LRH Manufacturing has implemented Sarbanes-Oxley Act (SOX) under the new rules under Section 404 implemented by the U.S. Securities and Exchange Commission. According to section 404 of SOX, LRH is required to ensure that the company’s financials are reported accurately. SOX has created a new set of standards for companies to control fraudulent reporting and improve fraud detection when it takes place. Under Section 404 of SOX Act 2002, LRH and our independent auditors are required to issue two public reports:
- A report by the management regarding the effectiveness of the internal controls of the company over financial reporting.
- In connection with the audits of the company’s financials, the independent auditor is required to provide an internal assessment and opinion of the effectiveness of the internal control over financial reporting.
Due to the implementation of this reporting standard, the cost structure of the company has altered significantly and there are a few processes and procedures to comply with the SOX Act. According to a report on the benefits of implementation of SOX, there are three major benefits (Rittenberg & Miller, 2005).
First is the significant advantage associated with control identification, documentation, and testing of the processes. Therefore, this will lead to improvement of the internal control process. This will help us evaluate our accounting risks and our control structure, which will help investors to gain increased confidence in the unaudited data provided to the securities market.
Second, is that it is expected that the future cost of SOX implementation will decrease in three years. The increased initial cost is related to the SOX implementation that arose due to the internal control mechanism that had to be implemented. These internal controls were absent before SOX, and therefore, the new implementation increased the cost initially. However, the research shows that the efficiency due to the internal controls will soon be observable in areas related to information, communication, and monitoring.
Third, this will help add more risk and control to the operations of the organization, which will add value to the organization eventually.
The areas, which will be improved through the implementation of SOX, are discussed below. SOX will enable a controlled environment for active participation by the board, audit committee, and management in the internal control process. Monitoring control will gain more attention as it will be realized that monitoring helps in gaining an integral part of the control process.
The cost of compliance with SOX is high at least at the initial stage (Charles River Associates, 2005). Many believe that the cost structure associated with the new auditing procedure helps in increasing the cost of companies while helping increase the profits of accounting firms (Solomon, 2005). According to the Wall Street Journal report, companies will spend at least $3 million in complying with this rule. The cost increase is not due to internal control but rather for the cost that is incurred due to the regulation, which makes it a compulsion for companies to play two reviews.
LRH has implemented SOX last year, and due to this, has initiated a few procedural and process changes in the organization. For this, sales officials are requested to follow strict cost control and maintain and track their cost records. They are even requested to book their revenues differently. For this purpose, a newsletter should be despatched to the sales team from the CFO of the company regarding the details of the new booking system and the intricacies of the new procedure.
Charles River Associates. (2005). Sarbanes-Oxley Section 404 Costs and Remediation of Deficiencies: Estimates from a Sample of Fortune 1000 Companies. Washington, D.C. Web.
Rittenberg, L. E., & Miller, P. K. (2005). Sarbanes-Oxley Section 404 Work: Looking at the Benefits. Altamonte Springs, Florida: The IIA Research Foundation.
Solomon, D. (2005). Accounting Rule Exposes Problems But Draws Complaints About Costs. Web.