CFRI examines 'year two' issues for section 404.

• Author: Marshall, Jeffrey
• Position: Current financial reporting issues

Now that U.S. companies have put the bruising work of "year one" on the Sarbanes-Oxley Act's Section 404 behind them and are underway on their year-two efforts, are things going to get any easier?

Probably, but as was brought out at FEI's Current Financial Reporting Issues (CFRI) conference in New York in November, there are plenty of potential headaches ahead. The much-ballyhooed section of the 2002 law requires public companies to develop an assessment, at the end of the most current fiscal year, of the effectiveness of a company's internal control structure and the procedures the issuer has in place for financial reporting.

This one section has been the most controversial, and most loudly protested, of the Sarbanes-Oxley (SOX) provisions, and research in the past couple of years has consistently shown that the hours spent on compliance and the ensuing costs have been far higher than regulators estimated. At some companies, compliance managers have been focused on little else in the past two years.

"Preparers [of financial statements] are struggling to find a balance between spending tremendous time and effort on SOX and running their businesses the best way they know how," FEI President and CEO Colleen Cunningham noted in her opening remarks of the two-day conference.

"Many say [the cost of compliance] has been excessive, and there has been healthy debate about how those costs could be lowered and how the process could become more streamlined," she added. "If there is good news on the cost side, it is in the finding from our own members that 85 percent expect their costs in year two for Section 404 to be lower, by an average of almost 40 percent, than in year one."

In a second-day panel discussion, "Section 404: Achieving Sustainability for the Future," a corporate accounting executive, a regulator, an accounting firm executive and the head of the Institute of Internal Auditors (IIA) examined some of the key issues around putting permanent compliance solutions in place.

Arnold Hanish, chief accounting officer for Eli Lilly & Co., noted that at Lilly, a new level of accountability has been created by having line managers report on changes they have made to the audit committee. He added that a "quality review" effort is underway to push sustainability, and that training would be provided where it was deemed necessary.

Hanish noted that Lilly executives had determined that they could...