February 25, 2005
Our Sarbanes-Oxley compliance has cost the company well into a million dollars. The cost benefit simply is not there for a company our size. Our auditors, unnamed Big Four firm, are just wrapping up their audit work and internal control review, and through everything, all theyve come up with is a few meaningless reclasses and an adjustment to inventory that amounted to an immaterial amount. None of their findings came from the internal control review they performed, but through the fishing around for issues that quite frankly, if they had done their due dilligence--and to be fair, if our finance people had done their due dilligence--these reclasses and adjustments shouldve been issues resolved years ago.
It seems that in the attempt to protect our investors, weve done more damage than good. We arent Enron. We have very simple accounting, and a very simple company to monitor from an entity perspective. We dont have billions of dollars of revenus just over 350 million this year. The 1,000,000 we had to spend this year, and the projected annual spending of at least 400,000, to maintain and update the Sarbanes work, just doesnt seem to have any worthwhile cost benefit. Not for a company our size and with very little to no accounting issues and/or risks.
GUIDANCE FOR REGISTRANTS
The registrants have little to NO guidance to help comply with the the Sarbanes-Oxley standards.
Our CPA firm, unnamed Big Four firm, has delayed all review and comments until after year end, saying that they cant give guidance due to independence issues despite our audit committee agreeing that they would approve some sort of review by our auditors of our work after the work is substantially complete. This has created numerous obstacles. We have a subsidiary that our management deems insignificant 3 percent of annual revenues for the year...we use 5 percent as a metric to determine signifigance..., but our auditors are now saying that because the standard says As of year end and not Year-ended that the potential significance of this subsidiary in the following year means that we should have included the subsidiary as a significant business unit...this comment coming 2 weeks before we plan to have our 10k complete and filed. We argue that we followed the standard and the little guidance out there, we had to use our own judgement coupled with some professional guidance of consultants, and they argue that they are using firm guidance that we obviously dont have, and are first hearing it in February of 2005 instead of before our year-end, which is December 2004....i.e., no time to remediate any deficiencies...only hope that the correct controls existed and were effective.
COST BENEFIT CONTROL OF AUDITORS
Its apparent, from the grapevine talk, that the firms are fishing for not only deficiencies, but significant and material deficiencies. In a year that one would reasonably expect that substantive testing would stay the same or be decreased, because of the extra control reliance, our CPA firm has INCREASED its substantive testing....my only guess is to increase their ability to find a deficiency.
Furthermore, in the internal control review that they have performed, they found NO deficiencies other than the two remaining deficiencies our internal Sarbox team identified that we couldnt remediate before year end.....however, they have found 3 or 4 deficiencies in their financial audit testing...which isnt unreasonable...however, in all cases the defiencies were discovered because the scope of the substantive audit procedures increased from the prior years.
Now Im not saying it wasnt justified to increase the test work, I am, however questioning the due dilligence of our CPA firm in the prior years, and I believe they are now on a fishing expedition to create or dig up deficiencies...theyve proposed no material adjustments, only reclass entries and insignificant adjustments, BUT they claim each and every adjustment is more than likely, at least, a significant deficiency....two of the adjustment will more than likely add significant accounting policy disclosures to our 10k filing. The significant accounting policies are not new accounting guidance, but guidance that has existed for YEARS. This just happens to be the year that our auditors decided to dilligently perform their audit and propose these adjustments.
It all boils down to the cost benefit of all this, and the true beneficiary of all this is the accounting firms mainly big four firms and them more than doubling their audit fees, and forcing an hourly rate down our throats instead of a contract rate...hourly rates have now become a standard practice. Our auditors told us all year that Sarbanes-Oxley was too much of a moving target to set fixed fees, and used the same excuse to not give us substantial review comments after we had sent them our finished products...we began sending them finished process documentation and control design back in June of 2004....no significant comments until Feb. 2005. However, they expected us to hit the bullseye of the same moving target, and critique us to the hilt in when they have their ducks in a row...a few months after we could do anything about their issues, and they have the audacity to quote firm interpretations.....the registrant has no leg to stand on, no guidance designed for our use, and we are virtually at the mercy of firm interpretations...i.e., hundreds of lawyers and big brained accountants at a central office whose only job is to create firm guidance VS. a small staff of employees and consultants..of a small to medium sized company... who are relegated to using their own interpretation, their personal networks of information, or other informal means of guidance to comply with this standard.
PROTECTING THE INVESTOR
In my opinion, weve not only taken 1,000,000+ dollars our Sarbanes cost out of investors hands, and weve given the CPA firms the power of GOD to even do more damage to our company by quoting unreasonable firm guidance with no checks or balances of official interpretations or guidance for us the registrant to use...even PCAOBs Standard 2 is not written for our use, but for the auditors use. Where does this benefit the current/potential investor that is investing/or would like to invest in our company? Weve taken 6-7 of his EPS this year in expense to comply with this work, and then our audit firm, despite the vanilla nature of our operations and accounting, is trying its darndest to stir up issues that honestly DO NOT EXIST, ignoring the fact that we have NO IDEA the potential impact of their opinion of our controls. In the END our investor are much worse off than before this came about. There is NO DOUBT about that. The reliance on our control environment is better, but a company of our size already had sufficient monitoring and entity-level controls to mitigate and major significant risks. Now we get to spend 400-500k annually of the investors money to give them a benefit that doesnt come close to justifying that amount spent