NYSSCPA Member Gives Update ‘Essential to the Times’

NYSSCPA Member Gives Update ‘Essential to the Times’
Reviews Current State of SOX Compliance

Since its overwhelming passage, the Sarbanes-Oxley Act of 2002—Sarbox or SOX, for short—has had a significant, ongoing impact on CPAs, public companies, attorneys, broker/dealers, investment bankers and the media covering them. In these circles, at least, SOX has become as intrinsic a part of the new millennium as, for example, the Tax Reform Act of 1986 was to the 80s.

On May 26 in Manhattan, New York State Society of CPAs member George I. Victor delivered an in-depth presentation on the current efforts to meet SOX’s provisions and the reverberating effect that the act, which will turn two years old on July 30, could have on other sectors of American business, from nonprofits to private companies.

According to Victor, most “major” companies have taken the appropriate steps to comply with SOX, especially the internal control standards of Section 404, by hiring consultants, beefing up internal staff and purchasing relevant software.

“Smaller companies have not been as quick to respond,” Victor said in a follow-up interview. “Some of them don’t have the necessary resources, in terms of dollars or staffing, or a sophisticated accounting system.”

Though smaller companies could be “behind the eight ball,” Victor, director of accounting and auditing for Reminick, Aarons and Company, LLP, pointed out that there are different compliance deadlines. For fiscal year end, accelerated filers must comply by Nov. 15, 2004, while nonaccelerated filers have until July 15, 2005.

Companies that fail to meet SOX’s requirements could receive an adverse opinion on their internal controls from their auditing firm. Officials with the Securities and Exchange Commission have said at past NYSSCPA events that, for now, an adverse opinion would not be considered a deficient filing, but Victor noted that such an opinion could be harmful to a public company’s image and its investor confidence.

Because companies cannot use their auditors to perform Section 404 consulting work, SOX has made for some strange bedfellows, helping forge alliances between accounting firms, even ones that historically have competed with one another.

“The audit firm is in a better position, in some cases, to identify who is a capable consultant or a capable accounting firm so that they are also comfortable with whoever is going in there to advise their client,” Victor said in regards to public companies in need of assistance with Section 404.

Similar to the public company situation, Victor said that the majority of large accounting firms have been preparing their systems to be in compliance with SOX, but he is concerned that those that have waited to do so could have difficulty testing andattesting to their clients’ internal controls.

Of broader concern, however, is the frequently mentioned trickle-down effect in which states could decide to implement Sarbanes-Oxley–type legislation that would apply to nonpublic companies and nonprofits with limited means. In addition to the added financial and administrative burden that this type of legislation could yield, the inconsistencies between each state’s laws could also present problems, Victor noted.

As previously reported, New York Assemblyman Richard Brodsky in March introduced State Attorney General Eliot Spitzer’s proposed legislation to safeguard not-for-profit corporations. For certain types of nonprofits, the bill’s provisions would require the president or CEO and the treasurer or CFO to certify the accuracy and validity of the annual report as well as the adequacy of the internal controls. A similar bill is in the state Senate.

Though he hasn’t heard of any definitive legislation that would apply similar standards to nonpublic companies, Victor thinks it could be “only a matter of time” before something is proposed. The impact on businesses with shoestring budgets could be detrimental.

“The last thing they want to do is apply thousands of dollars to an internal control system that in their view they were doing fine without, but is now being forced upon them,” Victor, chair of the NYSSCPA’s SEC Practice Committee, said.

The NYSSCPA’s Cooperation with Bankers and Other Credit Grantors Committee, chaired by Adam H. Reiss, sponsored Victor’s presentation.

“This topic is essential to the times…in terms of additional compliance and other matters that people should be thinking of,” Reiss, a senior manager with American Express Tax and Business Services, Inc., said. “(SOX) has heightened the level of compliance that public companies have to be wary of at this point, so a lot of effort is being put into place by the internal accounting departments of these companies as well as by outside accounting firms.”