SEC closes OfficeMax investigation

The day after I posted the item below, concerning possible vendor allowance problems at Office Depot, the two-year-old SEC investigation of OfficeMax finally ended, with no action against the company, which had cooperated with the Commission and fired six people who were involved in the alleged falsification of documentation.

The Naperville, Ill.-based company had launched an internal review in December 2004 after receiving claims from a vendor alleging that OfficeMax employees requested inappropriate promotional payments and falsified supporting documentation.

The internal investigation was conducted under the direction of the company's audit committee and was completed in March 2005. Six employees were fired in connection with the probe.

In June 2005, the SEC started its investigation, with which the company cooperated. OfficeMax said Thursday in an SEC filing that it was notified last month that the agency had completed the investigation.

Is the SEC about to give TPM outsourcing a helping hand?

Could be. At the recent TPMA meeting in St. Petersburg (it was not fun going home to eight inches of snow in Chicago), I made a presentation on benefits to be gained from Sarbanes-Oxley (it was an extended version of this post).

One of my points was that creating Sarbox-compliant trade promotion processes should make it much easier to outsource management of trade promotion – thus eliminating a messy, paperwork-intensive task that is not part of a marketer’s core business. A good argument, I thought.

At the very next session I attended, however, I got a jolt – a much better argument is coming. Ron Lunde was presenting on changes to be made in Sarbox, and said that among proposals being made by the PCAOB is one that one allow outside auditors to rely on data from responsible outside sources.

This could mean (if adopted by the Securities & Exchange Commission) that a company’s auditors might not have to perform audits on work performed by an outside supplier.

… the Board also proposed for public comment a new auditing standard on considering and using the work performed by internal auditors, management and others in an integrated audit of financial statements and internal control, or in an audit of financial statements only. This proposed standard is intended to further clarify how and to what extent an independent auditor may use that work to reduce the work the auditor otherwise would have to perform.

The full report is here.

The effect of this, if a conversation on the subject among the attendees at Ron’s presentation works out, is that a company would not need to have their trade promotion program audited by their Big Four audit firm, if the systems, processes, and practices of that program could be attested to by a responsible, reliable party. While that might be someone internal, it is more likely to be credible if it were an outside party with a SAS-70 certification.

The TPM outsourcing companies currently argue that their costs are not much higher than doing the work internally (actually, they often argue that it’s cheaper, but I’ve never really bought that argument), but if a potential client could also significantly reduce the cost of their annual audit by eliminating trade promotion from the items to by audited, the outsource firms would have a powerful new argument.

The period for comment on the proposed changes has just expired, so we can expect an update on this subject in the next few months.

Opening the Sarbox

The Securities & Exchange Commission is expected to announce a plan this week (BusinessWeek says it will be Wednesday) to revamp Sarbanes-Oxley, and the PCAOB, which enforces the rules, is also expected to announce a rewrite of its accounting standards.

It's an exercise designed to address businesses' core concern: Compliance simply costs too much. But when the dust settles and final rules are adopted early in 2007, any changes are likely to have a modest impact on Corporate America's bottom line. Their real value, rather, might be peace of mind.

Costs are apparently already decreasing as companies get a firmer grasp on how to do things. The estimate now is that compliance costs are about 0.25% of revenues, with best-of-breed companies at 0.14%.

The big change, rather than cost reductions, may be legal shields:

Without specific direction from regulators, companies fret that anything intimating even the slightest hint of a shortcut could leave them vulnerable to expensive shareholder litigation. It's that fear, probably as much or more than actual compliance costs, that's driving the call for change.

The recent elections, putting in power a Democratic congress, mean that any changes will come from the SEC and PCAOB, not congress, "because lobbyists fear that reopening the law, especially in the new, Democrat-controlled Congress, risks making it worse."

That means the much-discussed changes to exempt smaller businesses from some provisions of the Act are less likely to happen.

SEC pledges to lower Sarbox costs

The chairman of the Securities & Exchange Commission said Thursday that the commission will announce within the next few weeks steps to reduce the cost of compliance with the Sarbanes-Oxley Act.

The U.S. Securities and Exchange Commission and the board that regulates accountants will revise the Sarbanes-Oxley corporate governance law to lower compliance costs for public companies based on their market values, the SEC's chairman, Christopher Cox, said Thursday.

"In the next few weeks the United States is going to unveil significant changes to our implementation of a particular part of Sarbanes-Oxley," Cox said from London.

The new guidelines appear to be oriented toward allowing companies to focus on materiality:

The accounting oversight board will issue a new standard next month for how Sarbanes-Oxley audits should be conducted. The revision will instruct companies and auditors to focus on "what really matters, what's material to the preparation of the financial statements and to ignore what really isn't essential," Cox said.

Sarbanes-Oxley requires companies to hire an independent auditor to verify how well their procedures for publishing accurate financial statements work. The board's revisions will make audits "top-down, risk-based" and "permit reliance on the work of others," Cox said.

I'm sure everyone in the TPM biz will be watching anxiously to see what effect these changes might have/ Will "reliance on the work of others" mean that companies will have less need to recheck the work of their administrative services? Would that be wise?

Electoral effects on marketing

The big news in the past week was, of course, the mid-term elections. The Democrats taking control of both houses of congress will presumably have some major impacts on the nation as a whole, but how will it affect marketers?

Advertising Age offered some speculation, opining that there will very likely be an effort to limit marketing, especially of fast-food, directed at children. There could be curbs on prescription drug advertising as well.

The article being in Ad Age, it paid no attention, of course, to trade promotion or channel marketing; which is just as well, since on the rare occasions when they address channel marketing, they usually get it all wrong.

To be fair, though, there probably will be little effect on channel marketers, so Ad Age is probably justified this time in ignoring the subject. Though congress has oversight responsibility relative to the Federal Trade Commission, it’s unlikely they will use it to press Robinson-Patman enforcement.

It used to be a truism that Democrats were more enthusiastic about R-P than Republicans, which made sense because both Robinson and Patman were Democrats, as was the president who signed the law, FDR. But that was a long time ago, and recent history indicates that any difference between the parties on R-P is muted at best. The FTC under the two most recent Democratic presidents, Carter and Clinton, was not noticeably more active than when Republicans were in charge.

The two most recent FTC actions relative to trade promotion show a split in regard to the parties. There was a Robinson-Patman case pursued in the Clinton years – a minimum advertised price case against the recording industry for price-fixing on CDs – and there was a (half-hearted) investigation of slotting by the commission in 2000-03 (I served on a couple panels at their hearings), undertaken at the direction of the Republican-controlled Senate commerce committee. The findings could be summarized as “this subject needs further study,” and that was the end of that.

Overall, the record of both parties over the past couple decades indicates that enforcement of R-P in any significant manner is not on their radar. The one exception to this might be the possibility that hostility toward Wal-Mart among some groups might spur action. This is unlikely, but possible.

There has been some talk about possibly restructuring Sarbanes-Oxley – my bet is that this is off the table for the next couple years.

A representative of the American Association of Advertising Agencies was quoted in Ad Age as saying, "All in all, with the first open presidential election in years looming in 2008, Democratic control of either house will be characterized by high-level debates on popular issues. In the advertising, marketing and communications category, that leaves a lot of room for grandstanding.”

Grandstanding being something both parties are good at, it’s something we can always anticipate. But there’s little reason to expect much real action in the area of trade promotion.

Ex-CFO charged with channel-stuffing

The ever-popular gimmick of channel-stuffing has found another victim. The Securities & Exchange Commission has "charged the former chief financial officer of Lantronix Inc. with orchestrating a scheme to inflate the company's financial results for fiscal 2001 and 2002."

The SEC said that Cotton ... orchestrated the scheme, which involved deliberately booking revenue and delivering products to a distributor before orders had been placed, violating accounting procedures by booking revenue from orders that gave distributors expanded rights to return unsold products.

Penn Traffic releases internal audit report

Penn Traffic, the upstate New York retailer who, as previously mentioned here, was investigating possible misstatements in its trade promotion allowances, has released the report of its audit committee:

The Penn Traffic Company announced today that the Audit Committee of the Board of Directors has completed its internal investigation of the Company's promotional allowance practices. The Audit Committee found that the Company had engaged in certain improper practices principally relating to the premature recognition of promotional allowances ...

The findings may result in restatements of earnings from the periods affected. The SEC is also investigating.

SEC investigating Zale

Zale Corp. announced that t he Securities & Exchange Commission is investigating the company in regard to several accounting issues, including "the timing of certain vendor payments."

The company said the probe relates to accounting for extended service agreements, leases and accrued payroll. Zale said subpoenas request materials relating to these accounting matters, executive compensation and severance, earnings guidance, stock trading and the timing of certain vendor payments.