The Debate Over Sarbanes-Oxley
May 1 2005 by Chief Executive
The Debate Over Sarbanes-Oxley
Corporate America expended significant resources to meet the recent reporting deadlines in the Sarbanes-Oxley Section 404 compliance process. While it proved to be hard work and extremely time-consuming, there is little doubt it will improve the integrity and transparency of financial reporting in the years ahead, thus benefiting the capital markets and shareholders.
For most large companies, this is the first time that such a mass of data has been codified around their financial controls environment, as well as around the processes and systems related to those controls. Many executive teams already are using this information to execute action plans to remediate control deficiencies and are beginning to embed a systematic approach to monitoring compliance and test controls effectiveness.
Armed with their controls “portfolio,” executives now have an in-depth understanding of the nature and effectiveness of their internal controls over financial reporting and the business processes they impact. This knowledge provides corporate leaders with a new lens through which they can evaluate their business€¦quot;a new means of considering and controlling risk, improving the quality of their financial reporting, and driving a return on the Sarbanes-Oxley Section 404 compliance investment.
Our experience has shown that focusing on the performance of controls provides the most significant opportunity to help bring efficiencies to the enterprise by identifying key controls over financial reporting, eliminating redundant controls, streamlining the business processes they impact and better managing risk.
For instance, when control activities are manually oriented and “detective,” they tend to be time-consuming, expensive, prone to human error and occur after the fact. That affects business performance and raises total costs. It reveals, in fact, the hidden cost of controls.
Now, through the Section 404 compliance process, companies€¦quot;many for the first time€¦quot;can see the mix of “manual” versus “automated,” and “detective” versus “preventive” controls within their organization. Progressive organizations are replacing the dated processes of the relatively expensive and labor-intensive manual controls to make way for the more automated controls. For example, companies that some years ago installed new ERP systems are finding that those systems have embedded automated controls that had never been activated. Simply turning on the appropriate, embedded ERP controls can improve the controls environment. These are one-time expenses that will yield savings and efficiencies in future years.
In implementing Section 404, organizations must have a dual focus: build sustainable confidence through an ongoing assessment process for compliance; and achieve added value by balancing risk and the cost of controls, while identifying and pursuing business process improvement opportunities.
During each phase of the journey, the organization will seek to use improvements in controls over financial reporting to drive improved business performance. Along the way, the question, “How do we comply with Section 404?” becomes, “How can we use controls as a new lens to support the integrity and value of financial reporting and be a catalyst to improve business processes?”
Timothy P. Flynn
Public vs. Private Companies
I believe we do a disservice when we describe integrity as a value that works only in a setting that enables it. People enable integrity. If you want clarity, rid the organization of the assumption that integrity is situational. We’re either in a state of integrity or we’re not.
Finding scenarios that make it understandable to not have integrity is the beginning of the end of the system. Rationalization begins to precede wisdom and we end up with bankrupt principles. Professor Hooijberg ponders, “What is our integrity worth if our company goes bankrupt?” The answer is if we maintain our integrity, we’re worth a great deal; if we don’t, then we were bankrupt anyway.
The Dollar, Weak or Strong
Over the long term, the market will adjust to the appropriate level to make our imports, exports and assets appropriately valued. Of course, in the short term government intervention can cause major dislocations.
I also disagree with your comment about the yen. The yen was overly weak in the 1980s, suggesting a more competitive Japan than really existed. With its devaluation, Honda, Nissan, Toyota and others decided to move manufacturing to the U.S. creating hundreds of thousands of direct and indirect jobs. Actually, the revaluation of the yen did exactly what it should have done.
Finally, I disagree with your opinion that Americans will buy that BMW at any price. Those with means have the ability to buy what they want because they are smart about their purchases. Those that do not match desire with means are short-term buyers anyway.
Fixing America’s Schools
In the U.S., if you drop out of secondary school at 16, you can get a GED at 23, a two-year college degree at 30 and a four-year degree at 38. We’re the only country in the world where you can do that. In other industrialized countries, secondary education may at times be better, but who cares, so long as the “education elite” are afforded opportunities.
You are not alone in not getting it. But why not focus on what is great about the U.S.: It is the closest form of a “results meritocracy” this world has ever seen. Some in the U.S. who have a great deal of formal education€¦quot;professors, for example€¦quot;find it outrageous that a secondary school dropout who owns four gas stations often makes many times more than they do. We Americans will always find a way to become more productive, through whatever training is required€¦quot;and that can occur many years after we leave secondary school.