Oversight Systems Inc. released Monday the results of the 2007 Oversight Systems Financial Executive Report on Sarbanes-Oxley.

Among its findings, the survey of 168 financial executives identifies growing benefits of continuous monitoring of transactions, defined as real-time, automated testing of recorded transactions using rules and artificial intelligence:

• 64 percent see merits in using continuous monitoring as a detective tool in SOX compliance;
• 58 percent feel it can serve as a preventative tool;
• 50 percent think it can facilitate management's assessment of risk and help test the effectiveness of other controls;
• and 42 percent believe it can be used as a compensating or mitigating control.

"Now is the time for corporations to fix fraud and controls weaknesses," said Patrick Taylor, president and CEO of Oversight Systems. "Permitting the hangover from the corporate fraud scandals of 2002 to remain unaddressed is highly risky for any company and its executives. Today, continuous monitoring is a mature process that allows companies to automate controls testing and get real-time visibility into their financials. Smart compliance officers and corporate executives are adopting these processes and technology."

The study also identified benefits of real-time transaction monitoring within financial systems:

• 71 percent report that realtime transaction monitoring facilitates a stronger control environment;  
• 59 percent state it reduces errors in financial processes such as order-to-cash and procure-to-pay; and
• 49 percent believe the benefits lie in automated testing of control effectiveness.
• An additional third of respondents believe the benefits of real-time transaction monitoring are reducing the cost of maintaining compliance (36 percent), increasing confidence in financial reports (35 percent) and mitigating segregation of duties risks (31 percent)

Costs under control - finally

Now in its third year, the cost of implementing SOX regulations is coming under control. When comparing 2006 SOX costs with 2005 figures, financial executives report spending less. Compared to year-one spending:

• 9 percent of executives report spending an equal or greater amount on 2006 SOX compliance (17 percent in 2005);
• 29 percent of executives report spending less than half of first-year costs in 2006 (19 percent in 2005)

However, fewer costs have not silenced SOX opponents. While the Securities and Exchange Commission explores loosening Section 404 requirements, politicians in the new Democratic Congress are looking to rework the entire legislation. Financial executives are divided on what they feel the new political majority means to SOX regulations:

• 30 percent think a Democratic Congress will seek to expand or strengthen market regulations such as SOX;
• 27 percent believe Congress will reduce and weaken such regulations;
• 27 percent believe the new Congress will usher in more vigorous enforcement by the SEC and PCAOB;
• 16 percent feel that less vigorous enforcement is on the horizon.

Integrity takes center stage

Today, more than five years after Enron filed for bankruptcy, many companies still feel the fallout of the early-century accounting scandals. Nearly all financial executives (90 percent) report a cultural change among U.S. business leaders toward institutional integrity and fraud prevention as a result of these scandals.

The outlook among executives about this change, though, is divided – 31 percent perceive a vigilant change that will remain for the foreseeable future, 30 percent feel the interest will fade over the next five years, and 29 percent feel vigilance and interest by corporate leaders has already begun to fade.

"Any company that allows institutional integrity and fraud prevention to fade is swimming against the tide of investor preferences," said Joseph Carcello, Ernst & Young Professor of Accounting, and Director of Research – Corporate Governance Center at the University of Tennessee. "Investors, especially large institutional investors, have stated publicly that fraud prevention and detection is very valuable when evaluating potential investments. Continuous monitoring software offers a cost-effective means of reducing exposure to certain fraudulent financial reporting risks."

Likewise respondents' attitudes toward the benefits of SOX compliance indicate a fading level of interest compared to previous years. Although when asked the benefits of SOX compliance, 68 percent report that it ensured the accountability of individuals involved in financial reports and operations while all other factors lost support as compared to the 2006 study. The SOX benefit with the biggest drop was strengthening investors' view of a company, garnering just 16 percent support – down 10 percent from last year.

Investment picture

Recently, stock options backdating stories have run rampant in the headlines. The unsightly stories have resulted in renewed efforts at companies to review and reform options dating practices.

However, financial executives report only small increases in the amount of time auditors spend reviewing stock options as compared to one year ago. Of financial executives whose companies have stock options, 38 percent report no increase in the amount of time spent auditing and 47 percent report a 30 percent or less increase in time spent auditing stock options.

"Auditors have not really faced a lot of heat over stock option backdating, so their relatively tepid response to date is not too surprising," said Dr. Dana Hermanson, Dinos Eminent Scholar Chair of Private Enterprise and Professor of Accounting in the Coles College of Business at Kennesaw State University. "However, now that the issue is on the table, I'd hate to be an auditor who misses a future backdating abuse."

In 2007 financial executives report a significant increase in the positive impact SOX compliance has on shareholder value. Four in 10 executives (41 percent) report that SOX boosts shareholder value by building overall confidence in the market. Additional findings include:

• 37 percent report SOX increased shareholder value because investors know their company is operating ethically (27 percent in 2005);
• 30 percent report SOX created a cost burden that suppresses stock value (37 percent in 2005).

Board involvement is also apparent among companies. Nearly three-quarters of executives (72 percent) report their Board is actively involved in company management with 19 percent reporting the Board to be highly active.

A risk-based approach

The study found:

• 63 percent take a risk-based approach to redefining controls;
• 46 percent of executives report implementing a risk-based approach to financial controls as one of their 2007 goals.

Other financial goals leading the way include:

• reduce external costs (59 percent);
• reduce internal costs (57 percent);
• reduce the number of key controls (49 percent);
• automate manual processes with IT solutions (43 percent);
• focus on compliance benefits through quality financial operations (31 percent);
• reduce reliance on consultants (29 percent);
• and increase the morale of employees responsible for compliance (24 percent).

The previous annual SOX reports can be found at www.oversightsystems.com/survey.