Sarbanes-Oxley Executive Compensation Clawbacks Continue

Yesterday, the U.S. Securities & Exchange Commission (“SEC”) announced another successful “clawback” of executive compensation under the Sarbanes-Oxley Act of 2002. James O’Leary, former Chief Financial Officer of Atlanta-based Beazer Homes USA, was forced to return over $1.4 million in bonus payments and stock sale profits that he made as a result of fraudulent financial reporting in 2006. What is somewhat unique about the case is the fact that the CFO was not implicated in any wrongdoing other than certifying that the financial statements were accurate. The individual who is being criminally prosecuted for the fraud is the Chief Accounting Officer who reported to the CFO during the time period in question.

“Section 304 of the Sarbanes-Oxley Act encourages senior management to take affirmative steps to prevent fraudulent accounting schemes from occurring on their watch,” said Rhea Kemble Dignam, Director of the SEC’s Atlanta Regional Office. “O’Leary received substantial incentive compensation and stock sale profits while Beazer was misleading investors and fraudulently overstating its income.”

This announcement comes on the heels of a related clawback from the CEO of Beazer Homes that totaled more than $6.4 million. Again, in this case, the CEO was not implicated in any criminal wrongdoing. The SEC’s enforcement approach regarding both the CEO and the CFO in this case serve as a reminder to senior executives to ensure their annual certifications are accurate. The only way to know is to have a strong risk and control program in place. Wheelhouse Advisors can help. Visit to learn more.


SEC Releases Long-Awaited Study on SOX

This week, the U.S. Securities and Exchange Commission (“SEC”) released its study on the impacts of section 404(b) of the Sarbanes-Oxley Act (“SOX”). The SEC concluded that section 404(b) which requires an external auditor to issue an opinion on a company’s internal control over financial reporting should remain effective for mid-sized companies with a market capitalization of $75 to $250 million. Here is a summary of their conclusion and recommendations:

The work performed by the Staff reinforces our understanding that the costs of Section 404(b) have declined since the Commission first implemented Section 404, particularly in response to the 2007 reforms, that investors generally view the auditor‘s attestation on ICFR as beneficial, and that financial reporting is more reliable when the auditor is involved with ICFR assessments.

1. Maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers.

2. Encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation.

Since the Dodd-Frank Act exempted small companies with a market capitalization less than $75 million from section 404(b), this study should effectively end the debate over Sarbanes-Oxley section 404 requirements. For mid-size companies looking to gain efficiencies in complying with section 404(b), Wheelhouse Advisors can help. Email us at to learn more.

New Standards for Assessing Risks

As more companies continue to look to external service organizations to provide non-core operational support, auditors have recognized a need for better internal control auditing standards. In the past, the primary audit standard for these external service providers was the Statement on Audit Standards No. 70, better known as SAS 70. In the absence of another internal control audit standard, SAS 70 became the de facto standard for companies seeking assurance that their service provider was secure and well-controlled. Service providers also touted their SAS 70 reports from auditors as though it were a “Good Housekeeping” seal of approval. The main problem was the fact that SAS 70 reports focused only on internal control over financial reporting. They did not provide any assurance on items such as information security, operational control or regulatory compliance.

To fill this vacuum, the American Institute of Certified Public Accountants has developed new standards to replace the outdated SAS 70. Now known as Service Organization Control (”SOC”) reporting standards, these new guidelines provide for three separate and unique reports to address the full complement of internal controls at an external service provider.

The first standard report, SOC 1, essentially replaces the SAS 70 report that focused solely on financial controls. However, SOC 2 and SOC 3 are new reports that will provide opinions on the effectiveness of controls related to operations and compliance. SOC 2 is a restricted use report intended for use between auditors of the service provider and their clients. SOC 3 is a general use report that can be used by the service providers in providing assurance to potential clients as a “seal of approval”.

These new reporting standards become effective June 15, 2011, so the ubiquitous SAS 70 will soon become a relic of the past. More importantly, companies will soon gain a better understanding of how well their service providers are managing their risks.

SEC Resumes Clawback of Executive Pay

Financial reporting risk has returned to the headlines with a recent announcement by the Securities & Exchange Commission (“SEC”) that it will be “clawing back” prior bonus payments made to a prominent CEO who falsely certified to the effectiveness of internal controls within the company. Section 304 of the Sarbanes-Oxley Act of 2002 allows the SEC to seek reimbursement of bonus payments and/or profits from the sale of securities by certifying executives during the time period when the internal controls are found to be ineffective. Here is an excerpt from the SEC’s action:

“The Securities and Exchange Commission today announced a settlement with the chief executive officer of an Atlanta-based homebuilder to recover several million dollars in bonus compensation and stock profits that he received while the company was committing accounting fraud.

According to the SEC’s complaint filed today in federal court in Atlanta, CEO Ian J. McCarthy previously failed to reimburse Beazer Homes USA Inc. for bonuses, other incentive-based or equity-based compensation, and profits from Beazer stock sales that he received during the 12-month periods after his company filed fraudulent financial statements during fiscal year 2006.”

During the financial crisis of the past few years, Sarbanes-Oxley has taken a back seat to other more pressing issues. However, now that the dust has settled, we can expect to see more actions such as this one.

New SEC Rules Are a Sign of the Times

According to a report today in the Wall Street Journal, the Securities and Exchange Commission is set to issue new disclosure rules for companies looking to reduce debt levels at the end of each quarter simply for reporting purposes. Inquiries into the use of repurchase agreements by financial services companies have revealed the widespread practice of reducing debt levels artificially.  Here is what the WSJ has discovered.

Federal regulators are poised to propose new disclosure rules targeting “window dressing,” a practice undertaken by some large banks to temporarily lower their debt levels before reporting finances to the public.

The Securities and Exchange Commission is scheduled to take up the matter at a meeting Friday and is expected to issue proposals for public comment. The action follows a Wall Street Journal investigation into the practice, which isn’t illegal but masks banks’ true levels of borrowing and risk-taking.

A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.

New rules like these are certainly a sign of the times and companies must be prepared for more to come.  To learn how Wheelhouse Advisors can help you prepare, visit

FASB Chairman Steps Down

Yesterday, Robert Herz, Chairman of the Financial Accounting Standards Board (“FASB”), announced his resignation amidst a number of critical issues requiring resolution by the board.  It is interesting timing given that Mr. Herz had two years remaining for his term as Chairman.  It certainly adds to the uncertainty about the direction the board will take in the areas of mark-to-market accounting and the convergence of GAAP and IFRS.  Here is the Wall Street Journal’s view.

Mr. Herz’s departure, set for Oct. 1, also comes as the body is enmeshed in a battle over a proposal to expand the use of mark-to-market accounting, which requires companies to use market prices rather than management estimates to value financial holdings. Some investors say this practice brings a more realistic view to the numbers that public companies report, but banks have vigorously opposed the practice. They say it will introduce unnecessary volatility into results and exacerbated the financial crisis.

At the same time, Mr. Herz’s departure may affect the board’s ability to complete projects designed to bring together its rules and those set by the London-based International Accounting Standards Board. Mr. Herz’s long-stated goal was to make both accounting regimes similar enough that U.S. public companies could abide by the international standards.

Mr. Herz may be stepping down now rather than succumb to continuing political pressure being placed on the board. We may never know if that is the case, but one thing is for certain – the new Chairman will certainly have his or her hands full when they begin their term.

Sarbanes-Oxley is Here to Stay

The U.S. Supreme Court ruled today that a small portion of the Sarbanes-Oxley Act of 2002 is unconstitutional. According to the ruling, The Public Company Accounting Oversight Board (“PCAOB”) which oversees the accounting firms who audit U.S. public companies currently violates constitutional separations-of-powers principles.

The Court viewed the manner in which PCAOB members are currently appointed and removed to be unconstitutional because it did not operate at the behest of the President of the United States. As such, the U.S. Securities and Exchange Commission will now have the authority subject to the President’s review to appoint and remove PCAOB members at will.

However, the PCAOB itself and the remainder of the Sarbanes-Oxley Act remains intact and constitutional. So, those hoping to see the full demise of the Sarbanes-Oxley Act will certainly be disappointed by today’s decision. To read the full ruling, click here.