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Centralized Cost System Critical to SOX Compliance
It’s the beginning of 2005, which means a new era in
financial reporting for public companies in the US. The
Sarbanes-Oxley Act is the most sweeping set of financial
regulations since the securities acts of the 1930s. And, in
January many companies began submitting to independent
auditing overseen by the Public Company Accounting Oversight
Board requiring that publicly traded companies provide
accurate and transparent information to shareholders about
their financial performance.
The legislation comes on the heels of corporate fallouts
like WorldCom, Enron and Arthur Andersen that led to
billions in losses to shareholders and employees. Now public
companies must scramble to update, and in some cases,
establish the process of tracking and reporting of changes
in business operations and financial performance. Since
production costs are a significant portion of determining
earnings for any process manufacturer, the accuracy of data
on raw material prices, production yields or inventory costs
must be verifiable in order to comply with the legislation.
Sarbanes-Oxley and Cost Management
While SOX section 302 requiring CEO and CFO endorsement of
financial statements received the most attention when the
law was passed in 2002, it is SOX section 404 that is now
the most critical to companies. This section mandates that
all internal controls governing financial operations are
documented and that there is confidence in the IT
infrastructure that houses, moves and transforms data. The
controls are reviewed annually by external auditors to
determine their effectiveness in ensuring public companies
report accurate financial data. Translation: every financial
or accounting process that somehow impacts the company’s
balance sheet must be documented and audited.
The act requires the company to account for critical
business events and their impact on company operations and
financial reporting. Changes in costs due to sudden raw
material price shifts, critical failures on the
manufacturing floor or a significant reduction in demand for
a product can have an immediate impact on a company’s
financial performance. Furthermore, SOX section 409 requires
that companies provide rapid access to financial data when
changes like these occur, meaning that an integrated
solution is vital to meet the conditions set forth.
Technology Becomes Forefront of SOX 404 Compliance
In planning for the new rules, the Wall Street Journal
reports that companies have spent over 123 million hours and
$10-13 billion in efforts to comply with Sarbanes-Oxley
requirements. Efforts here rival the surge in technology
investments in preparation for Y2K. Public companies average
nearly $3 million in year-one spending on compliance
activities for consultants, systems and auditing services
according to a recent Financial Executives International
study.
While the Y2K frenzy did not lead to the demise any company,
SOX section 404 could potentially have a more consequential
impact on companies without the proper systems and controls
in place. Companies with revenues over $75 million face a
Jan 2005 deadline to document all internal control
activities required to meet SOX 404 compliance. While the
outcome of this first round of compliance reviews is widely
unknown, business leaders are aware that compliance is an
annual activity and business processes must be incorporated
to meet the annual requirements of the law.
How to Benefit from Having Impact:ECS
The idea of integrated data solutions to maintain accuracy
and integrity is a cornerstone of Impact:ECS. While each
client has a uniquely configured cost system, using
Impact:ECS as part of your overall cost management process
brings your company one step ahead in the compliance race.
By leveraging the power of an integrated costing approach,
tangible benefits are created for the entire finance
organization.
The latest software release includes a new feature, Model
Audit, to document the reliability of cost information from
Impact:ECS. Available in version 6.2, Model Audit allows
administrators to capture and report the activities of
individual users and events. The administrator can audit a
number of system actions over any period of time, providing
auditors with a documented trail of cost information used to
generate financial statements and report business
performance.
The benefit of Impact:ECS is that it is completely
customizable, allowing companies to establish costing
procedures that work for the company and meet the
requirements of SOX. In addition to our software, the 3C
Software professional services team works directly with
clients on SOX initiatives. They help clients with
documentation of controls and establishing appropriate
measures to ensure separation of responsibility exists. One
creative example of configuring the system to meet new
requirements is that the company has moved to a two-tiered
costing approach (quality control and production) that
allows for multiple checks before any changes are made to
the system. Clients are encouraged to work with our team of
professionals to ensure that they have a costing process
that will meet the new Sarbanes-Oxley requirements.
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