The Sarbanes-Oxley Act of 2002, the US Congress's sweeping reaction to a series of corporate scandals, is having a profound impact on US companies. Section 404, which places new obligations on companies to assess and report on the effectiveness of internal controls, has been particularly challenging. European and other non-US companies with a US listing have a period of grace and now must implement this part of the Act for fiscals years ending after 15 July 2006. But the fundamental nature of the change they are facing leaves no room for relaxation.
In Spring 2005, PwC brought senior executives from US and European energy and utility companies around the table to gain first-hand insights into 404 compliance. The US executives were just beginning to prepare for the second year for Sarbanes-Oxley compliance. The European companies were exploring the most effective means of achieving first-time compliance.
The message from the US executives is 'make no mistake, this is a reform of immense scale and complexity'. Oil and gas and utility companies operate in an increasingly complex environment where internal control deficiecies can have an important impact on the accuracy of financial reporting. Reserves reporting, decommissioning, customer account collection difficulties, energy trading, taxation and carbon allowances are just a few of the areas posing specific challenges.
The section 404 requirement to report on the effectiveness of internal control over financial reporting will increase the pressure on oil and gas and utility companies to prove that their governance and control practices are up to the challenge through the detailed documentation of internal control processes and the identification and correction of deficiencies.