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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Spend more to reduce costs?

It is becoming increasingly important to not to analyse energy consumption for all utility types, be it electricity, gas, water, heat, renewables, oil etc. The bottom line is both operational efficiency and utility costs monitoring. In the long run, these are management strategies designed to drive energy costs downwards as a continuous improvement cycle and as a measure of reducing carbon emissions.

It is also getting increasingly easier for organisations reduce energy use and achieve this goal using technology without having to “remember” to do it yourself. Organisations can never go wrong by investing in energy management software. There are varied software options to choose from depending on the organisational objective.
Some of the energy management objectives that organisations may need to meet are:

? Establishing baseline energy use

? Carrying out Energy audits

? Monitoring and measuring energy performance against the energy policies of an organisation and objectives

? Achieving energy certification
Energy management software?s come in handy when an organization wishes to achieve either of the above objectives.

Use of energy management software?s also assists organisations in measurement and verification of energy consumption as well as Monitoring and Targeting. Measurement and verification is where a company quantifies energy consumption beforehand (baseline energy use) and after energy consumption measurements are implemented in order to verify and report on the level of savings actually achieved.

Organisations that wish to verify the energy savings achieved by building retrofits can use energy management software?s. This is an important objective for companies that wish to either satisfy internal financial accounting and reporting requirements, or to meet the terms of third-party contracts for project implementation and management. Monitoring and targeting is also made easier by use of software. This is critical as a management technique, regardless of whether an organisation has specific facility retrofits in order to keep operations efficient and to monitor utility costs.
Overall, an investment in energy management software, is worthwhile in the achievement of management strategies designed to drive energy costs downwards as a continuous improvement cycle.

Energy efficiency demystified

Energy bills are all about Energy efficiency but energy efficiency management is not all about bills. Energy efficiency means reducing carbon emissions, lowering energy costs and improving the quality of life. Energy efficiency is therefore about conservation of energy in a broader perspective; in fact energy efficiency is almost becoming a moral obligation.

Through adoption of appropriate energy efficiency measures, companies can significantly bring down the overhead costs making hundreds of dollars in savings. Energy efficiency is also synonymous with a better quality of life. Taking appropriate measures to ensure proper insulation protects your premises against extreme weather conditions leading to more productivity and an improvement in the bottom line.

Improved energy efficiency means a smaller amount of carbon emissions, less pollution and a better environment.

It is now easier than ever to visually identify where your facility is wasting energy, how much energy is being wasted while tracking the progress made in reducing energy consumption by turning that detailed, raw energy-consumption data into useful charts and figures.

Having visibility of your Energy usage gives you knowledge of what power you are consuming. This helps you change energy usage behaviours and this can have significant savings and reduction in your electricity bills. Real-time electricity consumption tracking is enough prodding for you to be on the lookout for inefficient energy consumption unit’s e.g.? Heating and cooling equipment, ducts insulation of your premises or a failure of one of these components to perform as intended. Pin-pointing the problem areas is not a walk in the park but fixing it can make your building more energy-efficient and comfortable.

A wide range of solutions are now available for charting and analysing energy consumption that helps energy managers, facilities managers, energy consultants and building-services engineers. These will not only offer advice but will enable you provide tailor made solutions for your organisation by assisting you in developing a sustainable energy strategy. Our energy monitoring software is one example.?

Energy efficiency- succeed and benefit

Energy is neither created nor destroyed; it is only transformed. This being the law of conservation of energy, and given that the process of transforming energy is inefficient resulting in loss of usable energy in the process of transforming one form of energy into another form, Energy Efficiency finds a home.
Talking of Energy efficiency, think of how much useful energy can be obtained from a system or a particular technology. It is also about the use of technology that requires a lesser amount of energy to carry out the same task.

Energy efficiency is the responsibility of both demand side and supply side. Supply-side energy efficiency refers to a set of actions taken to ensure efficiency through the electricity supply chain. Supply side efficiency measures are about efficiency in electricity generation; be it operation and maintenance of existing equipment or upgrading existing equipment with state-of-the-art energy-efficient generating equipment.

The demand side energy efficiency on the other hand refers to the actions taken to use less/demand less energy. Think of less energy usage in relation to improvement of energy efficiency in buildings, solar water heaters, energy efficient lighting systems such as Compact Fluorescent Lamps, conducting energy audits to identify potential energy saving opportunities, efficient water heating systems and the list is endless.

Success of energy efficiency is a win ? win to YOU-ME-US – the energy consumers, to THEM the energy producers and suppliers and to our precious ENVIRONMENT.
Gain to energy suppliers: – Less energy usage and better energy usage patterns among consumers consequently reduces the customer load which reduces losses on the supply side. Less energy loss creates capacity on the system to serve more customers.

Gain to you-me-us: – Less energy usage and better energy usage patterns Benefits the customer through reduced Electricity bills / $ savings through lower bills.

Benefits to the environment: – Usage of less energy reduces use of fossil fuels, hence reduction in GHG emissions hence conserving our environment. Companies look at means to make rational use of their least efficient generating equipment. The objective is to improve the operation and maintenance of existing equipment or upgrade it with state-of-the-art energy-efficient technologies. Some companies have on-site electricity generation alternatives and thus tend to consider the supply side in addition to demand-side energy efficiency.

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