SOX compliance for the subsidary of foreign US Company 767



  • Hi everybody,
    When i read the sox act, i think it’s applicable for us company and foreign company quoted on NYSE.
    But my question: if a the foreign company have an Interests in Joint Ventures and investments in Associates and subsidaries, all theses companies have to be in compliance with SOX or just the ‘mother company’ must be in compliance.
    Thanks in advance
    Marouen



  • If the affiliate is fully consolidated then yes, the affiliate has to be compliant too. Still, depending on affiliate’s materiality it has to be assessed to what leven it is in-scope, meaning how detailed you need to be in designing and testing the controls.
    However, I am not quite sure about equity-investee… I would say no in this case, but not so sure about it…



  • Many joint ventures and associates may not be in scope. If it’s not fully consolidated into a filer then it probably doesn’t need to comply.



  • you would have to consider the risk of a misstatement in the investee’s books resulting in a misstatement in the financial statements of the parent, which is filing with the SEC.
    If this would result in a material misstatement in the filer’s financials then some measure of controls would have to be documented, tested etc at the affiliate / JV / subsidiary as well.
    Anyone’s views differ on this?
    adios



  • you would have to consider the risk of a misstatement in the investee’s books resulting in a misstatement in the financial statements of the parent, which is filing with the SEC.

    Not necessarily. It depends on what type of JV/Associate/Investment your talking about. I understood the question to be about a minority (non-consolidated) entity…
    Where you are not consolidating and investment/associate/JV then your financial statements are affected by 1) dividends received from the investee and 2) the carrying value of the investment. Your obligation under SOX would be to have controls around the income stream (relatively easy) and the valuation of the investment (trickier). A financial misstatement in the investee would only have an impact insofar as it affects the carrying value of the investment.



  • Isn’t there somthing in the act about the responsebility of the controlling party in a JV?



  • Really i don’t know if SOX Act discuss about this point
    But i think if you prepar Consolidated Financial St, you’ll have to comply even for JV/Associate/Investment. and SOX responsability apply to CEO and CFO of JV and Invest.
    In other case, for non consolidated F.St, it may be not necessary.
    Anyone agree with this point ?



  • Isn’t there somthing in the act about the responsebility of the controlling party in a JV?
    In the Act - No.



  • Sorry, not in the few lines of the 404 it self, but…%0AWe’re just having a big issue with the SOx compliance at my company which owns 51% of a JV with a ‘non-democratic’ government owning the other 49%. I cannot remember what and which laws it was, but I know we had problems regarding Sarbanes Oxley



  • Joint ventures with U.S. publicly-listed companies fall within the Act if the financial records of the joint venture are consolidated with the public company
    Even if of the joint-venture partners files reports with the SEC, the US-listed partner must consider the effect of an accounting restatement at the joint venture could have on the US-listed partner’s own financial statements.
    It is true that after SOX, U.S. companies are less receptive to financial arrangements that formerly were accepted practice - off balance sheet arrangements and non-GAAP financial practices.



  • Sorry, not in the few lines of the 404 it self, but…%0AWe’re just having a big issue with the SOx compliance at my company which owns 51% of a JV with a ‘non-democratic’ government owning the other 49%. I cannot remember what and which laws it was, but I know we had problems regarding Sarbanes Oxley %0AWell ordinarily 51% would not truly make this a JV - it is a subsidiary and therefore coming into scope. Unless, of course, the 51% did not give you control…



  • There is no real control even if we have the majority



  • There is no real control even if we have the majority
    Then you could presumably argue for non-consolidation and treat it at as an investment?
    Looks like you have an argument for it being out of scope for SOX.



  • Our auditors (big4) thinks otherwise, so we have a real dilemma



  • The controls within the JV are exempt from SOX 404 if the JV is not consolidated within the parent company. If you are only picking up your share of the JV earnings, then your SOX risk is around the controls that you have to get comfortable that your share of US GAAP income is correct and that your carrying value in the investment is correct. This goes a little bit farther than just accounting for a dividend revenue stream as indicated above.%0AThe challenge is in getting comfortable with your share of US GAAP income while not documenting / testing controls over financial reporting within the JV.%0AWe have the same situation with a 51% non-consolidated JV. Our auditors (Big 4) agree that we do not have to document / test controls within the JV.



  • Can Somebody throw light on this topic.
    What exactly will be the key areas for a JV sox.
    The other part of JV is not sox compliant



  • Based on my review of the accounting criteria for the general partner of limited partnerships under the consolidation or equity method, please consider the following:

    1. Based on EITF 96-16 it appears the general partner may not have a controlling interest based on the following examples where both partners must approve:
      ’ Approval of any new business plan or material modification to the business plan.
      ’ Any capital or the expenditures in excess of USD50,000
      ’ Any acquisition or lease of real property in excess of USD50,000, including the exercise of extension options under the leases
      ’ Any material change in product designs, programs or offerings
      ’ Appointment and removal of key officers, other than the manufacturing manager.
      ’ Operating and managing the day-to-day business and affairs in a manner consistent with the business plan and then-current budgets
      ’ Hiring and removal of employees
      ’ Proposing revisions to the Business Plan or budget for submission to the Board of Directors for consideration
      ’ Implementing the business plan and budget as approved by the Board of Directors
      ’ Executing contracts or other instruments on behalf of the Company
    2. Because the limited partner has the ability to participate in significant decisions that would be made in the ordinary course of business it appears the general partner does not control the partnership, therefore the general partner should account for its investment in the limited partnership using the equity method of accounting.
    3. In addition, based on the white paper by Deloitte, the partnership agreement should have been reviewed for other criteria that may need to be considered to determine who has controlling interest, for example:
      ’ Ability to block acquisition or dispositions of assets
      ’ Ability to select, terminate, and set the compensation of management responsible for
      implementing the limited partnership’s policies and procedures
      ’ Ability to approve the limited partnership incurring additional indebtedness
      ’ Right to block dividends
      ’ Right to initiate or resolve a lawsuit
      ’ Relationships between the general partners and the limited partners (e.g., whether the limited partners are parties related to the general partner);
      ’ Whether the limited partners’ rights relate to operating or capital decisions that are not significant to the ordinary course of business of the limited partnership;
      ’ Whether it is remote that the event or transaction that requires the limited partner approval will occur; and
      ’ Whether the general partners have a contractual right to buy out the interest of the limited partners for fair value or less,
      ’ thereby giving the general partners the ability to prevent the limited partners from exercising their participating rights.
    4. It may also be worth looking at reporting relationships, this could be a key factor of control.
    5. The non-controlling status of the general partner should be assessed each reporting period that financial statements are prepared.
    6. Equity method investments should be classified as a non-current asset. [IAS 28.38]
    7. If the joint venture is classified as a non-current asset under the equity method, it may be subject to SOX auditing as part of the general partner’s audit based on the risk matrix (considering the known risks, possible materiality of the investment), sampling of account reconciliations or review of investments under the treasury matrix.


  • I think you have to distinguish different issues:

    1. whether elements of the financial statements of the joint-venture or associate are material for the financial statements of the owner and whether there is a risk of a material misstatement.
      A listed private equity fund that mostly makes minority investments in companies may have a lot of joint ventures and associates, which are material for its (consolidated) financial statements (if there are not a lot of majority investments around).
    2. whether there is an obligation to assess the effectiveness of internal control over financial reporting only at the owning entity, also at the joint-venture or associated entity or at both.
      The question whether an assessment needs to be done depends on whether the joint-venture or associate is material (see issue 1). If it needs to be done, you need to do it at the owning entity, but whether you can also do the assessment at the joint-venture or associate depends on the owning entity’s ability to actually enforce the assessment at the joint-venture or associate (see issue 3).
    3. whether the owning entity can enforce the implementation and assessment of a system of internal control over financial reporting at the joint-venture or associate.
      If you go to the U.S. Code to check out the Securities and Exchange Act (SEA) or if you look up its consolidated version on the U.S. Security and Exchange Commission’s website, you should find an obligation for each issuer to maintain accounting books and to maintain a system of internal accounting control (which is the old term for internal control over financial reporting) in section 13 (if I remember correctly, the numbering of sections in the U.S. Code is different) of the SEA. The section contains sort of an obligation to use reasonable best efforts in the case of minority ownership to get the joint-venture or associate to maintain internal controls. You can use this section as an analogy to the assessment of the effectiveness of internal control over financial reporting.
      As far as I remember the Sarbanes-Oxley Act itself and the implementing rule of the SEC remain silent on those issues. I think the PCAOB Auditing Standard No. 5 mentions the treament of associates. The SEC’s or the PCAOB’s Q and As may also mention those issues.


  • As far as I remember the Sarbanes-Oxley Act itself and the implementing rule of the SEC remain silent on those issues. I think the PCAOB Auditing Standard No. 5 mentions the treament of associates. The SEC’s or the PCAOB’s Q and As may also mention those issues.
    This is from the SEC FAQ on SOX -
    Question 2
    Q: Is a registrant required to evaluate the internal control over financial reporting of an equity method investment?
    A: The accounts of an equity method investee are not consolidated on a line-by-line basis in the financial statements of the investor, and as such, controls over the recording of transactions into the investee’s accounts are not part of the registrant’s internal control structure. However, the registrant must have controls over the recording of amounts related to its investment that are recorded in the consolidated financial statements. Accordingly, a registrant would have to consider, among other things, the controls over: the selection of accounting methods for its investments, the recognition of equity method earnings and losses, its investment account balance, etc. For example, a registrant might require that, at least annually, its equity method investees provide audited financial statements as a control over the recognition of equity method earnings and losses. However, nothing precludes a registrant from evaluating the control over financial reporting of an equity method investment, and there may be circumstances where it is not only appropriate but also may be the most effective form of evaluation. For purposes of applying this guidance, we make no distinction between those equity method investments for which the registrant is required to file audited financial statements pursuant to Rule 3-09 of Regulation S-X and those where no such requirement is triggered.


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