The Sarbanes-Oxley Act And
The Freight Transportation Implication
 

 

Executive Summary

Contrived success, fueled by financial fraud was the soup from which the Sarbanes-Oxley Act of 2002 (SOX) sprung forth.  Perhaps driven by a new business model or old fashioned greed or Wall Streets demands for short term profits at any cost, manipulated financial information satisfied all bases.  The corporate wreckage and financial devastation of real people, young and old, rich and poor that were left in the wake of the schemes looked like a highway strewn with the destroyed promises of tomorrow.

 

Viewed from the highest observation point, it might appear that fraud was the sole cause, but the significant impact on the general population, the effects of which were felt around the world, would clearly implicate complexity and complicity. Certainly, deceit is no stranger to fraud and this unholy alliance, when coupled with opportunity forms the essential mix necessary to easily attract opportunistic predators and investors alike. The combined power of egregious financial abuse, and the publics aggressive stock purchasing response produced an environment ripe for global financial devastation. The significant public losses coupled with the corporate demise of some of Wall Streets shooting stars demanded swift government intervention which resulted in the enactment of the Sarbanes-Oxley Act of 2002.

 

Although developed and signed into law rapidly, such uncharacteristic congressional action seems to have been instantly effective. Evidenced by such high profile cases like Enron and WorldCom as well as the continuing revelation of fraud portrayed by the perp walk on the one hand, and delayed filings by a host of companies on the other hand, demonstrates the importance that regulators and prosecutors alike have assigned to protecting the public from fraudulent schemes.

 

Effective, efficient, and timely implementation of the immediate requirements of the Sarbanes-Oxley Act are facing delays allegedly caused by high costs. Timely implementation is important in order to properly address both the spirit and terms of the Act and to overcome the current delays and associated obstacles alternative methods of approach need to be identified.

 

This white paper will briefly describe the Sarbanes-Oxley Act of 2002; and discuss freight transportations unique ancillary capabilities as a timely, cost efficient and effective resource for exposing and reducing the potential financial abuses understood by SOX as well as meeting its compliance objectives.

 

Sarbanes-Oxley Act of 2002

Originally known as H.R. 3763, and enacted by the 107^th Congress of the United States at its Second Session, on January 23, 2002 as An Act, to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws and for other purposes.

 

The Act consists of three (3) preliminary sections which include a table of contents, eleven (11) titles which comprise 1107 parts or sections; it is complex and reasonably complete.

 

The American Institute of Certified Public Accountants (AICPA) has succinctly described The Sarbanes-Oxley Act of 2002 as follows:

 

The Sarbanes-Oxley Act was signed into law on 30th July 2002, and introduced highly significant legislative changes to financial practice and corporate governance regulation. It introduced stringent new rules with the stated objective: "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws".

 

Sarbanes-Oxley was passed in 2002 with the aim of making companies more financially transparent and better at handling business risks - a reaction to the financial scandals at Enron and WorldCom.

 

According to President Bush, SOX is intended to, "deter and punish corporate and accounting fraud and corruption, ensure justice for wrongdoers, and protect the interests of workers and shareholders".

 

Although Sarbanes-Oxley was designed to address financial abuse and accounting fraud for the purpose of protecting investors in public companies, it has become abundantly clear that many private companies are changing the composition of their boards as well as their relevant governance practices. A January survey by the Foley & Lardner law firm found that, 78% of the private companies responding have self-imposed corporate governance reforms. While not adopting all the requirements of Sarbanes-Oxley, especially those calling for extremely sophisticated monitoring of accounting and information systems, many private firms are doing more basic things, such as reorganizing their boards and having their chief executives certify audited financial statements.

 

Provisions of Interest

The above descriptions are shared by the general public and influential corporate leaders alike. In agreement with the general understanding that, improving the accuracy and reliability of corporate transparency and disclosure will reasonably achieve the objectives of SOX, the provisions of Section 404 seem to be industries current focus and therefore the primary interest for this white paper. However, all eleven (11) titles of the Act are important; they should be reviewed and understood by everyone who is or may become directly involved with their implications. Four (4) titles and in particular Sections: 302; 401; 404; 409; 802 and 906 speak to compliance and internal control; they appear to engender the most interest amongst officers and executives.

 

According to a recent N.Y. Times article (April 17, 2005), all but a very few executives agree with the importance of Sarbanes-Oxley; executives are pushing for what they describe as specific changes in the implementation of the law, while singing its praises in general terms. Section 404s requirement for monitoring of accounting and information systems seems to be the current area of officer and executive complaint.

 

Section 404 requires management to assess the effectiveness of the company’s controls and procedures and present a written assessment to their auditors. The outside auditors are then required to attest to managements assertions. “404” is also responsible for ensuring that service providers of any outsourced functions have: documented their financial processes; carried out a risk assessment; and have in place adequate controls over financial reporting which have been thoroughly tested for their effectiveness. Outsourcing however does not relieve the company of its burden and therefore, the responsibilities identified in Section 404 can never be delegated to the service provider by the user organization.

 

Neither Section 404 nor any other provision of SOX is independent; they reasonably relate to each other and in some cases rely heavily upon each other. It can be reasonably assumed that it is not a coincidence that many of the SOX provisions integrate with the Securities and Exchange Act of 1934. Clearly, both Sarbanes-Oxley and the SEC Act of 1934 were the result of real and perceived corporate abuses. The SEC Act contains many fundamentals such as definitions of words used by SOX as well as containing the underlying premises for a number of SOX provisions. Finally, SOX also modifies and appends a number of provisions in the SEC Act

 

Section 404 holds a great deal of interest for many executives, primarily with respect to its cost. As an example, executives at a recent roundtable hosted by federal regulators in Washington complained about the high cost of complying with Section 404. Additionally, several recent surveys prepared by the following companies support this conclusion and identify the high average cost of compliance incurred by their respondents:

 

Financial Executives Internationals study of 217 publicly traded companies conclude that the average cost of 404 compliance was $4.36 million

The Big Four Accounting firms (Deloitte Touche Tohmatsu, Ernst & Young, KPMG, and PricewaterhouseCoopers) survey demonstrates that 90 of their clients spent an average of $7.8 million on compliance.

 

Perhaps as a direct consequence of these surveys, William McDonough, Chairman of the SECs Public Accounting Oversight Board said that the Agency is considering ways to provide guidance on 404 requirements.

 

While costs will probably drop as companies become more familiar with 404, there may be other methods of approach that could more expeditiously reduce the implementation costs of Section 404, and satisfy the need to timely address the general understanding and concerns of the Act.

 

Freight Transportation and Sarbanes-Oxley

If you accept the notion that timely and accurate information is the essence of understanding as well as the basis for compliance, than extracting data from the corporate transaction stream is a method of approach that should be considered as an effective alternate means for solving the current cost complaint. Therefore, minimizing the number of information sources can immediately reduce the cost of monitoring the accounting and information systems. Consequently, a corporate information base that is continuously refreshed with timely and accurate detailed transactional purchasing and sales data provides a single source for the rich and robust information necessary to meet the objectives and purpose of Section 404.

 

Freight transportation in general; todays freight transportation paradigm, the freight lifecycle, and the freight alter ego, are immediately and readily available to create the required corporate information or knowledgebase. Empowered by the Terms of Sale/Purchase and Freight Terms, the transportation transaction stream is highly capable of delivering the required financial data. Flowing within a company and amongst the trading partners, the aggregated data forms the corporate knowledgebase.

 

The pervasive license granted to the freight alter ego allows standard data mining tools, such as those found in InsourceAudit, to extract the relevant financial data directly from the transportation transaction stream. To further ensure data integrity, terms compliance is effectively addressed by RoutingGuides. As the supply chain engine, freight transportation also provides access to all of the trading partners associated, relevant data. Another important freight transportation resource is its costing ability; its application with respect to fulfilling some of Sarbanes underlying requirements can be effectively addressed with information contained in TransportGistics Cost Accounting white paper. Finally, the corporate view from the transportation and logistics perspective offers every enterprise the opportunity to identify and recognize all of the underlying financial data necessary for SOX compliance.

 

Lastly, process documentation is highly recommended; it will establish the understandable basis upon which the compliance program was created; and serve to provide the necessary confidence that will allow the officers and executives to place their signatures on all SOX required filings. Beginning with the documented transportation purchasing profile, the documented Terms of Sale/Purchase and Freight Terms, and concluding with conforming SOX reports, the process will be complete.

 

Sarbanes-Oxley and the Freight Connection

The traditional financial areas contemplated by SOX focus attention on the typical financial section of a company, such as accounting, finance, and treasury. However, other areas of exposure exist and can also serve to address the Sarbanes-Oxley mandates. Specific departmental budgets, regardless of their size, can at least serve as indicators. Freight transportation, because of its budgetary rank and its unique abilities can be both a bellwether and provide the actual financial data to be used for the intended purpose defined by SOX.

 

The total freight transportation spend, including other financial areas such as loss and damage claims, when accounted for properly can reveal potential financial abuse.

 

Freight transportation offers collateral financial information areas that can be used to support the primary data as well as invoked as an additional control device. Loss and Damage claims have long been an area for potential financial abuse. Notwithstanding the total claims dollar value, claims dollars directly relate to inventory. Abuses can be identified in a number of ways. As an example, if the claims dollars exceed their respective inventory value, incrementally by SKU or by product such imbalance should be considered, at least as a financial anomaly and require further investigation. Similarly, claims paid by the carrier, when compared with the respective claimants inventory could also reveal financial abuse. Discovery of financial error here can be indicative of the kinds of abuse addressed by Sarbanes-Oxley.

 

Risk and SOX

Given the attention focused on SOX by the media, and the ongoing discussions amongst colleagues regarding performance and compliance, great care must be taken so as not to lose sight of the potentially grave risk to vulnerability created by the Act. Compliance demands the development of a corporate information base; its contents would properly describe the aggregated data as a corporate knowledgebase. If such information would ever get into the wrong hands it is highly probable that even the best damage control would be insufficient.

 

Data security breaches are becoming a regular occurrence; recent examples such as: Lexus Nexus; Time Warner; and HSBC demonstrate that even large and purportedly well managed companies have been compromised. The confidential and essential corporate data and information required to meet the SOX mandates must be absolutely protected and controlled by its owners. Clearly, known security systems have been successfully penetrated, but the corporate knowledgebase demanded by SOX will require new and innovative methods, systems and procedures to protect the confidential corporate essentials. TransportGistics Convergence white paper suggests that new opportunities and paradigms can be created by converging like and disparate knowledge bases and disciplines. Invoking the principles of convergence as described by TransportGistics offers a proven method of approach in creating a primary and effective defence against sophisticated intrusion. In addition to using convergence as a method of approach, strong consideration should be given to continuous security change.

 

Conclusion

The Sarbanes-Oxley Act of 2002 is an extremely large blip on the radar of every company, regulator and prosecutor. All but those individuals who are currently under scrutiny agree with its purpose and the reason it was enacted. The primary complaint with SOX is the alleged cost of implementation. Since the only choice that is available to a public company is how they implement a compliant program, finding alternatives that will satisfy the fundamental requirements is a mission worthy of pursuit.

 

Freight transportation has long been an invisible commercial and industrial resource. Its universal data production capabilities are uniquely capable of creating a rich and robust information base; it therefore represents a significant opportunity for companies, regulators and prosecutors alike. Aggressive prosecution of the financial abuses defined in the Act demand that every company develop a process whose financial accounting is above reproach and is capable of withstanding intensive investigation. A universal corporate information base that provides the companies officers and executives with a corporate knowledgebase may make it more palatable for their signatures to appear on their financial reports. The size of the freight spend together with the unique capabilities of freight transportation again positions the transportation and logistics executives in another important corporate role.

 

As we have seen from many of TransportGistics previous white papers, freight transportation can be a highly beneficial resource in addition to the mission critical role it is known for. Freight transportation is common to all companies, but each company is unique and therefore a specific program must be developed that will allow the results of efficient and effective transportation, distribution and logistics management to provide a viable cost efficient and effective SOX compliant program. TransportGistics, Inc. has the tools and management experience to assist a company with the development of highly successful SOX compliant programs. To learn how TransportGistics can help you develop cost efficient and effective compliance that utilizes the power and resources of a professional transportation and logistics system, simply contact jwest@transportgistics.com.

 

About TransportGistics, Inc.

TransportGistics is a global, multi-product and services company that provides market leading, simple, incremental solutions for transportation management and logistics functions within the supply chain.

 

TransportGistics commitment to education is portrayed through its advancement of professional logistics and transportation programs.  Its white paper site presents important and timely transportation and logistics subjects each month, and is regularly visited by more than 125,000 clients and readers representing companies in the private and public sectors, universities and governments, worldwide. TransportGistics is a founding  partner at the Center of Excellence in Wireless Internet and Information Technology at the State University of New York-Stony Brook.

 

Continuation

Please consider this white paper as a continuum in this subject area, succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any specific questions or comments to papers@transportgistics.com.

 

Disclaimer

The information presented herein represents the opinion of the author, but not necessarily the opinion of TransportGistics, Inc.  This white paper is not presented as a legal position or as a recommendation.

 

“Idea Logistics",  "Freight Lifecycle Management”, “Convergence” and “Today’s Freight Paradigm” are sales marks of TransportGistics, Inc.

 

 

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