Public Company Oversight Board created by the law took longer than anticipated to turn draft compliance rules into final rules. In the meantime, many companies have found prospective compliance to be more involved than they first anticipated. For example, PricewaterhouseCoopers (PwC) says nearly 75% of 54 company Sarbanes-Oxley project leaders attending a compliance conference in late January reported significantly more-than-expected work required to comply with Section 404. No wonder. First, starting at the individual account level, companies have to figure out which of their internal controls over financial reporting must be included in the certification process, explains Los Angeles-based Lynn W. Edelson, PwC's U.S. leader for systems and process assurance. After the first step, companies must successively document all significant transactions, evaluate financial controls over the transactions and test the operating effectiveness of their controls. In effect, companies asserting they have good controls over the ways they handle financial reports must leave a paper or electronic media trail that allows an outsider to easily see that is the case. "Management has always been responsible for internal controls over financial reporting," explains Edelson. "The difference now is that there's a much more stringent requirement for evidence that they have done so," she emphasizes. "They may have had an informal internal control structure and that would have been O.K. But now they've got to prove that to their external auditor and the regulators."

**********About Sarbanes-Oxley Usually referred to by the names of its principal sponsors, Sen. Paul A. Sarbanes, D-Md., and Rep. Michael G. Oxley, R-Ohio, the Public Company Accounting Reform and Investor Protection Act was approved by Congress and signed by President Bush in 2002. Title IX of the legislation already requires CEOs and CFOs to certify company financial statements. Section 404, focusing on a company's internal controls over financial reporting, is now slated to take effect beginning Nov. 15. A summary of the law prepared by the New York-based American Institute of Certified Public Accountants covers nearly 10 pages and suggests just how sweeping the legislation is.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.