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Atkins: Still Wailing On 404

Jan 26

Written by: Jack Ciesielski
1/26/2007 5:11 AM

Commissioner Paul Atkins delivered a speech at the Corporate Directors Forum and as usual, unleashed himself on one of his favorite topics: Section 404 of the Sarbanes-Oxley Act. Atkins, like the Paulson Committee and Bloomberg/Schumer, worry about the US markets' place in the world rather than investor information - as if the two were mutually exclusive.

His speech contained the usual complaints about the "costs" of 404. (As if there are no costs to investors or the economy as a whole for audit failures.) He cited in particular the costs incurred for compliance procedures performed by firms that were subsequently ignored by auditors. Seems like the answer is to make the auditors snap to attention, not gut the rules.

While the PCAOB and the SEC continue to revise Auditing Standard 2, it's good to note that their efforts aren't wasted on Commission Atkins:

"I think almost all players in this debate have recognized the flawed approach that was initially rolled out. Last month, the SEC proposed additional guidance for management's assessment of internal control. Around the same time, the PCAOB proposed replacing AS 2 with a new audit standard, AS 5, for an outside auditor's attestation of internal controls. Far from being a rollback or lessening of standards, I think the new proposals go a long way towards implementing the original vision of Sarbanes-Oxley. I look forward to seeing the comments on these proposals."

We'll see how satisfied everybody is with the new, improved AS 5 in about another month. While Atkins notes that Sarbanes-Oxley has been around for almost five years (its birthday is in July), there have only been two complete 404 inspection seasons. (No - wait a minute. Those small cap firms that never seem to have control problems are still being granted waivers.) Simply by virtue of the learning curve experienced by most sentient human beings, the process has to get better. Revising the audit guidance is part of the learning process. But it will be interesting to see if the critics are content with evolutionary change and continue to demand more "relief."

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.