Section 404 implementation: is the gain worth the pain?

• Author: Sinnett, William M.
• Position: Compliance

Following a Financial Executives International (FEI)-led meeting on Sarbanes-Oxley Section 404 implementation, Financial Executives Research Foundation (FERF) spoke with several participants about their year-one experiences and their recommendations for year two.

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Imagine being in the middle of a football game when the referees announce a more complex set of rules to play by.

This analogy aptly applies to financial executives going through year-one compliance for Section 404 of the Sarbanes-Oxley Act of 2002. These executives charged ahead towards the deadline with detailed documentation and testing, without having specific guidance on what was required by the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB).

The job got done, however, since most companies already had significant internal controls and systems in place. What the stringent requirements of Section 404 did, however, was add layers on to what most had already established. The result was a process that took far longer and cost far more than was estimated, or even imagined, at the start.

Indeed, year one costs of complying with Section 404 were much greater than anyone had expected. As cited in a March survey of 217 companies, Financial Executives International (FEI) found that member companies spent an average of $4.3 million for added internal costs and additional fees for auditors and other consultants. This average was up 38 percent from estimates made in July 2004. The March survey results also indicated that employees logged an average of over 26,000 hours per company to comply with the regulations.

To find out what was behind these staggering numbers, FEI sponsored a meeting of Section 404 implementation team leaders and their senior managers in Boca Raton, Fla., in early March. The goal of the meeting was to help companies benchmark leading practices from year one and discuss recommendations to make the process work better for year two. Financial Executives Research Foundation (FERF) later spoke with some of the participants.

The Washington Post Co.

Questions the interpretation and cost/benefit to shareholders

John B. (Jay) Morse Jr., vice president-Finance & CFO of The Washington Post Co., a $3 billion integrated media company headquartered in Washington, D.C., believes the ultimate interpretation of the Sarbanes-Oxley Act of 2002 by the SEC and the PCAOB has gone far beyond what the law actually intended.

"The impetus for Sarbanes-Oxley was the sudden spate of large-scale corporate malfeasance at companies like Enron Corp. and WorldCom Inc.," Morse says. He notes, "the problems involved were not cases of payables or payroll systems gone awry."

Morse indicates that while the "orchestrated misdoings" at Enron and WorldCom were created at the top, Sarbanes-Oxley...