Moody’s is worried that reluctant auditors are holding back on problems until the problems already go public.

While the number of material weaknesses being disclosed by companies in their Section 404 auditor and management reports has dropped dramatically over the three years in which companies began filing, rating agency Moody’s Investors Service has uncovered a disturbing pattern—controls-related problems seem primarily to be reported after a company has already restated their financials or reported a material audit adjustment. Of the some 3,600 Moody’s corporate clients that reported in calendar year 2006, 72 disclosed material weaknesses. What Moody’s found concerning was the fact that 92% of those had already been forced to issue restatements or material audit adjustments prior to the discovery of the material weakness. "What we think is happening is a lot like a doctor telling a patient after they have had a heart attack that they also have high blood pressure,” says Gregory Jonas, one of the authors of the report. “We are not seeming to learn about material weaknesses in these reports until after there has been some reporting problem like restatements or material audit adjustments.”

This auditor reluctance or failure to find weaknesses before they are manifested in reporting problems penalizes shareholders, and Jonas believes that reporting must become more “proactive rather than reactive”—that is, uncovering control problems before restatements—for shareholders to really reap benefits.

Jonas thinks that policymakers attempting to reduce the costs of compliance may be able to achieve their goals simply by getting auditors to take a more proactive approach and companies to focus more on fraud prevention. “Enormous sums of money are being spent [for controls] in areas that are far removed from senior management cooking the books,” says Jonas. “I fear that we’re not spending nearly enough money on the real reason that we got 404.”

U.S. executive compensation practices are taking on a European look

U.S. executive pay practices are moving in the direction of the kind of long-term incentives used extensively in Europe, according to a new Hay Group executive comp study. While the vast majority of U.S. and European companies emphasize long-term incentive plans for the senior executives, the most common compensation vehicle— stock options—is designed very differently in Europe than it is in the U.S. Most U.S. companies issue stock options without tying them to any additional performance measures, whereas their European counterparts insist on executives meeting additional performance conditions for vesting.

Recent new disclosure requirements on executive compensation, newer accounting treatment for stock options and heightened concern among shareholders rights groups and institutional investors about excessive compensation are prompting U.S. companies to reexamine their compensation structures. But Irv Becker, U.S. practice leader at the Hay Group, also thinks that companies are being influenced by Europe for other reasons. “You have a lot of mergers and acquisitions that are global in nature,” notes Becker. “And so there are a lot more European companies buying U.S. companies, and that means more European influence on executive compensation as a result of those transactions.”

Still, U.S. companies must cross a relatively wide chasm before compensation incentives truly take on a European look. Some 63% of U.S. companies provide time-vested restricted share plans to their eligible employees, as compared to less than 5% of European companies that grant those restricted shares. “Companies are getting a lot of pressure from institutional shareholders that they don’t like time-vested restricted stock [compensation],” says Becker. “We definitely believe in the next couple of years, we will see more and more companies using performance shares. And I think it will start to whittle away at the usage of time-vested restricted stock.”

People on the Move

Drugstore.com Inc. named Thère du Pont senior vice president, operations and CFO of the $416 million online provider of health, beauty, vision, and pharmacy products, based in Bellevue, Wash. Prior to joining the company, Du Pont, 40, spent 13 years with Wawa Inc. where he assumed various key roles, most recently president and CFO. He is a member of the board of directors for the E. I. du Pont de Nemours and Co. on the audit, compensation and science technology committees. He is also a trustee of the Children’s Hospital of Philadelphia and President of the Longwood Foundation.


Arch Chemicals Inc., the $1.4 billion global biocides maker, with headquarters in Norwalk, Conn., has announced that Louis S. Massimo, executive vice president and CFO, has been named executive vice president and COO. Massimo, 49, came to Arch Chemicals (and its former parent company Olin Corp.) 13 years ago and has held various positions of increasing levels of responsibility. Prior to his role as CFO, he managed the company’s HTH Water Products business. Steven C. Giuliano, controller and principal accounting officer, has been promoted to vice president and CFO. Giuliano, 37, has been the company’s controller since it was spun off in 1999. Meghan E. DeMasi, assistant controller, has been named controller.


Furniture Brands International Inc., a $2.4 billion furniture company located in St. Louis, has announced the resignation of senior vice president and CFO Denise L. Ramos. Ramos has resigned in order to accept the CFO position at ITT Corp. The company will begin evaluating internal and external candidates for the position.


Consolidated Graphics Inc. has announced the resignation of G. Christopher Colville, executive vice president and CFO of the $879 million general commercial printing company, with headquarters in Houston. Colville, 48, has stated that he would like to devote more time to his family as well as pursue other personal interests. His retirement is effective June 30, 2007. While conducting a search for a replacement, the company will be looking internally as well as externally.



MTV Networks named Paul Rourke senior vice president and CFO, of MTV Networks International, a unit of MTV Networks, based in New York. Rourke came to MTV Networks in July 2006, as senior vice president of corporate finance. Prior to joining the company, he was senior vice president of Treasury operations for CBS Radio. He was also treasurer for Scient Inc. and before that he held numerous finance positions at Young & Rubicam Inc.

Lombardi Draws Up a New Blueprint

Lombardi Software Inc., a business process management (BPM) software provider based in Austin, Tex., has released Lombardi Blueprint, an on-demand collaborative process planning tool that allows organizations to map processes, identify problems and make improvements. The Lombardi Blueprint application is available as a software as a service (SaaS). Blueprint is a browser-based, process planning tool, which allows business process improvement team to collaborate on processes such as payment and supply-chain and settlement from multiple locations and add participants at any time. Processes can be exported automatically to Microsoft PowerPoint, allowing easy dissemination and communication of goals. Blueprint provides multiple views for representing processes. The mapping view is targeted towards users who need to describe activities and responsibilities and want to identify problems. The application supports detailed workflow modeling using the business process modeling notation (BPMN) for more sophisticated business analysts. The documentation view provides wiki-like capabilities for documenting processes and automatically manages revision history and audit trail capabilities for every process. The process models are built on Lombardi’s shared model technology and can be transferred back and forth between Blueprint and Lombardi Teamworks, a BPM suite. Blueprints are available as a personal account or a team account, which is licensed in groups of 10 users.

Polivec Makes it Easier to Stay on Uncle Sam's Good Side

Polivec Inc. has released Polivec Enterprise Governance Solution (EGS) 5.0, a policy-driven governance, risk and compliance (GRC) application that enables organizations to control the process of complying with the ever-increasing number of government regulations and industry standards. The application sits on the server and links policies (whether external government regulations or industry standards) to specific tasks. EGS 5.0 allows companies to continually assess and report on the organization’s progress in adhering to external regulatory and legal requirements as well as internal policies and directives; integrate creation and control of business policies, making governance and compliance documents actionable and subject to review and management; communicate policies and requirements to employees, partners, outsourcers and other third party vendors; track and manage manual activities that have an impact on compliance; and incorporate information from IT systems into the regulatory compliance context.

EGS 5.0 centers on the consists of four modules, which addresses a specific governance aspect:
• The Policy Center, which acts as the repository for regulatory documents, policies, best practices and procedures, features a mapping engine that links policies with regulations. This allows users to identify any area of non-compliance and areas where regulatory requirements overlap.
• The Awareness Manager, which automates the distribution of policies, records employee acceptance and measures comprehension through regular testing,
• The Technology Manager, which connects EGS to the IT systems, allows for quick action.
• The Activity Manager creates, monitors and audits individual employee tasks to achieve and maintain compliance.