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Unfortunately, when those Section 404 audits began to be conducted for the largest companies, they were costly. Partly, that was caused by badly designed and overly cautious audits conducted by inexperienced auditors. Experience reduces costs to some extent, and in 2007, the Securities and Exchange Committee and the accounting oversight board adopted reforms to make the audits much less expensive.
The section has never been enforced for most companies. The S.E.C. repeatedly delayed the effective date for companies with market capitalizations under $75 million, as lobbying grew bolder and legislators like Senator John Kerry, the Democratic presidential candidate in 2004, opposed enforcement of the law. Mr. Bush`s last S.E.C. chairman, Christopher Cox, avoided making a decision by ordering one more study that would arrive after he was gone.
That study showed that Section 404 costs had come down significantly, and last month the S.E.C. under its new chairwoman, Mary L. Schapiro, announced that in the middle of 2010 -- eight years after the law was passed -- all public companies would have to start complying.
It took just one month for the House committee to vote to gut Sarbanes-Oxley. It voted to exempt those companies worth less than $75 million, and asked for a study on whether companies worth less than $250 million should be allowed to stop complying with the law.
In doing so, it turned aside a plea from Ms. Schapiro, whose opinions carry far less importance in this Congress than those of lobbyists who claim to represent small business.
The Supreme Court case, to be heard Dec. 7, is on the somewhat arcane question of whether it was legal for Congress to require that the members of the oversight board be appointed by the S.E.C. rather than by the president or someone directly responsible to him, like the secretary of the Treasury.
If the Supreme Court rules that the board is illegally appointed, Congress could quickly act to save it by changing the appointment process. But who can be confident that this Congress would want to save the reforms of 2002?...
Unfortunately, when those Section 404 audits began to be conducted for the largest companies, they were costly. Partly, that was caused by badly designed and overly cautious audits conducted by inexperienced auditors. Experience reduces costs to some extent, and in 2007, the Securities and Exchange Committee and the accounting oversight board adopted reforms to make the audits much less expensive.
The section has never been enforced for most companies. The S.E.C. repeatedly delayed the effective date for companies with market capitalizations under $75 million, as lobbying grew bolder and legislators like Senator John Kerry, the Democratic presidential candidate in 2004, opposed enforcement of the law. Mr. Bush`s last S.E.C. chairman, Christopher Cox, avoided making a decision by ordering one more study that would arrive after he was gone.
That study showed that Section 404 costs had come down significantly, and last month the S.E.C. under its new chairwoman, Mary L. Schapiro, announced that in the middle of 2010 -- eight years after the law was passed -- all public companies would have to start complying.
It took just one month for the House committee to vote to gut Sarbanes-Oxley. It voted to exempt those companies worth less than $75 million, and asked for a study on whether companies worth less than $250 million should be allowed to stop complying with the law.
In doing so, it turned aside a plea from Ms. Schapiro, whose opinions carry far less importance in this Congress than those of lobbyists who claim to represent small business.
The Supreme Court case, to be heard Dec. 7, is on the somewhat arcane question of whether it was legal for Congress to require that the members of the oversight board be appointed by the S.E.C. rather than by the president or someone directly responsible to him, like the secretary of the Treasury.
If the Supreme Court rules that the board is illegally appointed, Congress could quickly act to save it by changing the appointment process. But who can be confident that this Congress would want to save the reforms of 2002?...
Those who favored the amendment saw it differently. They were simply out to help small businesses, which would be burdened by having to report on whether they maintained acceptable financial controls, and to have auditors check on whether those controls did work.
They also suggested that more foreign companies would list their securities in the United States if they were spared that onerous requirement. No one seems to have asked if investors really would benefit from making it easier to invest in companies that fear such an audit.
There are other threats to Sarbanes-Oxley as well.
The law set up a long-overdue system of regulating the accounting industry, which had proved time and again that it was incapable of effective self-regulation. The Public Company Accounting Oversight Board has done a credible job, but a month from now the Supreme Court will hear a case that could drive it out of existence.
The Sarbanes-Oxley law also took steps to reinforce the independence of the Financial Accounting Standards Board, which writes accounting rules in the United States. By giving the board a secure source of financing, legislators said they were protecting it from the threats of the companies that had previously made donations to keep the board functioning.
But this Congress has made clear that independence for the accounting rule writers can go too far -- particularly if the rules force banks to reveal the horrid mistakes they previously made.
This year, a subcommittee of the House Financial Services Committee held a hearing at which legislators sought no facts but instead threatened dire action if the chairman of the financial accounting board did not promptly make it easier for banks to ignore market values of the toxic securities they owned. The board caved in, which may be one reason why banks are reporting fewer losses these days.
But the board`s retreat was not enough to satisfy the banks. The American Bankers Association is now pushing Congress to give a new systemic risk regulator -- either the Federal Reserve or some panel of regulators -- the power to override accounting standards. The view of the bankers is that the financial crisis did not stem from the fact that the banks made lots of bad loans and invested in dubious securities; it was caused by accounting rules that required disclosure when the losses began to mount.
The amendment approved this week dealt with Section 404 of Sarbanes-Oxley, which has become a rallying cry for opponents of regulation. Some Democrats seem to think that passing it will be seen as pro-business, and thus help to protect vulnerable Democrats who in 2008 won seats previously held by Republicans. The sponsor of the amendment, Representative John Adler of New Jersey, is one such legislator.
Section 404 was adopted with little controversy in 2002, and for good reason. It simply mandated that public companies report on the effectiveness of their internal financial controls, and that auditors render an opinion on them.
Since the law already required companies to maintain effective controls -- and had done so since 1977 -- it seemed unlikely that would increase costs much for any company that was already in compliance. And it was crystal clear that controls either did not exist, or were evaded, at WorldCom and Enron.
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Goodbye to Reforms of 2002
by Floyd Norris
Friday, November 6, 2009
provided by
The New York Times
It took just five weeks after the WorldCom accounting scandal erupted in 2002 for Congress to pass, and President George W. Bush to sign, the Sarbanes-Oxley Act. That law required public companies to make sure their internal controls against fraud were not full of holes.
It took three more years for Bernard Ebbers, the man who built WorldCom into a giant, to be sentenced to 25 years in prison for his role in the fraud.
Mr. Ebbers will be 85 years old before he is eligible for release from prison. He may be freed, however, before the law is ever enforced on the vast majority of American companies. A Congressional committee voted this week to repeal a crucial part of the law. Other parts are also under attack.
Sarbanes-Oxley was passed, almost unanimously, by a Republican-controlled House and a Democratic-controlled Senate. Now a Democratic Congress is gutting it with the apparent approval of the Obama administration.
The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 -- a name George Orwell would appreciate -- to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.
Some veterans of past reform efforts were left sputtering with rage. "That the Democratic Party is the vehicle for overturning the most pro-investor legislation in the past 25 years is deeply disturbing," said Arthur Levitt, a Democrat who was chairman of the Securities and Exchange Commission under President Bill Clinton. "Anyone who votes for this will bear the investors` mark of Cain."
...
# Stocks fluctuate on unemployment report, GE- AP ...
# House Dems say Sat. vote on health care may slip- AP ...
1:30 pm : The stock market continues to drift along sideways. Gains remain strong among industrial stocks, which are up 1.3%, but financials continue to lag with a 0.4% loss.
Treasuries are having a rather quiet session. Accordingly, the benchmark 10-year Note is up just one tick, which has left its yield just above 3.5%.DJ30 +11.49 NASDAQ +5.38 SP500 +1.96 NASDAQ Adv/Vol/Dec 1076/1.14 bln/1508 NYSE Adv/Vol/Dec 1383/584 mln/1532 ...
US market still trading slightly in Green:
Dow 10,028.71 +22.75 +0.23%
Nasdaq 2,112.48 +7.16 +0.34%
S&P 500 1,069.92 +3.29 +0.31%...
# Oil falls below $78 as US unemployment rises- AP ...
Dow 10,016.77 +10.81 +0.11%
Chart for Dow
Nasdaq 2,108.03 +2.71 +0.13%
Chart for Nasdaq
S&P 500 1,068.03 +1.40 +0.13%...
1:00 pm : The major indices have kept to a relatively tight range, currently near the unchanged mark, as investors digest a worse-than-expected monthly jobs report and a slightly better-than-expected wholesale inventory reading.
October nonfarm payrolls fell 190,000 in October, which was worse than the expected decline of 175,000. Meanwhile, the unemployment rose to 10.2% from 9.8%, which was worse than the 9.9% consensus. The rise in unemployment was not due to more workers entering the workforce -- the labor force declined by 31,000 people as 259,000 workers left the workforce over the last month. The jump in unemployment was solely due to an increase in the number of unemployed.
Separately, wholesale inventories fell 0.9% month-over-month in September, which was slightly better than the -1.0% consensus.
Earnings have not had much of an impact on trade. AIG (AIG 35.61, -3.67) is trading lower despite topping quarterly estimates, while Starbucks (SBUX 20.98, +1.28) is trading higher after beating expectations and issuing upside FY09 guidance.
In commodity trading, the price of gold hit a record high of $1101.90 per ounce, while oil prices are under pressure, down 3.3% at $77.00 per barrel.DJ30 +2.19 NASDAQ +1.52 SP500 +0.63 NASDAQ Adv/Vol/Dec 1139/946 mln/1434 NYSE Adv/Vol/Dec 1371/466 mln/1502...
Q: Why or how much you expect the NPLs to increase, we are seeing some improvement in the sales revenues of companies, we have seen their ability to raise equity- in your analysis what will contribute to the increase in NPLs—one had thought that we slowdown phase kind of ending if anything the NPLs might actually decrease?
A: NPLs will increase for one simple matter—we have seen exceptionally low levels of NPLs in India which has been a combination of very good economic environment, a very strong profitability which has prompted banks to make heavy write offs and surfaces results which has given very good recoveries. So we have come to a NPA number which was unsustainable at the Indian operating environment level. So we are now bound to go back to what is the more normal level which we would believe is 3-3.5% and we expect by the year 2011 fiscal we should be touching 3%.
Q: Indian banks right from the central bank have been commended for their safety and their high capital adequacy ratios (CARs). The fact that now they are going to be provisioning a lot more consequently rating agencies like yours have been positive on this move—do you sense that it may actually result in some bit of rating upgrade rather than a downgrade because of the way you are viewing it and the safety it will bring forward?
A: From an analysis point of view we have always been expecting cuts to be higher so which means this move is an acknowledgment of that. This will ensure that balance sheets start to account it for that in as many terms and to that extent. So really speaking, if I had been doing my analysis right and giving Indian banks to probably a minus on that, I don’t see this number changing per se leading either to downgrade or an upgrade.
Q: There is this argument about technical write-offs getting included in the provision cover and if that happens many of the banks are already in the 70% provision cover. First explain to us what is this technical write off because one thought those are for assets which are not in the NPA basket anyway and here the RBI is not looking very kindly at this explanation—can you take us through where you stand?
A; Technical write offs are basically the write offs which are done at the head quarter level but the recovery level at the branch level continues. So the borrower doesn’t come to know that his loan has been kind of written off in the banks books. So that is something which you can call a prudent step taken by banks in imagining that this money is very unlikely to come, so from that point of view balance sheet is healthier.
Q: If it is written off then it stands to reason that the banks demand that we should not provide for it is legitimate?
A: Banks are not providing for it. What the banks are asking for is that take the write off as 100% provision. So let me write that back as the written off NPA amount into the NPA and the 100% provision amount into the provision which as you would imagine if I add back something which is 100% provision cover it will improve the provisioning cover at the whole portfolio. That is essentially the pillar of the argument that the Indian banks here are presenting to the regulator.
Q: Where do you stand on that argument?
A: This is more of an accounting issue, more of regulatory norms issue. Being a global rating agency we have always been doing our own estimation on top of that because while in India you have seen 50% cover, in Singapore we see 100% cover and in Thailand we see 40% cover. We do our own estimate and from that point of view our ratings reflect that. So to the extent the numbers will change, it will mean that numbers will be more transparent and more believable to us but I do not think it will make any change in any credit profile. So we won’t make any rating changes. So to that extent this per se does not change the health of the banks but it improves their picture....
Banks to gain from RBI`s move to up provisioning cover: S&P
Published on Fri, Nov 06, 2009 at 17:07 | Updated at Fri, Nov 06, 2009 at 19:46 | Source : CNBC-TV18
Indian banks are likely to gain more than they lose from the Reserve Bank of India’s (RBI`s) move to tighten provisioning norms, said Standard & Poor`s ratings services in a report today. The new levels will bring Indian coverage ratios in line with major Asian banks, said the report.
Last week the RBI in its Credit Policy said that it wants Indian banks to increase their provision cover to 70%. The current rules are that the moment the loan foes bad that is interest is not paid for 90 days then 10% is marked off as provisioning and in second year its 20%, in third year its 30% and in that year the entire amount is marked out. So provision cover under rules goes by this formula but banks sometimes very often or prudentially keep a 70% cover, they mark more than is necessary just as a buffer.
Now the RBI has asked for this and immediately you saw some of the banking companies go under pressure especially SBI and ICICI, the two big banks which have provision cover much less than 70%, closer to 40%.
The report from S&P’s says that higher provisioning cover is inherently good for banks and should be seen as a positive step.
S&P says the RBI has taken the step as it expects more loan defaults in coming quarters. Currently, loan losses are understated because of good growth, it says.
S&P acknowledges that the higher provisions will depress profits in the next four quarters.
At the industry level, this change in coverage requirement, along with expected increase in non-performing loan (NPL) is likely to take total provisioning to Rs 71,000 crore, of which Rs 21,000 crore will be because of the higher provision cover.
In an interview with CNBC-TV18, the author of the report, Ritesh Maheshwari, Senior Director Financial Institution Ratings for Asia at Standard and Poor`s, spoke on the issue.
Here is a verbatim transcript:
Q: Take us through the argument—You seem to be saying that the idea is good because you are expecting bad assets to increase in the Indian banking system and therefore this is a good preparatory step?
A: Yes we have been believing for some time that Indian banks had gone through a Bennie phase and now we are entering a phase of consolidation where the asset growth which happened over the last few years is bound to cause new non performing assets (NPAs). That, with the tightening of business environment means even more so increase in the NPLs. So we have been feeling that the credit cost for Indian banks would be rising and we have been incorporating that in our analysis as well which was not in sync with the provisioning which Indian banks had been making but our ratings were reflecting the true state.
...
Gold breaks $1,100
* By Ben Rooney, CNNMoney com staff reporter
* On 10:44 am EST, Friday November 6, 2009
Gold powered through $1,100 an ounce Friday after the U.S. government said the nation`s unemployment rate rose more than expected last month, fueling demand for the metal as a safe haven.
December gold jumped $7.80 to 1,097.10 an ounce after surging to an all-time high of $1,101.90 an ounce earlier.
Prices spiked after the Labor Department said the unemployment rate rose to 10.2% in October from 9.8% the month before. That marks the highest level since April 1983. Economists had forecast an increase to 9.9%.
Gold rally to continue. Gold is benefiting from a "flight to quality," said Adam Klopfenstein, senior market strategist at commodities brokerage firm Lind-Waldock.
He said investors who were expecting an economic recovery "threw in the towel" after the jobs report. At the same time, investors who think the economy will continue to worsen "want to own something tangible."
"It looks like the market is giving gold the green light regardless of what`s going on in equities or the currency markets," he said.
Gold could come under pressure as investors book profits following the push above $1,100, but the market has a "bullish fundamental case," Klopfenstein said.
Prices have soared 5% this week amid speculation that overseas central banks may be moving toward buying more gold as they look for ways to reduce their exposure to the U.S. dollar -- the traditional reserve currency of choice for many of those foreign central banks.
The weak greenback also makes commodities that are priced in dollars, such as gold and crude oil, more appealing for investors using other currencies. As a result, gold often rises when the dollar weakens.
Many analysts say this week`s rally has been driven by speculative investors who trade based on momentum.
"The gold market is something a lot of speculative and institutional investors are looking at," said Adrian Ash, head of research BullionVault com. "You`ve got low interest rates and horrible economic data, for a lot of institutional investors gold is a no brainer."...
SBI extends 8% home loan product till March `10...
