JUNE - 2009

Control Chatter
News that Internal Control Professionals Needs to know
Control Chatter Headlines is a monthly news summary of the top stories concerning internal control and corporate governance. Headlines is prepared by the staff of Internal Control

Institute for the benefit of their members and associates. More details on the topics covered may be found by clicking on the LINK at the end of each headline. Topics covered this month include:       10 Things I Know About Today's CPA Industry Exposing A Major Flaw In Corporate Governance - Proxy Voting HealthSouth shareholder seeks $2.6 billion from ex-CEO Is Real Stimulus On the Way From the Supreme Court? Sarbanes-Oxley and U.S. Businesses in China Lessons Learned From Internal Control Audits 2008 Securities Litigation Study

10 Things I Know About Today's CPA Industry
1. Between 2002 and mid 2008, CPA firms enjoyed one of the biggest booms in the profession’s history. Business was so good that most firms stopped proactive marketing because they couldn’t handle any more business. The trigger and the fuel for this so-called "golden age" came from the U.S. government in the form of the Sarbanes-Oxley Act. See the other nine things I know by visiting 10 Things I Know About Today's CPA Industry

Exposing A Major Flaw In Corporate Governance - Proxy Voting
The entire legitimacy of the corporate governance structure depends on effective oversight - shareholders oversee directors and directors oversee management. Shareholders are supposed to elect directors and directors to select management. The periodic election process is a reminder of the oversight role of shareholders and directors. The integrity of the voting system is critical. If it doesn't work right, the system suffers. As we have learned in the past few years, you and I as individuals don't matter very much in this voting system. Our stock is in most instances not held in our name, so the vote is cast by intermediaries such as pension funds, mutual funds, banks, insurance companies and so on. We hope they vote in what is in our best interest, rather than theirs. Exposing A Major Flaw In Corporate Governance - Proxy Votin

HealthSouth shareholder seeks $2.6 bln from ex-CEO
Plaintiffs in a $2.6 billion lawsuit against disgraced former HealthSouth Corp boss Richard Scrushy said on Monday they would try to recover as much money as possible. The suit in an Alabama state court by stockholder Wade Tucker seeks to recover money for HealthSouth, the health care provider that last week posted first-quarter revenues of $475.1 million. Tucker won $47 million in 2006 from Scrushy in unjust bonus awards and his lawyers are now pursuing recovery of $2.6 billion in squandered and fraudulently paid monies by HealthSouth during its $2.7 billion accounting scandal in 2002.
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Scrushy, who founded HealthSouth, was the first chief executive to be tried under the Sarbanes-Oxley Act after a massive accounting fraud in which senior executives overstated profits in order to please shareholders. HealthSouth shareholder seeks $2.6 bln from ex-CEO

Is Real Stimulus On the Way From the Supreme Court?
With the rest of Washington floundering trying to help the beleaguered economy, good news may be on the way from the unlikeliest of the branches of government: the United States Supreme Court. The Court today agreed to hear a case, Free Enterprise Fund vs. Public Company Accounting Oversight Board (PCAOB) that challenges the constitutionality of the Sarbanes-Oxley (Sarbox) law. A Court ruling striking down Sarbox would be a huge shot of adrenaline for financial markets and could help start a genuine economic recovery. The staggering costs of Sarbanes-Oxley bear repeating. An analysis by Ivy Xiying Zhang of the University of Rochester measured the total stock market impact of the law as costing over $1 trillion. Perhaps a third of that loss reflects direct compliance costs; the other hundreds of billions of dollars are a result of the economic inefficiencies created. Nobel Laureate Milton Friedman told the New York Sun a couple of years ago that Sarbox was the biggest problem facing the U.S. economy, noting that it tells entrepreneurs: “Don’t take chances because down will come the hatchet. We’re going to knock your head off.” Sarbox was a classic government overreaction, rushed hastily into law in the wake of the Worldcom scandal with little deliberation. It would be an amazing victory for freedom and free markets if it could be undone by the Court at the same time the political branches are repeating the mistake with ham-handed overreactions to the credit crisis. The most onerous requirements are under section 404 of the act, which has been interpreted by the PCAOB as requiring full external audits of all internal control measures. PCAOB and the Big Four accounting firms have turned Sarbanes-Oxley into a full-employment act for accountants and auditors, in effect rewarding them for their failing in the corporate scandals. PHIL KERPEN: Is Real Stimulus On the Way From the Supreme Court? « FOX Forum « FOXNews.com

Sarbanes-Oxley and U.S. Businesses in China
The Public Company Accounting Reform and Investor Protection Act of 2002 commonly known as Sarbanes-Oxley or SOX after the two authors of the bill, was enacted on July 30, 2002 in response to several major corporate and accounting scandals, the most infamous being the meltdown of energy giant Enron. Sarbanes-Oxley includes some of the most farreaching reforms of American business practices since the Depression Era and it not only apples to U.S.-based parent companies, but subsidiaries organized outside the borders of the United States. This means that U.S. business operating in China must remain compliant, challenging them to design and maintain their internal control structure in an accounting and reporting environment that is early in its development and is rapidly changing. Many Chinese accountants and local Chinese CPA firms lack the expertise and experience to establish, maintain and review internal control systems. Despite these challenges, when contemplating an entry into the China market, SOX compliance should be considered with equal importance as the location and legal structure of the proposed China operations. Early internal control design and implementation in tandem with proper organization under Chinese laws will contribute to a smoother transition and earlier success. Sarbanes-Oxley and U.S. Businesses in China | China Briefing News

For more information: Visit the ICI web site at: Internal Control Institute or write for more information to the Internal Control Institute 2101 Park Center Drive, Suite 200, Orlando, Florida 32835-7614 Additionally, you may contact Michael Pregmon, Jr., Ph.D. COO and Managing Director, at (407) 472-4424 or mpregmon@internalcontrolinstitute.org.

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Lessons Learned From Internal Control Audits
The Center for Audit Quality (CAQ) has issued a new reference source for public company auditors that provides lessons learned from integrated audits of internal control over financial reporting. CAQ Lessons Learned – Performing an Audit of Internal Control in an Integrated Audit identified 21 practical insights for auditors, Among its suggestions, the report offers practical pointers about performing an integrated audit, notes the benefits of a top-down, risk-based approach to emphasize areas where material risks are most likely, and also the advantages of maintaining an open line of communication between the auditor, company management and the audit committee. Lessons Learned From Internal Control Audits

2008 Securities Litigation Study
In PricewaterhouseCoopers’13th annual evaluation of private securities class action lawsuits, one thing is glaringly obvious: While 2008 was an extraordinary year for litigators, it also demonstrated how extremely vulnerable giant financial institutions and entire economies are to fissures in the financial system. It was a year of tumultuous change for the financial industry, and one that is likely to usher in a future of new regulation, oversight, and enforcement. In 2008, both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) focused attention on financial markets. The SEC secured some of the largest settlements in its history from firms charged with misleading investors about the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed, and sold: UBS Securities LLC and UBS Financial Services and Citigroup Global Markets settled for $30 billion. The number of federal securities class actions from the plaintiffs’ bar rose for the second year, with 29 percent more filed in 2008 than in 2007. A total of 210 cases were filed in 2008 compared with 163 in 2007. Read the entire report at http://10b5.pwc.com

Help Wanted
If you see a news story concerning internal control or corporate governance that you feel is important for other professionals to know please send it to (mpregmon@internalcontrolinstitute.org). Sign up for our free newsletter and other informational updates at ICI Contact Us Page

For more information: Visit the ICI web site at: Internal Control Institute or write for more information to the Internal Control Institute 2101 Park Center Drive, Suite 200, Orlando, Florida 32835-7614 Additionally, you may contact Michael Pregmon, Jr., Ph.D. COO and Managing Director, at (407) 472-4424 or mpregmon@internalcontrolinstitute.org.

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