To the Rescue: The ACFE: Is It a Bird? A Plane? Alan Greenspan?

By Reinstein, Alan | The RMA Journal, October 2004 | Go to article overview

To the Rescue: The ACFE: Is It a Bird? A Plane? Alan Greenspan?


Reinstein, Alan, The RMA Journal


A child took a pencil from my desk, so now all your mommies and daddies must buy lead detection devices, and you must wear them at all times.

But Ms. Fixitquik, the girl who stole your pencil isn't even in our class.

No matter--at least we won't have to worry about any of you stealing pencils.

But Ms. Fixitquik, they're awful heavy.

You'll get used to it. Remember how you never thought you'd get used to collars that keep you from wandering off? No one has gotten shocked recently ...

Sometimes it feels like our regulators and legislators don't think through the whole risk/reward equation. We know it's important to manage the risks we face, but we resent it when the price tag of each new initiative is foisted on everyone. A fraud uncovered in several large companies has repercussions not only for all companies but for their lending institutions as well. But there it is. And it's not like a few banks haven't had frauds of their own.

As one of its provisions, the Sarbanes-Oxley Act (SOX) of 2002 is expanding its expectations for the financial expert, a person many companies and their financial institutions already have on their audit committees. Now, many explicit and implicit costs arise in attracting and retaining such experts, and committee members and their banks may face increased liabilities as well. This article discusses SOX Section 407's effects on the banking industry, including the financial expert's possibly increased legal liability, available safe harbors, and expected education and experience attributes. The article also offers methods to attract and train bank audit committee financial experts (ACFEs). Banks need to know that their customers are in compliance and that their own institutions are in compliance.

Action: WorldCom, Global Crossing, Enron, and scared shareholders.

Reaction: Sarbanes-Oxley Act (SOX) of 2002. Originally called the Public Company Accounting Reform and Investor Protection Act, SOX seeks to restore investor confidence by improving corporate governance of U.S. public companies, holding implications for bank customers and shareholders alike. As has been amply demonstrated, an act of fraud has many, many victims, and financial institutions with interests in WorldCom or other such companies have suffered huge financial and reputational losses. While onerous for financial institutions and their customers, the provisions make sense. Generally addressing financial reporting and disclosure, conflicts of interest, and corporate governance, SOX especially affects the audit process. For example:

* It sets procedures to address complaints regarding accounting practices.

* It assesses the aggressiveness or conservativeness of a firm's accounting policies and how such policies affect the firm's financial posture.

* It evaluates such accounting judgmental areas as company reserves and contingencies.

* It reviews management's handling of proposed auditor adjustments.

* It assesses the "quality" of the financial statements, not just their acceptability.

* It mandates that companies' audit committees contain only independent directors, who in turn appoint and compensate the outside auditors and oversee their work.

* It mandates that audit committees should contain at least one member designated as an audit committee financial expert (ACFE).

Congress asked the Securities and Exchange Commission to implement SOX's key provisions and, in the process, to define a financial expert. The SEC did so in 2003, requiring that an ACFE:

* Understands generally accepted accounting principles (GAAP) and financial statements.

* Has the ability to assess the general applications of such principles in connection with accounting for estimates, accruals, and reserves.

* Has experience in preparing, auditing, analyzing, and evaluating adequately complex financial statements (relative to the industry) or supervising those engaged in such activities. …

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