CFOs Report On Sarbanes-Oxley Obstacles

September 12, 2003 (PLANSPONSOR.com) - One in three (34%) chief financial officers (CFO) say meeting executive certification and internal control requirement pose the most challenge to Sarbanes-Oxley Act compliance.

Even though CFOs recognize that these sections of Sarbanes-Oxley pose the most challenge to their compliance with it, the majority has already taken steps.   Nearly nine out of 10 (85%) CFOs surveyed said their company has adopted policies and procedures to support the executive certification process, a number that rose to 93% among financial heads at larger firms, according to Protiviti Inc’s survey of 300 chief financial officers (CFO).

CFOs are not solely focused on Sections 302 and 404 of Sarbanes-Oxley though.   Twenty-three percent of CFOs expect identifying and recruiting a “financial expert” for the audit committee to be the most challenging and 27% said the most difficult task they face is aligning audit committee activities with requirements of Sarbanes-Oxley.

“Publicly traded firms remain under intense pressure from boards and shareholders to meet the new governance requirements of Sarbanes-Oxley, the SEC, the exchanges and other regulatory bodies,” said Everett Gibbs, managing director for Protiviti. “Companies are undergoing significant operational and cultural changes needed to achieve compliance, and our study indicates these changes are occurring well beyond executive certifications and internal control issues. Directors and management are addressing areas such as audit committee oversight, board composition and structure, and auditor independence.”

Board Composition

Despite this increased pressure on governance, and in particular the make up of corporate boards, a surprisingly low 33% of CFOs at large companies report there have been or will likely be changes, with the number improving only slightly (40%) when the entire sample is plugged in.   “While these percentages are noteworthy, they suggest that, in terms of board composition and charters, a majority of public firms believe they already are in compliance with Sarbanes-Oxley and exchange listing requirements,” Gibbs said.

Those firms that are planning, or have already conducted, changes in their board cite reason include:

  • new rules concerning independence (41%)
  • the desire for greater levels and diversity of experience on the board (25%).

However, corporate boards are not remaining static, as changes are afoot at the board level in the type of information directors are receiving. In 83% of companies, management decided on its own to provide more information to the board and its committees, while in one of three companies directors issued requests for more detailed information.

Additionally, many CFOs report they have still not formed a disclosure committee.   In fact, less than half (49%) of those canvassed have yet to form such a committee, despite suggestions from the Securities and Exchange Commission (SEC) to do so.   What’s worse though is that nearly all of those polled are relying on a disclosure committee to review the executive certification process on an ongoing basis.   However, have-nots tend to be concentrated on the lower end of the company size spectrum, since 74% of larger companies said a disclosure committee has already been formed, compared with only 33% of smaller companies.  

Those that have formed a disclosure committee, report its composition consists of the following positions:

  • CFO – 79%
  • Controller or principal financial officer (59%)
  • General Counsel – 42%
  • COO – 31%
  • Internal audit director – 28%
  • CEO – 25%.

Outside Influence

In addition to their own internal crackdowns, CFOs are also cracking the whip on external business partners.   Eight out of 10 (83%) large companies have adopted procedures governing non-audit services by the external auditors, with 13% that are prohibiting all non-audit services by this group.   Further, 63% of all CFOs polled have rules in place that parallel SEC regulations on how external audit relationships should be governed.

Assessing the overall survey, Gibbs said, “The results show momentum is building. Corporate governance reforms are influencing behavior, as evidenced by CFOs and public companies acting on a wide array of issues that continue to reshape the governance landscape. Companies have clearly begun the journey; however, the verdict is still out as to how long it will take for these steps to restore investor confidence.”

A full copy of the report can be found at  http://www.protiviti.com/downloads/CFOSurvey.pdf .

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