Posted on: Sunday, November 7, 2004
Companies rush to complete mandatory reviews
By Carrie Johnson
Washington Post
WASHINGTON — Thousands of public companies and their auditors are racing to meet year-end deadlines that require them for the first time to certify the strength of their financial checks and balances, an intense and costly effort that regulators call the most important reform to spring from the recent wave of accounting scandals.
Scores of companies are struggling to finish the process on time, and a significant minority lags in the work, according to industry experts. If companies do not fix serious weaknesses, or do not complete the review, they must disclose those shortcomings in annual reports — and face consequences as great as personal liability for executives and a possible plunge in stock price.
Two of the country's biggest accounting firms, PricewaterhouseCoopers LLP and Ernst & Young LLP, recently dispatched report cards to clients, warning that many companies were falling behind schedule and still might have serious internal weaknesses to report as of Dec. 31.
Dennis Beresford, a former accounting industry official who teaches at the University of Georgia, said the new rules have led to acrimony between auditors (who insist on caution and extra work) and corporate financial officials (who must personally sign off on the reviews and at the same time control rising costs).
The tension arises because both auditors and financial managers are under the gun in an unprecedented way, scrambling to document hundreds of basic business processes, such as making sure that all checks require signatures from two corporate executives, under substantial time constraints. The reviews are mandated under the 2002 Sarbanes-Oxley Act, which aims to combat accounting trickery.
"Management wants to get good marks," said Daniel Akerson, a former chief financial officer at MCI Communications Corp. who leads the audit committee at American Express Co. "Auditors worry if they dress things up too much to make boards and management happy, it's going to come back on them, too."
Privately, some companies and audit firms are pointing the finger at each other for not pouring sufficient resources into the effort, which has consumed vast amounts of money and management attention.
General Electric Co. officials, among the first to embrace the need to meet the stricter standards early last year, said they shelled out $30 million to get their controls in shape. Other large companies said they expect to pay an average of $3 million, if not more, according to a July survey by Financial Executives International, a trade group for financial executives.
Toledo-based auto parts manufacturer Dana Corp. has hired outside consultants to help, spending more than 100,000 hours on the initiative to date, spokesman Gary Corrigan said.
At Tasty Baking Co., one of hundreds of smaller companies engaged in the effort, employees are making sure that invoices paid by the Philadelphia treat maker match purchase orders or are signed by a manager to attest to their legitimacy. As many as eight employees are dedicated to the control work, and some 20 more occasionally participate.
"We have two local plants, no international translation issues — we're as simple as it gets from a process standpoint," said Pamela Prior, internal control director at the 1,100-employee firm. "And yet here we are. ... The effort is this significant."
The Securities and Exchange Commission is taking the effort so seriously that it has called for postponing other key initiatives for as long as six months to give companies time to finish their internal control reviews.
