April 28, 2006
Recently I have read where many business leaders criticize the Sarbanes Oxley 404 process as overly expensive and unnecessary for the operation of their business. The CEO of one such company, Sun Microsystems, claims it to be a waste of money yet their review found a material misstatement in their tax reporting. I suspect their review also found where they overpaid their taxes and many other problems that, if uncorrected, create a high risk of errors in financial reporting. This lack of control generates errors that cost a company far more than the cost of compliance. Some of the issues are as follows.
Failure to adequadely test computer systems prior to implementation. Costly errors that result from this control deficiency include the overpayment of employees for hours worked, unnecessary inventory purchases, overpayment of employee benefits, errors in customer billings, and duplicate payments of supplier invoices.
Failure to restrict logical access to computer applications and data. This control deficiency also results in overpayments of employee wages, benefits, and supplier services.
Failure of managers to review and approve transactions. In areas like RD, engineering, new product development, etc. such control failures result in uncontrolled spending, over budget, behind schedule and little benefit to the organization.
In summary, I truly believe that the cost of complying with Sarbox 404 will prove much less than the savings and benefits to the Companies that embrace the effort. I believe this especially true for small companies who currently are exempt from 404. If small companies expect their business to grow and prosper, they will need effective controls in the managment of their business. They will learn many ways to implement these controls and improve their business during the 404 compliance effort.
For those companies like Sun Microsystem who feel compelled to criticize the 404 compliance effort, I see a future of a dead company with little future for employees and shareholders.