The Unexpected Benefits of Sarbanes-Oxley

1. The Unexpected Benefits of Sarbanes-Oxley Harvard Business Review April 2006 Presented by: Alyssa Phillips & Michael Paulson

2. The Beginning of SOX Sarbanes-Oxley was passed in 2002 in an attempt to combat fraud, improve reliability of financial reporting, and restore investor confidence. Several executives could not understand why they had to bear the burdens of SOX that dishonest executives had triggered. Section 404 says it is management’s responsibility to monitor reporting.

3. Gratitude for Sarbanes? Although some managers were displeased with their new responsibilities under SOX, some were very pleased. They long felt the need to protect their stakeholders and developing better info about company operations to avoid making bad decisions.

4. Factors Brought into Play • The enactment of SOX brought in a frantic pace of mergers & acquisitions, & less than seamless integration of combined entities; • Rapid implementation of new info technologies & their incompatibility with systems; • Foreign expansion produced disorienting encounters with unfamiliar languages, cultures, laws, etc.; • Business alliances and outsourcing; • Stringing together of supply chains.

5. Strengthening the Control Environment • A proper control environment is a factor considered when evaluating internal control over financial reporting pursuant to Section 404. • If a company can demonstrate a strong control environment, then it can reduce the overall scope of its internal-control evaluation. • PepsiCo uses an annual survey of sr. execs to demonstrate conditions of its internal control.

6. Improving Documentation • Documentation took up a lot of workers’ time during the 1st year of SOX • It received gradually increasing support from the exec suite. • One CFO of a Fortune 1000 real estate co. made a humbling discovery that people signing off on documents weren’t carefully reading them, leaving the company susceptible to unenforceable contract provisions, among other things.

7. Increasing Audit Committee Involvement Directors face increased legal liability for inattention. Members of the audit committee must be free of most financial & personal ties to the company. “At the very next meeting of our audit committee, it was a different world in terms of members’ engagement level,” quoted an executive.

8. Exploiting Convergence Opportunities 2 approaches: Meeting requirements, but at minimum cost & utilizing the fewest possible resources; leverage the resource expended on compliance to obtain a return on their investment Benefits of this include being able to free up people and reallocate them to higher-value activies.

9. Standardizing Processes Several companies with different divisions realized they had different processes for different tasks. CFO of a large clothing manufacturer realized each division of AR imposed different due and dunning date, late fees, and interest rates on customers. Another company found that each division had different billing methods.

10. Reducing Complexity Iron Mt., a records and info mngt co., acquired more than 150 competitors. Simplification was the game plan, as each co. came with its own organizational chart & Iron Mt. integrated the reporting structure. They also centralized all acct. activities since each co. brought its own system.

11. Strengthening Weak Links Complexity arises from outsourcing, partnerships, & shared-services arrangements, aka extended enterprise. Many firms’ clients are reevaluating their outsourcing arrangements & partnerships.

12. Minimizing Human Error Many tasks have been made automated to reduce error. One executive stated, “You need human judgment to determine whether the override is reasonable or whether it needs to be investigated.”