How to Reduce Costs when Complying with SOX 404

Section 404 contains the most onerous and most costly requirements you’ll ever encounter in the Sarbanes-Oxley Act (SOX). In this article, we?ll take a closer look at the salient points of this contentious piece of legislation as it relates to IT. We?ll also explain why companies are encountering difficulties in complying with it.

Then as soon as we’ve tackled the main issues of this section and identify the pitfalls of compliance, we can then proceed with a discussion of what successful CIOs have done to eliminate those difficulties and consequently bring down their organisation’s IT compliance costs. From this post, you can glean insights that can help you plan a cost-effective way of achieving IT compliance with SOX.

SOX 404 in a nutshell

Section 404 of the Sarbanes-Oxley Act, entitled Management Assessment of Internal Controls, requires public companies covered by the Act to submit an annual report featuring an assessment of their company?s internal controls.

This ?internal control report? should state management’s responsibility in establishing/maintaining an adequate structure and a set of procedures for internal control over your company?s financial reporting processes. It should also contain an assessment of the effectiveness of those controls as of the end of your most recent fiscal year.

Because SOX also requires the public accounting firm that conducts your audit reports to attest to and report on your assessments, you can’t just make baseless claims regarding the effectiveness of your internal controls. As a matter of fact, you are mandated by both SEC and PCAOB to follow widely accepted control frameworks like COSO and COBIT. This framework will serve as a uniform guide for the internal controls you set up, the assessments you arrive at, and the attestation your external auditor reports on.

Why compliance of Section 404 is costly

Regardless which of the widely acceptable control frameworks you end up using, you will always be asked to document and test your controls. These activities can consume a considerable amount of man-hours and bring about additional expenses. Even the mere act of studying the control framework and figuring out how to align your current practices with it can be very tricky and can consume precious time; time that can be used for more productive endeavours.

Of course, there are exceptions. An organisation with highly centralised operations can experience relative ease and low costs while implementing SOX 404. But if your organisation follows a largely decentralised operation model, e.g. if you still make extensive use of spreadsheets in all your offices, then you’ll surely encounter many obstacles.

According to one survey conducted by FEI (Financial Executives International), an organisation that carried out a series of SOX-compliance-related surveys since the first year of SOX adoption, respondents with centralised operations enjoyed lower costs of compliance compared to those with decentralised operations. For example, in 2007, those with decentralised operations spent 30.1 % more for compliance than those with centralised operations.

The main reason for this disparity lies in the disorganised and complicated nature of spreadsheet systems.

Read why spreadsheets post a burden when complying with SOX and other regulations.

Unfortunately, a large number of companies still rely heavily on spreadsheets. Even those with expensive BI (Business Intelligence) systems still use spreadsheets as an ad-hoc tool for data processing and reporting.

Because compliance with Section 404 involves a significant amount of fixed costs, smaller companies tend to feel the impact more. This has been highlighted in the ?Final Report of the Advisory Committee on Smaller Public Companies? published on April 23, 2006. In that report, which can be downloaded from the official website of the US Securities and Exchange Commission, it was shown that:

  • Companies with over $5 Billion revenues spent only about 0.06% of revenues on Section 404 implementation
  • Companies with revenues between $1B – $4.9B spent about 0.16%
  • Companies with revenues between $500M – $999M spent about 0.27%
  • Companies with revenues between $100M – $499M spent about 0.53%
  • Companies with revenues less than $100M spent a whopping 2.55% on Section 404

Therefore, not only can you discern a relationship between the size of a company and the amount that the company ends up spending for SOX 404 relative to its revenues, but you can also clearly see that the unfavourable impact of Section 404 spending is considerably more pronounced in the smallest companies. Hence, the smaller the company is, the more crucial it is for that company to find ways that can bring down the costs of Section 404 implementation.

How to alleviate costs of section 404

If you recall the FEI survey mentioned earlier, it was shown that organisations with decentralised operations usually ended up spending more for SOX 404 implementation than those that had a more centralized model. Then in the ?Final Report of the Advisory Committee on Smaller Public Companies?, it was also shown that public companies with the smallest revenues suffered a similar fate.

Can we draw a line connecting those two? Does it simply mean that large spending on SOX affects two sets of companies, i.e., those that have decentralised operations and those that are small? Or can there be an even deeper implication? Might it not be possible that these two sets are actually one and the same?

From our experience, small companies are less inclined to spend on server based solutions compared to the big ones. As a result, it is within this group of small companies where you can find a proliferation of spreadsheet systems. In other words, small companies are more likely to follow a decentralised model. Spreadsheets were not designed to implement strict control features, so if you want to apply a control framework on a spreadsheet-based system, it won’t be easy.

For example, how are you going to conduct testing on every single spreadsheet cell that plays a role in financial reporting when the spreadsheets involved in the financial reporting process are distributed across different workstations in different offices in an organisation with a countrywide operation?

It’s really not a trivial problem.

Based on the FEI survey however, the big companies have already found a solution – employing a server-based system.

Typical server based systems, which of course espouse a centralised model, already come with built-in controls. If you need to modify or add more controls, then you can do so with relative ease because practically everything you need to do can be carried out in just one place.

For instance, if you need to implement high availability or perform backups, you can easily apply redundancy in a cost-effective way – e.g. through virtualisation – if you already have a server-based system. Aside from cost-savings in SOX 404 implementation, server-based systems also offer a host of other benefits. Click that link to learn more.

Not sure how to get started on a cost-effective IT compliance initiative for SOX? You might want to read our post How To Get Started With Your IT Compliance Efforts for SOX.?

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2015 ESOS Guidelines Chapter 3 ? The ESOS Assessment

ESOS operates in tandem with the ISO 50001 (Energy Management) system that encourages continual improvement in the efficient use of energy. Any UK enterprise qualifying for ESOS that has current ISO 50001 certification on the compliance date by an approved body (and that covers the entire UK corporate group) may present this as evidence of having completed its ESOS assessment. It does however still require board-level certification, following which it must notify the Environment Agency accordingly.

The Alternate ESOS Route

In the absence of an ISO 50001 energy management certificate addressing comprehensive energy use, a qualifying UK enterprise must:

  1. Measure Total Energy Consumption in either kWh or energy spend in pounds sterling, and across the entire operation including buildings, industrial processes and transport.
  2. Identify Areas of Significant Energy Consumption that account for at least 90% of the total. The balance falls into a de minimis group that is officially too trivial to merit consideration.
  3. Consider Available Routes to Compliance. These could include ISO 500001 part-certification, display energy certificates, green deal assessments, ESOS compliant energy audits, self-audits and independent assessments
  4. Do an Internal Review to make sure that you have covered every area of significant consumption. This is an important strategic step to avoid the possibility of failing to comply completely.
  5. Appoint an Approved Lead Assessor who may be internal or external to your enterprise, but must have ESOS approval. This person confirms you have met all ESOS requirements (unless you have no de minimis exceptions).
  6. Obtain Internal Certification by one of more board-level directors. They must certify they are satisfied with the veracity of the reports. They must also confirm that the enterprise is compliant with the scheme.
  7. Notify the Environment Agency of Compliance within the deadline using the online notification system at snapsurveys.com as soon as the enterprise believes is fully compliant.
  8. Assemble your ESOS Evidential Pack and back it up in a safe place. Remember, it is your responsibility to provide proof of the above. Unearthing evidence a year later it not something to look forward to.

The ESOS assessment process is largely self-regulatory, although there are checks and balances in place including lead assessor and board-level certifications. As you work through what may seem to be a nuisance remember the primary objectives. These are saving money and reducing carbon emissions. Contact Ecovaro if we can assist in any way.

What is Business Intelligence?

How well do you know your customers? That is, can you actually pinpoint which among them are you most profitable with and which are making you spend more? Are you content with the accuracy of your forecasts and market predictions? Do you feel you’re spending more on legal costs and regulatory compliance than you should?

Your IT department may be handling these concerns pretty well but perhaps you’d like to know how you can further improve things.

What we’ve got is an IT solution wrapped in a fancy name called ‘Business Intelligence’ or BI. If you think that’s too strong a term, we invite you to read more below, then you be the judge.

Dashboards – Determine the health of your business at a glance

Most drivers rarely make use of their car’s dashboard. After all, you can still reach your destination by just using the steering wheel, pedals, gear stick and so on. But that’s not exactly the most efficient way to drive, right?

If you want to save on fuel, you’ll want to glance on the RPM and speedometer from time to time. You might also want to utilise the trip meter to determine which route is the shortest to a given destination. Other dashboard components like the fuel gauge, tire pressure gauge, engine temperature indicator, and volt meter can likewise provide information about your car’s health.

The same concept applies to business management. If you want to run your business intelligently, you can make use of BI dashboards. These are tools in a typical business intelligence package that will allow you to determine the health of your business via a set of smartly configured gauges and other intuitive graphical representations.

So that, literally, at a mere glance, you’ll already know whether various units in your company are working efficiently. A dashboard will also give you instant feedback of the strategies you’ve recently implemented; to let you know if things are working as planned.

If you want more information than a dashboard can provide, our BI packages also include highly customised reports.

Reports that help you decide faster

Dashboards are great for getting valuable information at a glance but they won’t tell you everything. For more details, you’ll need to view highly customised reports. Our reports are tailor made for each user. We see to it that, by default, each person gets the information he needs the most.

If you belong to the sales department, you normally won’t need a presentation of the data that is appropriate for people in accounting. That way, you don’t spend time filtering. Instead, you and your people can move on to making well-informed decisions.

Our BI systems make use of your vast collection of data to provide reports that will organise your regulatory requirements and call your attention to approaching deadlines. The same system will provide the right information for your people on the field. If your team members are equipped with smart phones and Pocket PCs, they can retrieve whatever it is they need to know to close deals, make sales, and serve clients faster than the competition.

Generating logical information from disparate sources of data scattered over an enterprise-wide organisation is no easy task. But we’ll make it look simple. That’s because we’ve got the expertise to bring it all together into a robust data warehouse and to extract them in the form of reports and dashboards through OLAP.

OLAP and Data Warehousing – Powering the generation of actionable information

Want to know how to generate reports with the highest degree of accuracy and reliability? In theory, what you need is a single repository or a data warehouse. That is, order receipts, sales invoices, as well as customer & supplier data is integrated with regulatory details, personnel data, and others. These are all specially organised for future reporting and analysis.

However, data, no matter how all-embracing, is useless until it is processed into actionable information. Through OLAP or Online Analytical Processing, you can seamlessly collect all relevant data from your vast repository to answer queries like “What is our company’s profitability for the 2nd quarter in all identified key cities for our top-of-the-line products?”.

The strength of OLAP lies in its inherent ability to perform data analysis and very complex calculations, thus enabling it to return complex queries much faster than other database technologies. It is therefore suitable for very large data sources, i.e., data warehouses.

Dashboards and reports will only give your organisation the edge if the information retrieved is reliable, fast, and accurate – exactly the kind OLAP is so good at.

Mobile BI – Step back and see the big picture anytime, anywhere

Spreadsheets are great for displaying detailed information. However, in today’s highly competitive market, retrieving information that matters the most in the shortest possible time is vital in maintaining a sizeable lead over the competition. To step back and see the big picture, you’ll need insightful tools like dashboards and automatically generated reports.

Reports can be beamed to mobile devices such as smart phones and Pocket PCs. They can also be viewed on eBook readers as well. You can also do the same tasks with spreadsheets. But imagine how you’d need to scroll over a large spreadsheet on any of these mobile devices just to know which customer in your current location has performed well over the last month.

If you really want to make quick, well-informed decisions, BI dashboards for mobile devices is the way to go. You can make use of various business objects such as drill-able charts, performance metrics, and metric trend graphs to make crucial decisions even when on you’re in the field.

Is Your Project Agile, a Scrum or a Kanban?

Few projects pan out the way we expect when starting out. This is normal in any creative planning phase. We half suspect the ones that follow a straight line are the exceptions to the rule. Urban legend has it; Edison made a thousand prototypes before his first bulb lit up, and then went on to comment, ?genius is 1% inspiration, 99% perspiration?. Later, he added that many of life’s failures are people who did not realise just how close they were to success when they gave up.

So be it to this day, and so be it with project planning too. There is no one size fits all approach when it comes to it. Agile, Scrum and Kanban each have their supporters and places where they do well. Project planning often works best when we use a sequential combination of them, appropriate to what is currently happening on the ground.

Of the three, Agile is by far the most comprehensive. It provides a structure that begins with project vision / conceptualisation, and goes as far as celebration when the job is over, and retrospective discussion afterwards. However, the emphasis on daily planning meetings may dent freethinking, and even smother it.

Scrum on the other hand says ?forget all that bureaucracy?. There is a job to do and today is the day we are going to do it. Although the core Agile teamwork is still there it ignores macro project planning, and could not be bothered with staying in touch with customers. If using Scrum, it is best to give those jobs to someone else.

The joker in the pack is Kanban, It believes that rules are there to substitute for thought, and that true progress only comes from responsible freedom. It belongs in mature organisations that have passed through Scrum and Agile phases and have embarked on a voyage towards perfection.

That said, there can be no substitute for human leadership, especially when defined as the social influence that binds the efforts of others towards a single task.

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