Sarbanes-Oxley: Implications for Government Contracting

2. Sarbanes-Oxley: Implications for Government Contracting Presented by Andy Habina April 26, 2005

3. Sarbanes-Oxley Overview • One of the most dramatic changes in financial reporting laws in 50 years • Results from concerns related to collage of Enron, World Com, AA • Applies to all publicly traded companies whose fiscal year ends on or after 11/15/04 and have market cap > $75M

4. Sarbanes-Oxley Overview • Law created 5 member Public Company Accounting Oversight Board (PCAOB) • Responsible to set standards for public accounting firm (external auditors) • Required “inspections” of external auditor firms • Issued Auditing Standard No.2 An Audit of Internal Control over Financial Reporting Performed in Conjunction with and An Audit of Financial Statements

5. Sarbanes-Oxley Overview • Requires management assessment and ultimately certification as to the effectiveness of the company’s internal controls over financial reporting • Most companies will adopt COSO framework as criteria to determine effectiveness of internal controls

6. Sarbanes-Oxley Overview • Committee of Sponsoring Organizations under the Treadway Commission (COSO) • Five components • 1.     Control Environment • 2.     Risk Assessment • 3.     Control Activity • 4.     Information and Communication • 5.     Monitoring

7. Sarbanes-Oxley Process • Documentation • Flow diagrams and narratives of critical processes & identification of key controls • Design Effectiveness • Assessment of design of controls to prevent or detect financial misstatements • Testing Operation of Controls • Evaluation of test results

8. Sarbanes-Oxley Process • Evaluation of test results • Deficiency • Significant deficiency • >.5-1% of pretax operating income • Material Weakness • > 4-5% of pretax operating income Other consideration

9. SOX & Government Contracting Implications • For Government contractors, many of the critical processes are things that DCAA may be reviewing already • Examples: time and labor, contracts, billing, purchasing, IT

10. SOX & Government Contracting Implications • DCAA Memorandum of November 8, 2004 • Encourages discussions with contractor about their SOX processes • Suggests joint reviews where feasible • Identifies benefits of reduced DCAA audit activity

11. SOX & Government Contracting Implications • Opportunities for the Future • Reduced need for IT General Controls Audits by DCAA if company has “clean” opinion • Reduced cycle time for closing of contracts for companies that: • Do not have large % of Cost-type contracts • Have no SOX material weakness • Historically have not had significant cost questioned during incurred cost submissions

12. SOX & Government Contracting Implications • Obstacles • Must be “win-win” • Objective risk assessment by Government • Fear of losing staff by DCAA • Fear by companies that resources saved in one areas used in another

13. SOX & Government Contracting Implications • Significant Opportunity for both sides to reduce costs • Reliance on PCAOB is warranted • Sharing of documentation already created is key objective not creating more government specific documents • Now is the time!