COMPLIANCE COUNSELOR
SOX 404 compliance: Efficiency is key
Robert D. Kugel
06.14.2005
Rating: -2.50- (out of 5)
What you will learn from this tip: How to better understand SOX Section 404 and improve compliance efficiency.
The intent of Sarbanes-Oxley (SOX) Section 404 is to improve internal control over financial reporting. The number and scale of accounting scandals in the wake of the 1990s stock market bubble forced a change from informal to formal control mechanisms. SOX was enacted so investors in public companies could have reasonable confidence that financial reports are prepared according to generally accepted accounting principles (GAAP) and therefore fairly represent the results and condition of the company.
Although the word "control" stresses fraud prevention, it also carries a broader context of safeguarding assets (i.e., preventing undue risk), managing spending and maintaining a sound accounting environment. To address the shenanigans instigated by senior executives, the law made them responsible for having adequate controls over financial reporting, periodically attesting to the effectiveness of their internal controls and reporting any issues with the control systems and methods used to assess their effectiveness.
The vagueness of the law's language, the lack of enf
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orcement history and the potential severity of failing to "pass" has created a great deal of anxiety among senior executives of public companies. Since SOX is here to stay, companies should focus on improving compliance efficiency. One important way to improve compliance efficiency is to reduce the number of points of control. There are at least two ways to do this.
How well SOX addresses the original impetus of preventing large-scale, high-level financial fraud remains to be seen. Since public companies are required to comply with the law, many of the actions they take to improve their compliance efficiency will have the added benefit of making their finance operations more efficient.
MORE INFORMATION:
Robert D. Kugel is CFA, VP and Research Director at Ventana Research. He heads up the Financial Performance Management (FPM) practice, focusing on the intersection of information technology and the finance organization. The FPM research agenda includes the application of IT to financial process optimization and collaborative systems, control systems and analytics, profitability management and advanced budgeting and planning. Rob has been a technology analyst for over 20 years.
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