Sarbanes Oxley Deadline Looms Ominously for Unprepared Companies

Many U.K. firms relying on outside consultants to ensure compliance with SOX reporting requirements, wilismorris survey finds

Many U.K. firms relying on outside consultants to ensure compliance with SOX reporting requirements, wilismorris survey finds

London  November 30, 2004  U.K. companies are relying heavily on independent contractors to ensure they are in compliance with Sarbanes Oxley legislation, and many are unprepared to meet the requirements of the corporate reform act, according to a new survey by U.K. business consultancy wilismorris.

The U.S. Congress passed the Sarbanes Oxley Act of 2002 to effect some of the most wide-reaching corporate reforms in more than 70 years following a string of high-profile cases of corporate malfeasance.

Under the act, companies that are listed with the Securities and Exchange Commission (SEC) will, for years ended after November 15, 2004  or July 15, 2005 for non-U.S. companies  have to report on the strength of their internal controls and have that report audited (under Section 404 of the law). Serious weaknesses must also be reported to investors.

wilismorris recently surveyed the readiness of U.K. companies to determine how prepared they were for Section 404. "Although the results were not entirely surprising, there are a lot of companies who are simply not ready for Section 404," said Shaun Critten, a senior partner with the firm. "A large proportion of organizations are still documenting internal controls and have not even begun to think about testing or remediating."

One alarming feature, according to wilismorris, is the heavy reliance upon independent contractors to complete the work. "We were staggered by the amount of companies [that] had effectively delegated responsibility for compliance with the act to contractors," said Critten. "Our recent 'boot camp' for Section 404 teams identified that a lot of these teams are not particularly well skilled either, and it is frightening to think that a CEO or CFO's reputation (and civil liberty) is in their hands."

One interesting aspect of the act  yet to be tested  is how investors will react to their companies reporting defects in internal controls. "We estimate that most companies will have at least one serious control breakdown," said Critten. "Because no Section 404 report has yet been filed, investor reaction is unknown, but the first reports will be very interesting."

Critten noted that foreign registrants, like those in the United Kingdom, have the advantage of a six-month lag behind their U.S. counterparts. "That provides a window in which they can observe the styles of Section 404 reports in the United States and the reactions they attract," he said.

But can foreign companies still meet the compliance deadlines? "Yes, but with a lot of hard work, a detailed strategy, senior manager support and ownership, quality training for quality teams and a lot of luck," said Critten, who concluded, "It can be done, but those lagging behind must start now."

For more information on Sarbanes-Oxley, read Parts 1 and 2 of the recent series on Contract Management: Five Myths of Contract Management, and Contract Management: Improving Corporate Governance.

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