“Executives of public companies and their outside auditors will have to ensure that adequate controls are in place to prevent fraud and other financial-reporting problems under a rule the Securities and Exchange Commission unanimously approved Tuesday,” writes Deborah Solomon in today’s Wall Street Journal.

“The rule is aimed at preventing the kind of fraud that has rocked companies such as Enron Corp. and HealthSouth Corp. and undercut investor confidence. The rule requires that executives and outside auditors evaluate controls and report any problems to shareholders.”

“SEC commissioners said the rule, required under last year’s Sarbanes-Oxley law, is significant since a number of recent accounting scandals could have been prevented with more-rigorous financial-reporting oversight. ‘Strong internal controls will significantly deter management from committing fraud,’ said SEC Commissioner Harvey Goldschmid.”

“Under the new rules, company executives must attest that the corporations they run have ‘adequate internal control over financial reporting’ and give an assessment of those controls at the end of each fiscal year.”

“The requirements mean higher expenses for public companies, and some smaller companies had expressed concern about increased costs and substantial time commitments related to implementing the sterner oversight guidelines. SEC staff said Tuesday that they expect companies to spend an average of 383 hours in the first year trying to meet requirements associated with the rule.”

“Large companies, such as those with overseas operations or a lot of subsidiaries, could expect to spend thousands of hours trying to comply with the internal control requirements, according to SEC staff. SEC Commissioner Paul Atkins said companies could spend ‘hundreds of millions of dollars’ to meet the requirements.”

“The SEC originally sought to have companies comply with the new rules by September 2003, but given the expensive and time-consuming realities of meeting the new requirements, the deadlines have been pushed back. Alan Beller, who heads the SEC’s corporation finance division, said the agency’s staff, taking into account the costs and time involved, said the rules would now go into effect in June 2004 for most public companies, while smaller businesses and foreign private issuers will have until April 2005 to comply.”

” ‘Companies want to do the right thing, and the additional time allows companies to go through thoughtful analysis,’ said Colleen Sayther, president of Financial Executives International. Ms. Sayther, who said most criticism of the new rules centered on the tight compliance timetable, said an informal survey of member companies found that some big companies are expecting implementation time in excess of 6,000 hours. The survey, which was of member companies with an average of $3.3 billion in revenue, had 83 respondents, Ms. Sayther said.”