November 18, 2005

A Fitting Wrap-up to “Sarbanes Oxley Should Apply” Week

Filed under: Economy,Taxes & Government — Tom @ 3:09 pm

On Wednesday, I suggested that the Internal Revenue Service (IRS), based on a report detailing serious internal control problems issued by the Government Accountability Office (GAO), should be forced to comply with Sarbanes Oxley. “SarBox,” for those who don’t follow business news very much, is the collection of onerous rules relating to accounting, internal controls, and management conduct that were imposed on publicly-traded companies in the US in the wake of Enron’s bankruptcy several years ago.

On Thursday, I wondered whether the two Government-Sponsored Enterprise (GSE) home loan monsters, Freddie Mac and Fannie Mae, are in compliance with SarBox, as they are legally required to be, because their shares are traded publicly. Based on the comment of S.O.B. Alliance member Porkopolis at that post, the answer is an obvious “no.”

But the week’s prize for Best Candidate for SarBox Required Compliance goes to ….

…. (drum roll please) ….

The European Union (HT American Thinker through Lucianne), which for the eleventh year in a row could not get a statement of financial assurance from its auditors (ya gotta love the headline):

11 years’ chaos for EU accounts
November 17, 2005

EUROPE’S official financial watchdog has refused to approve the EU’s accounts for the 11th year in a row because they are so full of fraud and errors.

The European Court of Auditors refused to give a statement of assurance on the EU’s E100billion ($160.3 billion) budget for 2004. “The vast majority of the payment budget was again materially affected by errors of legality and regularity,” it said.

The audit found major shortcomings in the EU’s two biggest areas of spending – farm subsidies and regional development.

And it refused to approve the budgets for the EU’s foreign policy, aid program and internal policies, particularly its research program. However, financial assistance to countries applying to join the EU was certified, as was the administration budget.

The report is highly embarrassing for the European Commission, which said it was “sad” about the findings but insisted it had made progress on improving its account-keeping.

….. Greece was singled out for criticism, with olive farmers claiming for trees that did not exist, farmers seeking support for goats they did not own, and inspectors faking inspections.

Half the project budgets approved by the commission were inadequately monitored.

“The situation, which represents no major improvement, was largely due to over-declaration of costs, declarations of ineligible costs or the absence of supporting documentation, such as proofs of delivery of services paid for,” the Court of Auditors found.

EU Rota anticipated this, though it wasn’t a tough call.

Some will probably suggest the United Nations would be a better candidate than all of the above. Folks, there are limits to what even SarBox can do. Based on what has happened in the wake of attempted audits of the Oil For Food program thus far, I’d say don’t bother (note the report’s findings of 702 deficiencies on Page 4)–It’s a hopeless case.

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5 Comments

  1. SOX is certainly onerous, but entirely necessary. With that being the case should I, as an ADS shareholder demand that it apply to foreign companies which issue ADS shares?p

    Comment by Kevin Irwin — November 19, 2005 @ 8:37 pm

  2. #1, good question. I think there has been some controversy about that, but don’t know the status.

    The point of my post is that if it’s OK to impose SarBox on public coporations, then there’s no reason why it shouldn’t be imposed on governmental entities that handle and supposedly control billions of dollars. We as taxpayers deserve the level of protection company shareholders are getting from SarBox. (For the record, I think SarBox is way overdone in terms of the costs it has imposed on companies and therefore the economy).

    Comment by TBlumer — November 19, 2005 @ 8:44 pm

  3. Actually, it has helped to create new businesses which offer SOX management solutions.

    I could buy into the SOX requirement for federal agencies.

    Comment by Kevin Irwin — November 19, 2005 @ 10:09 pm

  4. The problem as I see it is that audit fees have jumped something like 60% on average, even at companies that are already well controlled. I consider that, as well as the extra legal fees which aren’t being reported, a waste. Some say that these increases are only a first-year conversion issue, but I personally don’t see the fees coming down much, if at all.

    Yes there are SarBox compliance companies, just like there are HR compliance companies, environmental compliance companies, security and privacy compliance companies, etc., etc. I’m sure most of them are run by good people performing a valid service. BUT…..with rare exception, they don’t create wealth. To the extent that execs and everyone else is running around worrying about these compliance issues, they’re distracted from growing their companies, sales and marketing, and looking for/researching into new products and lines of business. I believe that SARBOX has taken and will take a half-point off of annual economic growth every year it continues to be in existence in its current form.

    The idea of forcing major govt. agencies to comply would be that it would hopefully lead to reducing the impact of some of the sillier aspects of the law, especially the Section 404 internal control provision, which is forcing companies to way overkill their control systems and which is where the increases in audit and legal fees are being run up for (mostly) no real good reason.

    Comment by TBlumer — November 19, 2005 @ 10:39 pm

  5. Oh, and I meant to mention that nobody is really measuring the I’m-sure billions in info technology costs of developing and implementing and monitoring SarBox compliant systems, which again at already well-controlled companies are not necessary.

    Comment by TBlumer — November 19, 2005 @ 10:45 pm

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