Summarize the following by taking note of the three key points: -Departures from the past -Sarbanes-Oxley: Is it performing -Enterprise Risk Management

restatements, high proportions of accruals, capitalization of expenses, etc. A widely quoted study of a professor from the business school of University of Chicago, reports that in a sample of 50 firms accused of fraud by SEC by contrast to another 50 companies which were not, a clear pattern of higher occurrence of higher-than-average component of stock compensation was found in the former sample. Other studies also confirm that companies are more likely to be subject to enforcement action if their boards are dominated by the management and they don't have a block holder or an audit committee. Severance pay is another contentious aspect of executive compensation often patently unrelated to performance. A striking case is that of the approval of a $140 million severance package for Michael Ovitz by the Disney Board in response to a request from CEO Michael Eisner, in 1996. Ovitz had hardly worked a year as Disney's president when Eisner decided he wasn't the right man for the job. Increasingly, governance bodies are concerned that executive compensation does not reflect the performance of the chief executive. While equity compensation is a means to address the agency issue by tying the interests of owners and managers, the executives undeservedly also benefit from the overall increase in market indices unrelated to the financial performance of the company. In addition, severance pay and retirement benefits and a host of other fees paid to former executives are not related to performance. While Sarbanes-Oxley has not specifically mandate any rule for compensation for executives, it does vest authority on compensation committees to decide on executive pay consistent with the overall interest of the company. SARBANES-OXLEY: IS IT PERFORMING? Sarbanes-Oxley sweeping provisions greatly add to the costs of SOX compliance without a doubt. Most companies see compliance including the need of procuring SOX compliance software as a sunk cost for the long-term benefits of credibility and efficiency benefits that will extend over many years. In addition, they expect that the costs of SOX compliance will decline as companies deploy SOX compliance software and learn to automate their processes. Currently, many companies are unsure about the benefits they will actually reap and the means to automate SOX compliance in a situation where processes are hard to standardize. According to widely quoted figures from Foley and Lardner, the SOX compliance cost for companies with sales turnover of less than one billion dollars, the SOX compliance cost was about $2.86 billion in financial year 2003 up from $2.12 billion in financial year 2002 and the corresponding figures for companies with revenues in excess of $1 billion is $7.4 billion. The major components of costs were directors and officers insurance, lost productivity and accounting.which employees at all levels. respond to unnoticed sources of risk in any corner of the enterprise and communicate it to the rest of the organization. This is facilitated by enterprise risk dashboards which help to communicate potential threats to the company and galvanize organizations to react rapidly before a crisis goes out of control. An example of enterprise wide management of risks is the case of TriQuint Semiconductor Inc., a US-based supplier of communications components and modules. As part of its compliance effort, TriQuint is conducting a risk assessment of all the business processes that affect its balance sheet and income statement. That evaluation is helping the company uncover latent risk across all its five divisions. TriQuint's combined Sarbanes Oxley and ERM efforts have helped it to gain insight into risks in the businesses it acquires. Typically, mergers fail when the cultures of two different companies clash. TriQuint has made several acquisitions in recent years, and some of those businesses have operations outside the United States. The company has been able to identify and discuss the risks new acquisitions face, including exposures related to specific cultural and regulatory environments.Figures have been presented in a variety of ways depending on how they are collected. Other sources such as Parson Consulting indicate that 50% or more of overall corporate governance cost revolves around process improvement, controls documentation, testing, SOX compliance software procurement and adapting controls to changing needs. In more recent years, however, companies are also increasingly reporting benefits from their investments in compliance with Sarbanes-Oxley, in a survey of 200 financial executives by Oversight Systems, 49% of them reported that the risk of fraud and errors has been reduced, 48% of them agree that their financial operations are now more efficient and 31 % report lower error rates. Furthermore, companies will be increasingly focused on lowering costs from automation of their compliance processes through the purchase of SOX compliance software. As many as 60% of them have plans to implement technology to automate their manual processes. ENTERPRISE RISK MANAGEMENT Corporations are rethinking their strategies towards the management of risk in the future to effectively comply with the Sarbanes-Oxley Act. Increasingly, companies are implementing Enterprise Risk Management Systems and employing Chief Risk Officers to govern their strategies for risk across the enterprise. Companies do not any longer want to be taken by surprise and incur losses as they are hit by unexpected events. They now realize that their ability to manage risks depends on anticipating risks, detecting their risks more effectively by looking at them in all its inter-dependence and fortifying their systems to withstand shocks. Some of the more sophisticated corporations, such as Microsoft and Boeing, implemented such systems in the past, independent of regulatory policy, while other companies are following in their steps under pressure from new laws and regulatory standards. A recent survey indicates that 50% of financial executives believe that they integrate their SOX compliance with enterprise risk management. This best practice has been spelled out, in all its details, in the seminal document of the Committee of the Sponsoring Organizations of the Treadway Commission on the subject. The conceptual breakthrough that under girds the new approach to risk management is the realization that business risks, financial risk and operational risk feed on each other and compound the impact of any one type of shock to a company. Operational risk, such as fraud in the company, can create a liquidity crisis for the company. Similarly, business risk, such as loss of intellectual property from outsourcing of business processes overseas, could lead to bankruptcy of a company. The vulnerability of companies has increased with the growing reliance on sophisticated financial instruments, an extended enterprise and information technologies. Increasingly, companies realize that they need to create a culture inDEPARTURES FROM THE PAST Sarbanes-Oxley recognizes that the mode of compensation, an increasing share of equity and equity options, in the packages that executives received was responsible for the frauds that were committed at several large companies. This kind of compensation created incentives for fudging the balance sheet and the income statement to engineer stock price increases. In addition, severance packages are overly generous. A survey by Mckenzie in 2003, a management consulting firm, found that 52% of the directors of companies believe that executive compensation is way too high. Academic literature also finds significant correlations between a high component of equity compensation and symptoms of fraud such as accounting