Companies Drag Feet on Updating Fraud Safeguards
Some feel no urgency to adopt new standards, even after clock runs out on old ones
March 2, 2015 8:33 p.m. ET
Corporate safeguards to prevent financial errors and fraud are like armor: unpolished they rust, and by then it’s too late. The most widely followed standards for these safeguards—or internal controls—were updated more than a year and a half ago. A deadline to adopt the new, more detailed standards passed in December.
But that hasn’t stopped more than 300 companies, with a combined market value of more than $450 billion, from sticking with internal-control guidelines that were written more than two decades ago, according to a review of regulatory filings by The Wall Street Journal. That number is expected to climb as more companies close their books for 2014 and disclose whether they have made the switch.“If you don’t have a good business reason for not making the move…that may be indicative” that management hasn’t put enough emphasis on controls, said Chuck Landes, a board member of the group that sets the standards: the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.
Some of the biggest companies among the laggards include Buffalo Wild Wings Inc.,Cheniere Energy Inc. and Hasbro Inc. Buffalo Wild Wings and Cheniere didn’t respond to requests for comment. Hasbro said it plans to adopt the new framework this year.
COSO updated its rules in May 2013, adding 17 related principles to the original set of five that were released in 1992. The accounting-industry consortium retired the old framework on Dec. 15 of last year.
The new standards require companies to disclose more details about how they design and test their internal controls, which could range from requiring that two people sign off on purchasing orders to restricting access to sales systems.
Delays in adopting the new guidelines could pose risks for investors. In the 2013 round of audit inspections, released late last year, audit regulators found flaws in nearly 40% of corporate audits done by the Big Four accounting firms, a small increase from the prior year.
In addition, more than 180 companies disclosed “material weaknesses” in their internal controls in 2013—the latest year for which data were available—an 11% increase from the prior year, according to data tracker Audit Analytics.
More significantly, 50 of those companies had to restate financial results, at least in part because of those deficiencies. They included restaurant operator Bob Evans Farms Inc. and shoemaker Genesco Inc.
Bob Evans’s troubles were related to valuing a casual dining chain it was selling. Genesco erred in how it handled the accounting treatment of bonuses.
Both Bob Evans and Genesco said they plan to be compliant with the new standards when they report fiscal 2015 results later this year.
Though there is no penalty for foot dragging, companies that don’t comply with the new standards face the prospect of closer regulatory scrutiny. “Both investors and we may continue to question” companies that haven’t made the switch, Nili Shah, a deputy chief accountant with the Securities and Exchange Commission, said recently.
For most companies, updating their processes and documentation doesn’t involved heavy lifting. Companies and auditors say that any company that complied with the original framework should find the transition easy.
“It wasn’t hard or costly,” said Carol Tomé, chief financial officer of Home Depot Inc., which plans to confirm its compliance with the new standards when it releases its annual report later this month. “We’ve been working on it for the past year,” she said, and the changes simply require “more granular” documentation of corporate controls and procedures.
But the new standards have played second fiddle to more immediate concerns at companies like Forward Air Corp. , which was focused late last year on preparations for its largest-ever acquisition, Towne LLC, which is slated to close this month.
“There wasn’t really any reason” to race to meet the COSO deadline, said Rodney Bell, CFO of Forward Air, which provides transportation and logistics services to the airfreight industry. “We only have three people in our internal audit group. We’ll knock [compliance] out in the first quarter.”
Clinical-stage biopharmaceutical company Xencor Inc., meanwhile, was busy late last year preparing to sell more stock to pad its coffers as its drugs proceed through early stage trials. The company plans to put the new standard into effect by year-end.
Ingredion Inc., a sweeteners and starches maker, began the transition to the new framework last year, but will delay implementation until later this year, said spokeswoman Claire Reagan. Based upon the SEC guidance and a belief that its existing controls are effective, the company decided “it’s better to be thorough and do it right.”
Getting it right is crucial for companies and investors. In late 2013, ATM maker DieboldInc. settled allegations by the SEC and Justice Department that employees paid bribes to overseas officials and falsified records. The company has since replaced most of its top management.
Christopher Macey, its controller, said Diebold won’t switch to the tougher standards until later this year because it is transforming its systems, outsourcing and controls.
“The company has considered this very carefully,” he said, “and is committed to a sound internal controls environment.”