Under the Sarbanes-Oxley Act of 2002, the U.S. Securities and Exchange Commission enforces strict regulations on financial statement certification, reporting and disclosure controls, and procedures.
New certification rules require that CEOs and CFOs sign off on and take personal liability for their companies’ financial reporting. If any fraud is committed by the corporation, these officers take the fall.
New accelerated reporting rules take advantage of advances in computer technology and shorten the deadlines in which a company must report quarterly and annual reports, as well as certain stock trading activity.
In addition, new disclosure rules mandate that a company’s everyday consulting auditor cannot be the same firm that prepares public financial reports.
“Companies need to be more open and put more information on the table,” says Rick Barraza, senior vice president of investor relations at San Jose-based Calpine Corp. “I think that’s been well-received by Wall Street. Ã‰ It gives more confidence and a comfort level for the investors.”
But unlike Calpine, some companies are struggling with compliance.
“You know who those companies are? It’s the $100 million companies with a small finance department,” says Bill Tulin, a partner at auditing and accounting firm Ernst & Young in San Francisco. “It’s the smaller companies that are public that don’t have the bench strength.”
That means they are going to have to spend money and time.
“At the end of the day, you’ve got to solve this problem in one of two ways,” Tulin says. “A company either hires the people itself or it hires consultants to help. There is no way around it.
“Basically, they are going to be held accountable,” he adds. “A lot of small companies have not had their feet held to the fire yet.”