Accounting Information Systems - Wiley

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Debate about requiring foreign companies to comply with SOX cen- ters on whether ... estimates the cost of compliance for U.S. companies at over $35 billion, ...
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C O N V E R G E N C E

C O R N E R

Accounting Information Systems As indicated in Chapter 3, companies must have an effective accounting system. In the wake of accounting scandals at companies like Sunbeam, Rite-Aid, Xerox, and WorldCom, U.S. lawmakers demanded higher assurance on the quality of accounting reports. Since the passage of the Sarbanes-Oxley Act of 2002 (SOX), companies that trade on U.S. exchanges are required to place renewed focus on their accounting systems to ensure accurate reporting.

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R E L E VA N T FA C T S • Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. While most companies have these systems in place, many have never completely documented them nor had an independent auditor attest to their effectiveness. Both of these actions are required under SOX. • Companies find that internal control review is a costly process but badly needed. One study estimates the cost of compliance for U.S. companies at over $35 billion, with audit fees doubling in the first year of compliance. At the same time, examination of internal controls indicates lingering problems in the way companies operate. One study of first compliance with the internal-control testing provisions documented material weaknesses for about 13 percent of companies reporting in 2004 and 2005. • The enhanced internal control standards apply only to large public companies listed on U.S. exchanges. There is continuing debate over whether foreign issuers should have to comply with this extra layer of regulation.1

Debate about requiring foreign companies to comply with SOX centers on whether the higher costs of a good information system are making the U.S. securities markets less competitive. Presented below are statistics for initial public offerings (IPOs) in the years since the passage of SOX. Share of IPO proceeds: U.S., Europe, and China (U.S. $, billions) China $17.2 17% Europe $34.8 33%

U.S. $51.9 50%

China $25.7 20%

U.S. $39.9 30%

Europe $64.8 50%

2004

Europe $82.2 43%

2005

# IPOs Avg. size

U.S. $49.9 26%

China $62.1 31%

2006

# IPOs

Avg. size

# IPOs

Avg. size

U.S.

260

$199.7

221

$177.0

236

$211.6

Europe

433

79.5

598

108.4

653

145.7

China

208

82.5

98

260.9

140

444.0

Source: PricewaterhouseCoopers, U.S. IPO Watch: 2006 Analysis and Trends.

Note the U.S. share of IPOs has steadily declined, and some critics of the SOX provisions attribute the decline to the increased cost of complying with the internal control rules. Others, looking at these same trends, are not so sure about SOX being the cause of the relative decline of U.S. IPOs. These commentators argue that growth in non-U.S. markets is a natural consequence of general globalization of capital flows. 1

Greg Ip, Kara Scannel, and Deborah Solomon, “Trade Winds in Call to Deregulate Business, A Global Twist,” Wall Street Journal, January 25, 2007, p. A1.

ON THE HORIZON High-quality international accounting requires both high-quality accounting standards and high-quality auditing. Similar to the convergence of U.S. GAAP and iGAAP, there is a movement to improve international auditing standards. The International Auditing and Assurance Standards Board (IAASB) functions as an independent standard-setting body. It works to establish high-quality auditing and assurance and quality-control standards throughout the world. Whether the IAASB adopts internal control provisions similar to those in SOX remains to be seen. You can follow developments in the international audit arena at http://www.ifac.org/iaasb/.

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