![[GO]](/_layout/img/search_go.gif)
In our first Compliance Week TV video we hear from Frank Diana, executive vice president of enherent Corporation, who discusses the challenges involved in information management. 
Compliance Education & Communications Mgr.
Access Management: Efficiency, Confidence, Control 
Code of Conduct
Whistleblower Guidelines
Improving GRC by Visualizing Your Data
Data Says Audits Reduce Restatements, Speed Disclosures
Companies that file clean internal control reports without an audit opinion logged restatements at a 46-percent greater clip than companies with auditors, according to a recent analysis in response to possible Congressional action.
Audit Analytics looked at the restatement history of companies that filed 2007 financial reports to look for differences between companies that filed internal control reports with audit opinions and those that filed reports without audit opinions. The analysis revealed not only a higher restatement rate, but also a slower response time when companies discover problems with past financials, said Don Whalen, director of research for Audit Analytics.
Sarbanes-Oxley Section 404 requires companies to report on the effectiveness of controls and have those reports audited, but the requirement was deferred by the Securities and Exchange Commission several times for smaller, non-accelerated filers. For the past two years, companies have been required to produce internally developed reports, but have not been required to submit the report to an audit. As part of the Investor Protection Act of 2009, Congress is now considering a permanent audit exemption for those smaller companies.
“When we focus on those that claimed to have effective internal control over financial reporting, we found that the management-only reports had a substantially higher restatement rate,” said Whalen. The study concluded when an auditor is involved and the internal control review leads to discoveries of mistakes, the market is more quickly notified that past financial statements are not reliable, said Whalen.
“This shows there is a benefit to the investing market to having the auditor attestation,” said Whalen. “The auditor attestation appears to both increase the quality of the SOX 404 filings by making them less ambiguous, and it also seems to hasten the disclosure of a problem. So there’s increased transparency in that respect.”
Cindy Fornelli, executive director of the Center for Audit Quality, made sure the Senate Banking Committee was aware of the research. In a letter to committee leaders, Fornelli said a permanent waiver for small companies would would mean “little independent scrutiny of financial reporting safeguards at an estimated 6,000 small companies.”
The above article is potentially highly misleading and inflamatory. While I do not dispute the %’s calculated, I have deep reservations as to the legitimacy of the comparison as quoted to support that SOX has made a difference. There is a huge difference in the average level of sophistication and internal accounting talent for entities that are currently required to provide an auditor’s report on internal controls in addition to management’s report on interenal controls. In my mind, the really relevant comparison would be to compare restatements among those companies subject to auditor attestion for the period subsequent to that attestation to the period prior to the requirement for attestation and the same % of restatements for entities not subject to auditor attestation in the same periods. The article’s inference is that clearly the auditor’s attestation has a causal relationship to the % but these clearly are not homogenous groups so I question the validity of such a comparison.
I think that you could greatly improve your content by adding some editorial views on matters such as this that present a more balanced position or by avoiding those submissions that very clearly are biased and focused on supporting a particular position.
Comment by Raymond R Quintin — December 4, 2009 @ 4:49 pm
The author’s argument would have been far more powerful if the “46% higher” restatement rate had been shown as a percentage of filings. I’m guessing the reason it didn’t is that, for example, if companies with an external auditor’s SOX attestation had a 1% restatment rate and companies without attestation had a 1.46% restatement rate, that is “46% higher”.
But a restatement rate of 1.46% (if that were the number) doesn’t sound quite as dramatic… also the author fails to note that the “control group” of companies with auditor attestation have been doing this since 2004 while the new companies to the process have only begun in 2007 or 2008 - hardly comparable.
Comment by Tom Reinebach — December 6, 2009 @ 12:27 am
The author of the article (Ms. Whitehouse) merely summarized the restatement analysis that was done by Audit Analytics and even quoted some statements from a representative of Audit Analytics.
The author would have added some real value for readers by providing a comment on the methodology that Audit Analytics used for their analysis and by providing reasons whether she believes that this methodology was appropriate to make a conclusion that an auditor attestation on the effectiveness of ICFR reduces restatements or provides significant benefits.
The market capitalization of the public float of non-accelerated filers is by definition smaller than that of accelerated and large accelerated filers. Non-accelerated filers tend to also be smaller in terms of revenue and total assets. Maybe a higher rate of restatements is primarily associated with the size of a filer and not with the fact that it does not have an auditor attestation. A comparison of non-accelerated filers and smaller accelerated filers of a similar size could be a better methodology in order to control for the size effect.
Apart from the benefit question (e.g. a reduction of restatements), the main question is whether the costs of the auditor attestation justify the benefits and whether there may be regulatory alternatives that generate similar benefits at a lower cost (e.g. public disclosure of restatements to disclosed or undisclosed unaudited financial statements that were discovered and recommended by the auditor together with disclosure about the nature and reasons for those restatements). Such public disclosure would increase pressure on companies to fix the root causes of fraud and error in financial statements. The SEC could also step up its enforcement of restatements and thus the books and records and internal controls provision in the Securities Exchange Act. This should include sanctions for mere negligence in internal control over financial reporting. Officer and director bars and civil monetary penalties are a strong deterrent.
Comment by Georg Merkl — December 10, 2009 @ 11:48 am