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.

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.

Financial Restatements Continue to Decline

A recent report by Audit Analytics noted that the number of financial restatements among U.S. public companies has declined for the third year in a row.  630 companies filed 674 restatements last year representing a 27% decline from 2008.  Here is what CFO magazine had to say about the report.

The report attributes the decline in restatements to two factors: improved internal controls as a result of Sarbox, and a 2008 recommendation by the SEC’s Advisory Committee on Improvements to Financial Reporting that the agency relax its requirements on what types of errors should trigger restatements.

“Frankly, I was pleasantly surprised,” says Dennis Beresford, an accounting professor at the University of Georgia’s J.M. Tull School of Business and a member of the CIFR. “It’s always hard to know exactly what the reasons were, but I’d like to think it was a combination of better financial reporting, better auditing, and hopefully a little more reasonableness in terms of applying materiality [as to what needs to be restated].”

Interestingly, the majority of restatements continue to come from the smaller, non-accelerated filers that are not subject to an external audit of their financial controls (see chart below).  The decision to exempt these companies permanently from an external audit is still being debated by members of Congress and the Obama Administration.

Many Companies Still Not Ready For SOX Audits

In last week’s issue of Compliance Week magazine, a startling survey result was disclosed.  It seems that almost two-thirds of the smaller public companies that will be facing an audit of their internal control over financial reporting this year are not fully prepared (see chart below).  While some may be looking for the U.S. Congress to exempt them from compliance (a measure that is currently being discussed on Capitol Hill), others may simply be ill-equipped or misdirected.  Here is what was reported in the Compliance Week article.

Of the 210 accountants participating in the recent poll, one-third said their company is less than 25 percent complete in implementing Section 404. Inefficiencies were attributed to problems such as poor training and education in the area of processes and controls, lack of focus on project management and utilizing resources, and a “compliance at all cost” mentality that is focused on effectiveness but not efficiency.

At a recent conference of the American Institute of Certified Public Accountants, Elisse Walter, a commissioner for the Securities and Exchange Commission, said the SEC does not support an exemption for smaller companies. “The SEC supports applying 404(b) to smaller companies, particularly as it applies to the financial crisis we’ve seen,” she said. “But now it’s in the hands of Congress.”

Time will tell the outcome of the congressional debate.  However, the companies that are behind schedule should not necessarily hope for a last-minute reprieve.  The best approach is to address the compliance requirements in a business-focused, practical manner that is effective, efficient and ultimately beneficial to the company’s long-term well-being.  If your company is looking for cost-effective solutions, visit to learn how we can help.

Do As I Say, Not As I Do

Last week, the Government Accountability Office (“GAO”) released the results of its annual audit of the Securities and Exchange Commission (“SEC”).  In the audit report, the GAO identified six significant deficiencies in the SEC’s internal control over financial reporting.  The collection of these deficiencies amounted to a material weakness in the SEC’s internal control over financial reporting.  For those who are not familiar with the term “material weakness”, it represents a reportable event that must be disclosed by U.S. public companies as a result of the Sarbanes-Oxley Act of 2002.  Here is what the GAO detailed in their report.

During this year’s audit, we identified six significant deficiencies that collectively represent a material weakness in SEC’s internal control over financial reporting. The significant deficiencies involve SEC’s internal control over (1) information security, (2) financial reporting process, (3) fund balance with Treasury, (4) registrant deposits, (5) budgetary resources, and (6) risk assessment and monitoring processes. These internal control weaknesses give rise to significant management challenges that have reduced assurance that data processed by SEC’s information systems are reliable and appropriately protected; impaired management’s ability to prepare its financial statements without extensive compensating manual procedures; and resulted in unsupported entries and errors in the general ledger.

As the primary enforcement agency for accurate financial reporting by U.S. public companies, the SEC should be leading by example in creating processes that provide reliable financial information.  Sadly, this is not the case and has not been for the past several years.  Let’s hope SEC Chairwoman Mary Shapiro does a better job than former SEC Chairman Christopher Cox and can effect the necessary change within the agency.

Sarbanes-Oxley Deja Vu

Last week, the U.S. House of Representatives proposed amendments to the Investor Protection Act of 2009 that will in essence seek to roll back some of the reforms implemented as a result of the Sarbanes-Oxley Act of 2002.  Specifically, Representatives Carolyn Maloney and Scott Garrett are seeking to exempt public companies with a market capitalization of less than $75 million from the requirement to have their internal controls audited by an external firm.

Their approach is to request the SEC to perform a study on the costs of compliance for these firms and then, determine the need for the requirement. While this may be a reasonable request, it has already been made and the SEC completed a similar study this year.  As a result, the SEC confirmed the need for the external audit and announced it will be required of all companies next year.  The Huffington Post reported that several investor advocate groups as well as a former SEC chairman were outraged by the proposed amendment.  Read more at: