In November, writing on behalf of the Business Roundtable, Pfizer Corp. CFO David Shedlarz sent a letter to the Public Company Accounting Oversight Board, asking that it reconsider aspects of its proposal addressing Section 404 of Sarbanes-Oxley. Section 404 requires, among other things, that companies document, test, and assess the effectiveness of their system of internal controls, and have their external auditor attest to the efficacy of such controls. Shedlarz urged the PCAOB to revisit the actual legislative directive, and require an external auditing firm to attest only to a company’s assessment of its internal control over financial reporting, rather than conduct an “audit” of the preparation, assessment, and testing of such controls. In addition, he emphasized the benefits a principle-based approach to standard setting would have in achieving governance objectives. “We believe that a standard that more appropriately focuses on the significant issues around business risk, fraud prevention, and detection would better serve the needs of investors, rather than the very prescriptive detailed testing approach in the [PCAOB's] proposed standard.” Shedlarz says he is firmly committed to the PCAOB’s success in establishing itself.
Shedlarz’s letter captures the concern that many in finance have about reform efforts in general. Do they, in the words of The Corporate Library chairman Nell Minow, a leading advocate for better governance, “lose the forest of good governance for the trees of a checklist approach to satisfying new regulations?” While recent changes certainly move things in the right direction, she says, more work needs to be done.
Knowing Your Food Chain
The key to a positive outcome, in the view of many CFOs, may be the ability of finance chiefs to help their companies set a course ensuring that both the letter and the spirit of the law are met. That can be achieved, they suggest, by working more closely and supportively than ever with the full board and the audit committee.
“As a CFO, I know people down the food chain,” says Hilton’s Hart. “The audit-committee members really don’t; they just deal with the CFO and controller.” In becoming a conduit not only for financial data but also for broader business context and operational details, the CFO provides the sorts of information that the board and its committee members need in order to provide the more-substantive guidance that reform efforts intend.
Hart understands audit committees well; he heads one for Kilroy Realty Corp., a real estate investment trust based in Los Angeles. A new attitude pervades such committees, he says, where “what once might have been seen as trivial now gets explored. It’s no longer written off as a ‘management issue.’ ” And that exploration requires expanded contact between the audit committee and the CFO.
There seems little question that the frequency, duration, and intensity of discussions between CFOs, audit committees, and full boards of directors have increased substantially in the months since Sarbanes-Oxley was passed. In a perfect world, says Smithart, the talks would focus on “achieving a greater understanding of business risks and issues.” She says that the Denny’s audit committee reviews monthly management and operating-results reports and quarterly-earnings releases via teleconference. It also holds committee meetings at each of the five regularly scheduled board meetings, and has other ad hoc communications that involve the CFO, Andrew Green. A number of CFOs, however, admit that the greater face time they enjoy with audit committees and boards is largely spent addressing new governance requirements.