The Unexpected Benefits of Sarbanes Oxley. When Congress hurriedly passed the Sarbanes Oxley Act of 2. Understandably, most executives wondered why they should be subjected to the same compliance burdens as those who had been negligent or dishonest. Smaller companies in particular complained about the monopolization of executives time and costs running into the millions of dollars. Perhaps SOXs most burdensome element was Section 4. See the sidebar Taking Control of Controls. Yet in the course of providing compliance advice to executives, we discovered a small subset who approached the new law with something like gratitude. For years, and especially when financial reporting had become fast and loose and criminal conduct entrenched at places like World. Com and Enron, these executives had secretly wished that some of the resources absorbed by their companies profit centers could have been diverted to improving financial management processes and capabilities. They were thinking not only of protecting stakeholders and shielding their companies from lawsuits but of developing better information about company operations in order to avoid making bad decisions. While providing compliance advice to executives, we discovered a small subset who approached Sarbanes Oxley with something like gratitude. However, the burdens of implementing SOX for the first time, in 2. Some spoke of putting their planned initiatives in a parking lot, with the hope of pursuing them the following year. As SOX went into effect, more and more executives began to see the need for internal reforms indeed, many were startled by the weaknesses and gaps that compliance reviews and assessments had exposed, such as lack of enforcement of existing policies, unnecessary complexity, clogged communications, and a feeble compliance culture. In any era, the enactment of a law like SOX would probably have prompted a similar stocktaking. But factors in the business world independent of recent abuses had rendered some companies operations and reporting opaque even to the people in charge, making the timing of SOXs enactment particularly fortunate. These factors included a frantic pace of mergers and acquisitions and less than seamless integration of the combined entities the rapid implementation of new information technologies and their incompatibility with legacy systems, as well as flawed electronic security and Y2. Ks jury rigged patches and fixes foreign expansion, which produced disorienting encounters with unfamiliar languages, cultures, laws, and ways of doing business the proliferation of business alliances and outsourcing and the stringing together of supply chains. It is no wonder that actual and reported performance at a number of companies diverged. Year two of compliance is now complete at most large U. S. companies. Is the parking lot still full of unimplemented change plans At many organizations, it is. Their executives want to simplify and standardize processes and systems but cant seem to find the time or the resources to do so. But some executives, particularly those who recognized SOXs advantages from the beginning, have figured out how to leverage the new law so that those plans for improvement can be realized. In year two, a number of companies have begun to standardize and consolidate key financial processes often in shared service centers eliminate redundant information systems and unify multiple platforms minimize inconsistencies in data definitions automate manual processes reduce the number of handoffs better integrate far flung offices and acquisitions bring new employees up to speed faster broaden responsibility for controls and eliminate unnecessary controls. Moreover, SOX inspired procedures are beginning to serve as a template for compliance with other statutory regimes. In this article, we describe the broad areas in which SOX compliance has benefited firms governance, management, and investors. Strengthening the Control Environment. Good governance is a mixture of the enforceable and the intangible. Business Process Reengineering Text And Cases Pdf To Word' title='Business Process Reengineering Text And Cases Pdf To Word' />Organizations with strong governance provide discipline and structure instill ethical values in employees and train them in the proper procedures and exhibit behavior at the board and executive levels that the rest of the organization will want to emulate. These are all components of the control environment, which forms the foundation of internal control. Popularized by the Committee of Sponsoring Organizations of the Treadway Commission in its 1. Internal ControlIntegrated Framework, the term control environment encompasses the attitudes and values of executives and directors and the degree to which they recognize the importance of method, transparency, and care in the creation and execution of their companys policies and procedures. A proper control environment is one factor an external auditor considers when called upon to evaluate internal control over financial reporting pursuant to Section 4. Download I Can See You Software Free. Bob Murray, the director of internal audit at Yankee Candle, a 6. We hope to score major points with our auditor for doing this, he says though hastening to add that strengthening the control environment is the companys primary concern. These points are not tallied in any literal sense. Rather, they contribute to the mass of evidence weighed by the external auditor. If a company can demonstrate a strong control environment, then it can reduce the overall scope of its internal control evaluation. Reduced scope can mean the company need not carry out as many internal tests and the auditor may do less corroborating, resulting in lower compliance costs. Testing scope is a matter of judgment and perhaps negotiation between the auditor and the company. Indeed, the Public Company Accounting Oversight Board PCAOB and the Securities and Exchange Commission encourage auditors to exercise judgment when evaluating financial reporting controls. Pepsi. Co uses an annual survey of about 1. Conducted by the companys internal auditors, the questionnaire probes hiring practices, employee evaluation, contract solicitation, incident reporting, objective setting, and other areas. According to Thomas Lardieri, general auditor and vice president for risk management, Pepsi. Co also tests financial employees understanding of their responsibilities as part of its annual ethics training. The training is administered via an interactive package that includes scenarios of ethical dilemmas one might encounter dealing with customers, suppliers, and colleagues and suggests possible solutions. About 2. 5,0. 00 managers receive the training. The companys remaining 1. Lardieri. Records of this training may be reviewed by the auditors. In our presentations at business seminars and conferences, we are often asked why we emphasize the control environment so heavily. Our questioners seem to believe that good internal control is predicated on the controls themselvesthe cross checking, the reconciliations, the data verification. We reply that without a strong control environment, a company will never attain good governance. A focus on the control environment helps ensure that the controls themselves are the second and third lines of defense, not the first. 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