New Product Description
Product Description: Transparency Rating Mechanism (TRM)
The above discussion clarifies two important facts: a) a strong, perceived need exists in the investor marketplace for greater firm transparency as a means of preventing further instances of corporate fraud and b) SOX, while it has many benefits, may not only be overly expensive but it does not apply to privately held firms. As a result, currently there is no established means of gaging the transparency of privately held firms. The product (i.e. TRM) introduced in this study is as a cost-efficient, flexible method by which public and privately held firms can provide the investor public with a detailed understanding of their internal control process.
The proposed benefits of this new Transparency Rating Mechanism (TRM) are widespread and include the following:
a) Decreased costs- the current implementation of SOX is very expensive both to firms and to society at large, and is widely acknowledged to be cost-inefficient.
b) More and better information for the investor public- under the current system, knowledge of firms' internal control efforts are limited to two states (e.g. compliant vs. non-compliant). TRM will provide investors with a detailed understanding of firm's internal control efforts.
c) Encourages flexibility- Under TRM, investors will be able to determine the value of compliance by choosing to invest in firms whose compliance practices match their own preferences.
d) Encourage greater transparency- Under TRM firms would receive greater incentives to establish effective internal controls, as the information would be widely dispersed and publicly available.
TRM utilizes a comprehensive ratings process very similar to Moody's for corporate bonds, as it is established and has been proven over time. The first step is that firms present information regarding their internal control efforts in a meeting lasting 2-4 hours. A rating committee with 5-7 (private) members compiles additional information on the firm's internal control efforts and then votes. An initial rating, ranging from "A" (i.e. excellent) to "F" (i.e. failing), is assigned with a thorough explanation. The firm has 1-2 day right to appeal, and the total process lasts approximately 3 weeks.
All firms with public debt more than $50 million are rated. Additionally, privately held firms are also rated upon request. Firms also are expected to request rating before issuing equity and/or debt financing. Ratings are not audited processes, but they do focus on relevant factors including: