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Wednesday, October 6, 2010

Public Companies: Top 5 Ways to Increase SOX Efficiencies and Cost Effectiveness


This top-five list gives you insight into the experience that accounting and consulting firm Armanino has gained while performing Sarbanes-Oxley (SOX) compliance services for small public companies.

1. Establish a good tone at the top. Good tone at the top is the one control with the largest impact on SOX costs. When upper management buys into the importance of SOX then everyone from staff to management will ensure complying with SOX and performing their controls are important parts of their job function. Without effective tone at the top, companies will face increase costs due to failure of key controls and undocumented changes to key processes.

2. Conduct a detailed risk assessment to determine key in-scope accounts and processes. A detailed and well conducted risk assessment is the foundation of an efficient SOX compliance effort. Analyzing the financial statement accounts and the risks that are affecting your company will help you narrow your focus on what's important. Gain efficiencies in SOX compliance by focusing less time, effort and money on mature processes and controls that are engrained in your company’s culture. Focus on high risk financial statement accounts and processes that are most affected by changes in your company and changes in the economy.

3. Conduct self assessments for low level risk controls. For controls and accounts identified as low risk, have company employees involved in testing key controls. Once you have identified processes and controls that are stable and low risk, get your company involved in testing the key controls. Ensure you discuss this process with your external auditor to obtain concurrence. A good self assessment process starts with proper training of the employees involved and consistent monitoring from the Internal Audit Department or the Finance/Accounting Department.

4. Modify your monthly financial reporting package to include entity level controls. Company executives regularly review detailed financial reporting packages that compare the current financials to budget, prior month, prior quarter and prior year. For smaller companies, finance executives are often involved in the day-to-day business activities and can determine material differences during the monthly financial review. Create entity level controls as part of your monthly review process to ensure your controls are precise enough. For example, instead of having five key controls around payroll, you can have one control around monthly variances in key payroll accounts. Any variance over a certain threshold has to be explained in detail, which may include documenting new hires, terminations or pay rate changes.

5. Develop or enhance strong controls around the journal entry and reconciliation process. Many processes and controls eventually lead to a journal entry. Companies can lower the overall amount of key controls by having strong controls around recurring and non-recurring journal entries, downgrading several controls to non-key and reference the controls over journal entries. We suggest specific controls around proper review and approval of journal entries, review of recurring journal entries to ensure completeness and executive management review of material non-recurring journal entries.

Similar to journal entries, a well developed reconciliation/roll-forward control process can lower the overall amount of key controls. Conducting reconciliations and roll-forwards for key accounts is a good tool to analyze changes that have occurred in the account balances and to determine if the changes coincide with day-to-day business activities.

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