Published by: Amper, Politziner & Mattia

It was an entertaining Superbowl, complete with another banner year of top flight beer commercials. But alas, I have to put down my beer and go back to work and address the regulatory requirements of Sarbanes-Oxley.

We have all faced the enormous effort and costs of the first couple of years of Sarbanes-Oxley for the "accelerated filers." Everyone appreciates the need and desire for appropriate levels of internal controls. What companies have had a hard time dealing with is the volume and controls documentation and testing required to meet this requirement. Looking at the costs incurred by companies in engaging internal and external consulting resources, and then the additional work and fees of the auditors, it is clear why the smaller businesses have been lobbying for relief. The biotech community has been actively engaged in discussions with regulators and rule makers to express its concerns.

There has been a lot of press on the merits of "COSO light" as the tool to provide a more meaningful framework around which the internal controls over financial reporting for smaller companies can be measured. In my experiences with many small biotechs facing this issue, the internal control that everyone relies upon can be summarized as follows:

"The management of cash is all consuming activity, strategically thought about by management, approved by the Board, and executed carefully by management. There are budgets and cashflow forecasts prepared to support this process, and these are the key topics discussed with current and potential investors, the Board and the entire team. Deviations from this plan (including new hires, additional studies, changes to clinical protocols and strategies, etc.) are thought through carefully. And this is looked at every day."

So if the Company can "formalize" its control environment around this key control, wouldn't it cover many of the elements of internal control? I think it probably would. That's not to say that there isn’t some critical work to be done here, as often this process is not formal and documented sufficiently. We have been able to successfully navigate some small biotechs through SOX and get a "clean opinion" from their auditors using this approach.

COSO light gives companies the opportunity to look at the business from the top-down. Proposed auditing standards are pushing auditors to think that way as well. It’s the convergence of these two elements that will make this process more manageable for both companies and their auditors, but it will take some time to be fully accepted as a "best practice." It’s like the scruffy old dog who got mud splashed on him, then winds up on the Budweiser wagon pulled by the Clydesdales.

John Pennett CPA
Director, Life Sciences Practice
Amper, Politziner & Mattia, PC