Ameasure of help arrived July 26, 2007,
for publicly traded companies in the
form of new guidance from the SEC and the Public Company Accounting
Oversight Board (PCAOB). The new rules
provide substantive language aimed at mitigating the excessive costs and complexities of reporting and compliance.
“The biggest consideration with these
new standards is that public companies
don’t just look to their auditors to see what
can be done,” says audit partner Matthew
Perreault of Armanino McKenna’s Technology and SEC practice. “They really
should use the new standards to their
advantage in terms of reducing their cost
to audit.”
Smart Business spoke with Perreault
about how the new rulings, when coupled
with a top-down, companywide approach
to compliance, may decrease audit costs
up to 20 percent.
What prompted the SEC’s new ruling?
In the past, auditors were able to look at
and focus their attention on areas of higher
risk and spend less time on low-risk areas.
The Auditing Standard No. 2 was written in
a way that it took away the ability of auditors to apply their judgment, and it very
much restricted their ability to rely on the
work that was done by either management
or internal auditors. Another element was
it required companies to reperform the
audit every year without the benefit of the
knowledge gained in prior years. So each
area, even if it was tested last year and you
knew it worked and it hadn’t changed, still
had to be retested. The new standard, I
believe, effectively addresses all of these
points.
How should companies build or rebuild their
compliance and reporting strategies?
I think it starts at the top. The effort is not
merely a finance response — it’s a companywide response — so if the CEO isn’t the
sponsor of the 404 compliance effort, he or
she needs at least to be a champion right
behind the CFO. One of the best practices
I’ve seen is to form a disclosure committee
consisting of both the CEO and the CFO,
along with the COO and the vice president
of operations, plus a representative from HR and participants from sales and marketing. All of those disciplines can have a
significant impact on the accounting, and if
you limit that disclosure committee to people in finance, they might not know what’s
going on with the rest of the company.
Must companies reinvent the wheel or is help
available?
We are finding that smaller companies,
especially when new pronouncements are
introduced, are struggling to write the 10Q
and 10K reports themselves. Often they are
poorly written and are missing certain elements. We usually point them right to the
SEC Web site where dozens of similar companies have already posted nearly identical
disclosures. This is a case where companies should embrace plagiarism by copying, pasting and editing the material from
the disclosures of others. I think companies need to seek out and look at what their
peers are doing, create benchmarks and
use what’s already out there. Not only does
it save time, it produces a better quality
product.
What kind of reporting timeline should be
established and how can companies stay on
track?
Companies often set a press release date,
sometimes an artificial date that is much
earlier than it needs to be, and then turn
around to their finance organization and
say, ‘Do whatever needs to be done to meet
this date.’ I think this unnecessarily compromises the quality of the records and
documents. Alternatively, project leaders
should start with a proposed press release
date and the ultimate 10Q and 10K filing
dates, and then work backward to determine a reasonable time frame to deliver a
draft of the press release and when they
ultimately need to close the books.
Should companies use inside or outside
resources?
For smaller organizations, I think a consultant is the best answer. The consultant
will have exposure to the best practices of
many different companies and, unless you
have a super overachiever in your ranks,
it’s difficult to replace that experience with
any degree of knowledge. If you can afford
to and opt to hire a salaried employee, the
best candidates likely will come from the
public accounting ranks or will have
worked for a number of similar companies
in the industry in a comparable capacity.
What quality controls should be built into a
compliance strategy?
It starts with creating a large enough time
frame, using existing literature that’s available in the form of checklists and going
through those with careful consideration
until fully understanding the nature of each
question. We suggest that companies
embrace those checklists and have somebody mindful of preparing them. Often-times, you benefit from a econd-level
reviewer who may not be as accounting
knowledgeable but is detail-oriented.
They’re the person that’s going to say, ‘I
don’t understand this question in the
checklist, so please explain how you interpreted it and explain why you believe the
disclosure was appropriate.’ That’s the best
quality control process you can have.
MATTHEW PERREAULT is the audit partner of the Technology
and SEC practice at Armanino McKenna LLP in San Ramon.
Contact Matthew at [email protected] or (925) 790-2755.