Centralized Cost System Critical to SOX Compliance Article
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.