Harvard Business Review April 2006 Presented by: Alyssa Phillips & Michael Paulson

 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.

 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.

 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.

 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.

 Documentation took up a lot of workers’ time during the 1 st 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.

 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.

 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.

 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.

 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.

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

 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.”