New regulations: preparing for the unplanned costs.

AuthorJohnsson, Margaret A.
PositionRegulation - Analysis of costs of complying with executive certification of corporate financial statements

CEOs and CFOs at $1 billion-plus companies are racing to comply with personal certification and other Sarbanes-Oxley requirements--with little regard to implementation costs.

At a recent global gathering of executives, the chairman and CEO of a corporation ranked among the world's 100 largest public companies confided that he had just signed off on the company's financials with great trepidation and less than full comprehension of every accounting policy he was approving.

Though few corporate executives may be as candid about their first experience with the new regulations, CEOs and CFOs in companies large and small are racing to better understand their financials in order to comply with Sarbanes-Oxley and a myriad of other new SEC and corporate governance requirements. To attest to the completeness and accuracy of corporate financial statements, non-financial disclosures, exhibits and footnotes, companies are beefing up internal processes, policies and analyses... with little regard to implementation costs.

The new regulatory environment takes the function of financial reporting to the next level of accountability. Everyone involved -- boards of directors and audit committees, external and internal auditors, senior and multiple layers of management, financial staff, outside and in-house counsel -- has a heightened awareness of the risks involved in filing their financial statements. This translates to more policies, more procedures, more risk assessment, more analysis, more scrutiny.., and more expense.

Yet few companies are calculating the costs. In a recent informal poll of $1 billion-plus companies based in Chicago and New York, The Johnsson Group found that companies -- ranging from pharmaceuticals to financial services -- are finding the filings painful to complete and the regulations costly to meet. Many corporations have spent considerable time analyzing and adjusting their traditional close process, reporting and review schedules. Most of the companies said that more layers of management and their board's audit committees were reviewing the implications of accounting policies in an unprecedented way. Focused almost exclusively on the need to comply, none had examined the cost of implementing the new regulations.

In this new regulatory environment, companies will, have to add financial staff and pay significantly higher auditing fees -- projected at 20 percent to 200 percent over pre-Enron/Andersen fees. In some cases, independent...

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