Elmer R. Easton
Reporting Companies Beware: SOX 409 Will Knock Your Socks Off
The Sarbanes-Oxley Act of 2002, an Act " To protect Investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes"
The advent of the Sarbanes-Oxley Act (waggishly known as the Accountants Health & Welfare Act of 2002) is seen by many as an exercise in checklist conformance. Others claim it to be another government intrusion in the practice of free enterprise. And still others laud it as an Enron-accelerated effort by the Feds (to wit, the SEC) to foster corporate truth-in-telling. Yet even Mr. Sarbanes and Mr. Oxley can't quite agree upon its ultimate interpretation, intent and value (WSJ 7.24.03).
But most agree with its potential impact as an extension to the Act of '33 and the Exchange Act of '34. As such, it is viewed as a wakeup call, no matter the scope of compliance. And that is the key word: Compliance. It appears that almost every major accounting company, business intelligence software purveyor and consulting organization is viewing Sarbanes-Oxley ("SOX") "compliance" as a new trough upon which to feed, fueled by their clients' fear of non-compliance retribution.
And the fear is well founded! But not for ignorance or non-compliance with the issues stressed by these current suppliers. True: It is important to respect the dozens of caveats concerning outside auditor "musts" and "Musts-not", internal audit committee composition and responsibility, and the Section 404-prescribed auditor certification of internal controls. Granted that the CEO and CFO can no longer claim ignorance of financial malfeasance and must attest to the accuracy of the published reports -- 10Q, 10K and 8K, accordingly.
The fear has to do with Title IV Section 409. And well it should! Consider the pertinent opening words of the Act: "To protect investors by improving the accuracy and reliability of corporate disclosures ..." Then consider that an investor in a particular security makes a decision every day whether or not to continue to own that security. There is scant comfort, from an investment decision perspective, to know that a company has complied with the voluminous check list or has satisfactory internal controls or that which is published is accurate.
So therefore consider, out of eleven Titles with sixty three Sections, only one Section - number 409, exhorts a company (called the "Issuer") to provide the kind of information suited to an investment decision. Depending on whether you are an investor or an Issuer, SOX 409 is a "sweet spot" or a "smoking gun". And perched on the sidelines is the Strike Bar, sensing the fresh meat incident to material non-compliance. And that's enough to knock your socks off!
To make the point, it is necessary to examine and interpret Section 409, to parse it line by line, partially rearranged for emphasis:
The operative words are "rapid" and "current" and "material", all subject to interpretation. Rapid and current mean that it behooves a company to fashion ("model") its reporting financials in a manner that material changes can be readily incorporated.
Material means information that could affect an investor's decision to "keep", "buy" or "sell". Simply put: "In which direction do the company's fortune appear directed."
Unusual words for an act of congress. (Not the only place in the Act for unusual words. In another section, WorldCom is cited as an example of malfeasance). Nevertheless, the intent is clear: "No fancy legal or accounting jargon, please!"
This may be the heart of the disclosure regimen. "However things went before - the last 12 months, the last 8 quarters, the last five years - will it continue looking forward?"
And if the answer is "no", which may mean that "things will be better", the why and the when are pertinent. This brings us back to the requirement for a "model" designed to determine these answers, quickly and simply.
If trend is the heart of disclosure, qualitative is the soul. The dictionary definition: "The degree or grade of excellence". The likely SOX definition: "The optimum future performance, positive and negative". And still again, a relevant model will be an invaluable tool, particularly if it takes into account the relevant bounds and constraints.
Graphs and charts are a common component of annual and sometimes quarterly reports. They don't accompany 10K and 10Q documents, retrievable from Edgar On-line, et al. But when they are provided, their design is hardly ever sufficient to properly determine trends, and if used by an investor for this purpose, it can lead to improper conclusions.
On the other hand, charts and graphs of various natures could be a feature of or accompaniment to the trend analysis described earlier. They could show corrections for anomalies; they could show potential projections for the future; they could show "what if ..."; they could show "quality", they could show bounds and constraints related to specific contributing items or variables. They could be a powerful tool for an investor's deliberative process.
This sums it up nicely and reverts to the opening statement of the Act and this discourse.
And why this discourse? A recent edition of the Los Angeles Times featured a front page and multi-column subsequent page article on the Sarbanes-Oxley Act. Albeit 50 or so column inches, it missed the point. A panoply of similar writings by analysts and potential compliance tool purveyors has similarly failed.
It isn't just the Enrons and World Coms that concerns the authors, it's the dozens and dozens of securities whose prices reached dizzying heights before reality set in. Wishful thinking substituted for rational analysis. The only problem is that the average investor, as well as the "professional", never received enough information - if indeed that information was generated or available - with which to make such an analysis.
So not withstanding its 64+ pages, eleven Titles and sixty three Sections, the purpose of SOX is exemplified in barely eight lines in one Section (409) of one Title (IV). For this is the only place in the entire Act, with all its caveats and entreaties, that validates its primary raison d'etre: the protection of the ordinary investor.
It's worth repeating: The ordinary investor who would like to be prudent investor, needs to know, "in plain English", how is "my company" doing? Will it or may it or can it make more or less or the same amount of money in the future? The investor isn't seeking conclusions, but enough information to make its own conclusions.
For the purpose fundamentally intended, the check list compliance and other aspects of the sixty remaining sections are a nicety. "Is my stock going to go up or down" and "Give me enough honest information to make an educated assessment" are the necessities.
And that's why failure to comply with SOX 409 may be enough to knock your socks off!
ACUMEN Financial Solutions, Inc.
ACUMEN/Sarbanes-Oxley Summary Specification
The Sarbanes-Oxley Act of 2002 (the "Act") is a blueprint in need of a blueprint. Whereas certain elements of "compliance" are straight forward and can be "check list" determined, others are fuzzy at best and are contributive to a software feeding frenzy of unusual (and probably unanticipated) proportion.
Issuers, the designation in the Act given to reporting companies that have issued registered stock, are exhorted throughout the Act to conduct their financial life in ways which "... fairly present in all material aspects the financial condition and results of operations ... for the period represented in the report". That is no change from the past.
But Title IV Enhanced Financial Disclosures, Section 409 Real Time Issuer Disclosures is both a change and a challenge:
ACUMEN/SOA is a set of tools designed to aid issuers meet, auditors confirm and analysts pontificate upon the new disclosure challenge.
A fundamental premise of ACUMEN/SOA is that a company must know itself before it can make itself known to its investors and the public at large. The fundamental premise is that issuers can/may no longer fool its investors and the public (Global Crossing is cited in the Act as an example.) Conversely, companies can ill afford to fool themselves.
As later detailed, ACUMEN/SOA is a tool set that will enable an issuer to both examine itself and to comply - in a timely manner - with the following mandated disclosure requirements:
ACUMEN/SOA is a tool set specifically tailored to enable disclosure compliance, financial and operational, at every level of a corporate hierarchical structure. Following are certain of the major elements:
The ACUMEN/SOA disclosure tools are just that - tools to facilitate an inward analysis and outward dissemination. Examples of such analysis and dissemination are as follows:
And, in turn, following is an excerpt from a "hypothetical" MD&A (Management Discussion & Analysis) with the kinds of information envisioned by the SOA framers and followers:
"Operations for the quarter were generally in accordance with expectations. Factors which affected or influenced the results were as follows:
"Looking forward, we may reasonably expect the following:
"The `what if' and `what could have been' looking back, and `what is reasonably expected to be, given the limitations and constraints' looking forward, reflect Management's current best estimates including the interpretation and extrapolation of past trends (suitably conditioned to discount anomalies) of future operations. As expressed in the "Safe Harbor" declaration elsewhere in this report, there are no certainties."
There is no question that being "more forthcoming" and "fairly presenting" in public announcements is tricky business. True appreciation of the combined continuous contact with shareholders (particularly institutional) large and small, analysts, bankers and regulators is perhaps reserved to those who have run public companies.
Nevertheless, that proverbial cat is out of the bag. Reporting on "trends", "qualitative and quantitative analysis", "forward looking expectations" and "graphical presentation" are here to stay. The ACUMEN/SOA Solution, as an addition to a Business Intelligence purveyors Financial Reporting product, provides technical excellence coupled with an exceptional ease of use by the non-technical professional. A profit-positive combination. Good examples of the non-technical professional are the CFO, the CEO and individual profit center managers. So even though the ACUMEN/SOA calculations are precise, the ranges (bounds, limits) that frame the what-if, and particularly bottom-up, results may be largely subjective and must be easy to manipulate.