Sarbanes-Oxley is Here to Stay

The U.S. Supreme Court ruled today that a small portion of the Sarbanes-Oxley Act of 2002 is unconstitutional. According to the ruling, The Public Company Accounting Oversight Board ("PCAOB") which oversees the accounting firms who audit U.S. public companies currently violates constitutional separations-of-powers principles.

The Court viewed the manner in which PCAOB members are currently appointed and removed to be unconstitutional because it did not operate at the behest of the President of the United States. As such, the U.S. Securities and Exchange Commission will now have the authority subject to the President's review to appoint and remove PCAOB members at will.

However, the PCAOB itself and the remainder of the Sarbanes-Oxley Act remains intact and constitutional. So, those hoping to see the full demise of the Sarbanes-Oxley Act will certainly be disappointed by today's decision. To read the full ruling, click here.

The Great Unspoken Danger

Yesterday, the U.S. House Committee on Financial Services conducted a preliminary hearing into the investigation of regulatory failure associated with the $50 billion Madoff Hedge Fund fraud.  Among those testifying was Leon M. Metzger, a Yale University professor and expert on hedge fund management.  His commentary included the following:

I wish to stress two things: first, the need for top-notch internal controls and second, that operational risk is the great unspoken danger.   A 2003 study of 100 hedge fund failures over a 20 year period concluded that 50 percent of hedge funds had failed due to operational risk...  When I was interviewed in August 2004 about teaching a hedge funds course at the Yale School of Management, I said that I wanted to emphasize good operational controls, which investors tend to overlook, and are essential to the success of an investment.  I was offered the job, and the importance of those controls is what I stress whenever and wherever I teach.  

Many risk experts fail to recognize the importance of strong internal controls, but they are (to use a football analogy) the "blocking and tackling" of risk management.  Without a solid internal control framework, any hedge fund, financial institution or corporation is likely to suffer a similar demise.  Wheelhouse Advisors can provide a no-cost diagnostic review of your internal control structure.  Visit www.WheelhouseAdvisors.com to learn more.

Room for Improvement

A recent study by the Financial Executives Research Foundation highlights the opportunities for many companies to improve the effectiveness and efficiency of their Sarbanes-Oxley ("SOX") Compliance programs. In this week's edition of Compliance Week, the study was examined and those interviewed in the article all agreed that room for improvement still exists.  The four main areas of improvement for most programs are:

• Transforming controls to focus less on manual controls and more on automated and entity-level controls;


• Consolidating processes into a reduced number of systems or a reduced number of locations, through a shared-services or business process outsourcing approach;


• Adopting more sophisticated testing strategies, including remote testing; and


• Conducting SOX testing work more deliberately and selectively.

Wheelhouse Advisors is uniquely qualified to provide cost-effective solutions in each of these areas.  Visit our website at www.WheelhouseAdvisors.com to learn more.