Requirements for businesses have dramatically changed since the Sarbanes-Oxley Act was passed in July 2002. The Act affects all companies listed on US Stock Markets, including those domiciled overseas but with ADRs.

Other countries are either adopting similar regulations (Thailand, Canada ) or already have similar regulations (such as the UK) as they seek to build upon the SOX fundamental tenets of strengthening overall business operations by providing guidelines to help efficiently manage internal controls and enhance financial reporting practices.

Companies are being held to a new level of accountability and executives (and non-executive directors) are challenged to:

• Demonstrate financial transparency and good corporate governance to investors
• Implement a system for managing compliance initiatives
• Maintain focus on core organizational missions

A SEC study of enforcement actions in the 5 years preceding SOX Act showed that the most significant areas of difficulty firms face include:

• fraudulent reporting of fictitious sales
• timing of revenue recognition
• valuation of revenue
• capitalisation or deferral of expenses
• use of reserves and other understatements of expenses
• accounting for business combinations
• inadequate disclosure in management’s discussion and analysis
• use of off-balance sheet arrangements

The situations in other regions of the world yield similar results with the addition of;

• Fraudulent reporting of cash balances held offshore (see Parmalat)
• Mis-statement of pension assets and liabilities

As the Sarbanes-Oxley Act is in actuality an on-going compliance exercise it must be adhered as more than a one-off documentation exercise and more just a case of good business practice and management.

The SOX effect

Some of the unwanted fallout from the Sarbanes-Oxley Act includes;

• Many audit firms are looking to divest themselves of "troublesome" clients as the audit firms have an increased liability
• Audit fees have increased on average by 20 - 30% to cover audit forms for the increased financial risks of conducting audits and expressing opinions on Financial Statements
• Director & Officer/ Professional Indemnity Insurance Premiums have increased between 200 – 400% as insurance companies attempt to mitigate their increased exposure to potential litigation actions
• Many small cap firms looking to go private in order to save costs

According to recent surveys conducted by CFO.com the SOX sections that are causing the most consternation to companies are the ones pertaining to controls;

• Section 302
• Section 404
• Section 409

As has been the case in many well intentioned regulations many institutions view compliance as an onerous task and not as a means of kick-starting well needed reform processes.

Crest Rider offers the following;

• Strategic consultative services for SOX compliance
• Vendor selection
• Business process mapping and re-engineering
• SOX solution development