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SEC Roundtable Assesses Round One of SOX Section 404 Reports

There is much to be learned from the first round of Section 404 reports. At the Securities and Exchange Commission (SEC) roundtable on the implementation of internal control reporting provisions held yesterday in Washington D.C., Chairman William Donaldson revealed that of the more than 2,500 registrants that filed their internal control reports by March 31, approximately 8 percent reported material weaknesses. "The process of implementing the requirements of Section 404, as well as the related SEC and PCAOB (Public Company Accounting Oversight Board) rules, has consumed considerable time, energy, resources, and has generated intense debate," Donaldson said. Although companies have been required to maintain a system of internal accounting controls since the enactment of the Foreign Corrupt Practices Act in 1977, many industry sources argue that most companies' efforts were insufficient. A string of Wall Street scandals, including Enron and WorldCom, eventually resulted in the more-recent enactment of the Sarbanes-Oxley Act of 2002 (SOX), which took corporate responsibility to a whole new level.

SOX Section 404 essentially requires all publicly traded companies to include in its annual report -- which is filed with the SEC -a statement of management's responsibility for establishing and maintaining an adequate internal control structure, along with procedures for financial reporting and an assessment of the effectiveness of those controls. It also directs that the independent accounting firm auditing the company's financial statements must report on the management's assessment and the effectiveness of the company's controls, in accordance with standards to be established by the PCAOB. These requirements have caused companies, and their auditors, to focus additional attention on the effectiveness of their controls and, in most cases, report publicly on those controls for the first time. "This was a very difficult year," said roundtable panelist Samuel DiPiazza Jr., chief executive officer, PricewaterhouseCoopers. "Companies have never focused on controls to this degree."

The main point of contention for most companies affected by Section 404 continues to be the cost versus benefits factor. While most of yesterday's panelists agreed on numerous positive impacts, such as an increase in confidence among investors and an overall improvement in the documentation of companies' policies and procedures, much concern was expressed over the costs of compliance -- an average $4.3 million according to a March 2005 survey by Financial Executives International. "The costs of 404 have been much higher than anyone anticipated," said panelist John Thain, chief executive officer of the New York Stock Exchange. "[Based on feedback from our listed companies] many companies would say that the benefits achieved aren't worth the costs."

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