Capital Property Management Practices in a SOX Environment

1. Capital Property Management Practices in a SOX Environment NPMA Conference Series 1 Wayne Norman CPPM Northrop Grumman

2. Agenda SOX brief overview What has that done to you internally in your entity Records- who and what changes to records do you let be made to capital records Physical Inventory methods and a suggested method

3. Quick info regarding SOX • The Sarbanes-Oxley Act was signed into law in July 2002 • Its purpose is to review legislative audit requirements and to protect investors by improving the accuracy and reliability of corporate disclosures. • requires that publicly traded companies furnish independent annual audit reports on the existence and condition of internal controls as they relate to financial reporting. • This act also states how the financial reporting process and controls over safeguarding of assets, reporting the results of management’s testing and evaluation must be handled.

4. Sox Risk related to Assets • The following are capital asset related risks as listed by one of the Big 5 accounting firms as oversight consultants: • Inventory/assets locations are not recorded accurately • What ensures that all assets are included in perpetual records? • What ensures that changes to system data are properly implemented (i.e., inputs are validated against changed asset information in the system)? • Disposed assets (sales & write-offs) remain recorded. • What ensures the continued security of inventory/assets • Inventory counts include goods owned by others. • Perpetual records improperly reflect quantity & $-amts.

5. Important aspects to ensure SOX Controls are in place • Identification and control, record establishment • Valid location ( at least to city…….taxes), proper location change recording • Inventory validation • Safeguarding/limited access to assets • Property disposition, retirement and LDD reporting with financial record closure • Impaired assets are properly adjusted/recorded • Proper recording of assets whose counting was recorded to a capital asset account • Self Assessment in place to ensure processes are working

6. Responsibility for Capital • Who Manages your capital property • Property Accounting • Just the Property Accounting role? • Facilities • Property Management • No One? • What constitutes Property Management • Full Property Management of capital assets is as important as government property management

7. ASTM E2279- Guiding Principles of Prop Mgmt

8. Single Process • This suggests (in my opinion) • One PM group to manage all property • One Property Mgmt records system • Similar consistent processes (without all the regulations) • Interface shadowing between your Accounting- Capital records system and your Property Management system • Supports Sarbanes-Oxley Control requirements

9. Benefits of One Process /System • One Focal point group for Management of all assets under all ownerships • Keep it simple (KISS) for custodians, property focal points, coordinators, employees, mgmt • One place to go for reports, move documents, tagging, surplus, etc, etc, etc • With an interface between systems, single entry for any key strokes • Is your capital really be managed by Property Accounting? Their financial role is their focus

10. Update access to Cap Assets • Financial actions- start/stop depreciation, account assignment, retirements- Property Accounting only • Establishing the asset shell, all in life cycle changes- Property Mgmt • Location changes- Property Focal points or PM • Transfers between different financial entities of your company- Property Accounting

11. Changes • Establish an inventory update to ALL capital assets- tangible, intangible and non-taggable • An example of requested changes from external audit • All tangible assets with a Net Book Value (NBV) over $5k must be inventoried every 3 years • All intangible assets, and non-taggable assets AND assets with a NBV of under $5k need reasonable verification of existence every 5 years • Stop writing off group assets 2 years after they reached 100% depreciation ( building startup furniture, standard tooling lot buy, etc) had to move these to reasonable judmental verification of existence

12. Capital Asset Inventory methods • Wall- to- wall (every 1, 2, 3 years) • Inventory by exception (every 2, 3 years) • (go find items not otherwise touched during processes which have recorded an inventory touch date) • Situational Inventory- touch all items in certain locations triggered by events (building closures, remodeling events, organizational relocations) • Rolling wave inventory by exception(discussed on next set of slides)

13. Inventory Rolling wave • Current- 2 Year cycle- wait until year two and touch/validate all our exceptions, perhaps conduct a wall to wall • Proposed- 3 year cycle • Everything is touched in some manner every 3 years by exception • Rolling wave- • Each year, the oldest year items are touched if they have not recently been touched (still have an inventory date that will exceed 3 years by current year end) • Every year some those results are turned in • Continuous yearly activity

14. Benefits of Using the Rolling Wave Inventory • Cost Effective • We would use our own people and not out source to outside companies which is a cost savings. • The total amount of assets to “Find” is significantly fewer than the Wall-to-Wall Inventory System. • Resource Sensitive • Only looking for assets that haven’t been “touched” or inventoried in record within the past 3 yrs. • Wall-to-Wall system there is much duplication efforts • More Efficient • Keeps a steadier stream of go-finds on a yearly basis interval • Fewer resources are required to find a smaller amount of assets

15. 3 year Rolling Wave Illustration

16. Current scenario- • Previous cycle 04- 05, reported after 2005 completion • Current cycle 06-07, to be reported after 2007 completion

17. Summary- Rolling Wave • Reduces disruption to contractor (steady state) • Reduces redundant touches • Level sets workload over 3 years • Does not increase risk to the customer • Continual annual feedback- more frequent partial inventory results.

18. Summary • Sarbanes Oxley is a big deal to your publicly traded company • Have you been inserted into this important control, and displayed your values to senior management? • Have you adjusted your capital processes to meet SOX risk controls? If not, stay ahead of the time bomb, make changes before YOU become caught up in the problem • Wayne.norman@ngc.com 310-813-4566