Mind your Ks and Qs Featured

8:00pm EDT August 26, 2007

Ameasure of help arrived July 26, 2007, for publicly traded companies in the form of new guidance from the SEC and the Public Company Accounting Oversight Board (PCAOB). The new rules provide substantive language aimed at mitigating the excessive costs and complexities of reporting and compliance.

“The biggest consideration with these new standards is that public companies don’t just look to their auditors to see what can be done,” says audit partner Matthew Perreault of Armanino McKenna’s Technology and SEC practice. “They really should use the new standards to their advantage in terms of reducing their cost to audit.”

Smart Business spoke with Perreault about how the new rulings, when coupled with a top-down, companywide approach to compliance, may decrease audit costs up to 20 percent.

What prompted the SEC’s new ruling?

In the past, auditors were able to look at and focus their attention on areas of higher risk and spend less time on low-risk areas. The Auditing Standard No. 2 was written in a way that it took away the ability of auditors to apply their judgment, and it very much restricted their ability to rely on the work that was done by either management or internal auditors. Another element was it required companies to reperform the audit every year without the benefit of the knowledge gained in prior years. So each area, even if it was tested last year and you knew it worked and it hadn’t changed, still had to be retested. The new standard, I believe, effectively addresses all of these points.

How should companies build or rebuild their compliance and reporting strategies?

I think it starts at the top. The effort is not merely a finance response — it’s a companywide response — so if the CEO isn’t the sponsor of the 404 compliance effort, he or she needs at least to be a champion right behind the CFO. One of the best practices I’ve seen is to form a disclosure committee consisting of both the CEO and the CFO, along with the COO and the vice president of operations, plus a representative from HR and participants from sales and marketing. All of those disciplines can have a significant impact on the accounting, and if you limit that disclosure committee to people in finance, they might not know what’s going on with the rest of the company.

Must companies reinvent the wheel or is help available?

We are finding that smaller companies, especially when new pronouncements are introduced, are struggling to write the 10Q and 10K reports themselves. Often they are poorly written and are missing certain elements. We usually point them right to the SEC Web site where dozens of similar companies have already posted nearly identical disclosures. This is a case where companies should embrace plagiarism by copying, pasting and editing the material from the disclosures of others. I think companies need to seek out and look at what their peers are doing, create benchmarks and use what’s already out there. Not only does it save time, it produces a better quality product.

What kind of reporting timeline should be established and how can companies stay on track?

Companies often set a press release date, sometimes an artificial date that is much earlier than it needs to be, and then turn around to their finance organization and say, ‘Do whatever needs to be done to meet this date.’ I think this unnecessarily compromises the quality of the records and documents. Alternatively, project leaders should start with a proposed press release date and the ultimate 10Q and 10K filing dates, and then work backward to determine a reasonable time frame to deliver a draft of the press release and when they ultimately need to close the books.

Should companies use inside or outside resources?

For smaller organizations, I think a consultant is the best answer. The consultant will have exposure to the best practices of many different companies and, unless you have a super overachiever in your ranks, it’s difficult to replace that experience with any degree of knowledge. If you can afford to and opt to hire a salaried employee, the best candidates likely will come from the public accounting ranks or will have worked for a number of similar companies in the industry in a comparable capacity.

What quality controls should be built into a compliance strategy?

It starts with creating a large enough time frame, using existing literature that’s available in the form of checklists and going through those with careful consideration until fully understanding the nature of each question. We suggest that companies embrace those checklists and have somebody mindful of preparing them. Often-times, you benefit from a econd-level reviewer who may not be as accounting knowledgeable but is detail-oriented. They’re the person that’s going to say, ‘I don’t understand this question in the checklist, so please explain how you interpreted it and explain why you believe the disclosure was appropriate.’ That’s the best quality control process you can have.

MATTHEW PERREAULT is the audit partner of the Technology and SEC practice at Armanino McKenna LLP in San Ramon. Contact Matthew at matthew.perreault@amllp.com or (925) 790-2755.