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A survey by Ernst & Young reveals that many foreign companies increased their estimate of the amount of effort required to meet the deadline by more than 50% when, thankfully, the SEC offered some breathing space.

The survey, Emerging Trends in Internal Controls, found that foreign companies have distinct “challenges” that most US companies don’t have to contend with and which make compliance with section 404 more difficult. They have, for example, a higher degree of decentralisation and have to work with a greater number of different languages, national cultures and systems. Many are also having to deal with the introduction of international financial reporting standards.

But as of the February survey date, almost 30% of companies had no budget for their section 404 programme. Less than a quarter had a detailed budget, while half had a “high-level” budget in place.

The Ernst & Young report warns that companies which fail to create and allocate a budget may find themselves short of resources towards the latter stages of section 404 implementation.

Most boards of foreign companies are currently being updated on section 404 progress quarterly or bi-monthly – and more than a third of project teams have yet to have any specific input from the CEO or the finance director.

But boards should be taking advantage of the extension, not to slacken off but to enhance their approach to compliance. The evaluation of company-level controls is one of the most challenging aspects of section 404, says the report, and requires a great deal of judgement. Part of this involves evaluating the “tone at the top” or the company’s control consciousness and operating style. “Asking senior management how they know the controls are in place can help determine whether a control has been placed in operation, as well as its operating effectiveness. Only (then) can an effective testing strategy be developed.”

About a third of companies have not yet selected a technology platform to help with 404 compliance, with some saying that they are waiting for the 404 technology market to mature further before making a selection. Of those that have done so, barely half expect the technology to be implemented fully in the first year, but now have the benefit of the deadline extension. l

– Sarbanes-Oxley will be the opening item in the Financial Director Summit being held at The Grove, Hertfordshire, 15-16 June. Alex Cohen, partner at law firm Latham & Watkins, will look at the problems of complying and the prospect of delisting from US markets. Details at or phone (020) 7316 9586.

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