This is a guest post by blogger Tom Hawkins.
The Sarbanes Oxley Act (Sarbox)has created a new world of burdens and risks for US companies. Created in response to a number of highly public accounting scandals, the Sarbanes Oxley Act aims to ensure accurate financial reporting for public companies through the maintenance of internal controls that identify material weaknesses and significant deficiencies.
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Compliance administration can be complex and costly, but the risks associated with non-compliance can prove costlier for those responsible for certifying the accuracy of financial data.
For many companies, fixed assets comprise a significant portion of the balance sheet. These are tangible assets owned by a company which cannot be simply liquidized (turned into cash), including things like machinery and equipment, vehicles and property. Fixed assets are considered a “material” item for SOX compliance requiring the documentation of internal controls and business processes used within an organization, as would be the case for any financial matter that is considered material.
The AICPA defines “material” as being based on the assumption that a reasonable investor would not be influenced in investment decisions by a fluctuation in net income less than or equal to 5% and that “rule” remains the basis for working materiality estimates.
It is estimated that more than 65% of fixed asset data within US business audit trails is typically misclassified, unrecorded or floating in limbo in corporate financial records.
Clearly, poor data quality represents a major potential Sarbox disclosure risk. In the case of manufacturing companies, fixed assets constitute a major chunk of the total. But even service organizations like hotels, banks or financial institutions have to invest heavily in furnishings, equipment, and technology to attract and retain customers. Fixed assets therefore matter a great deal when it comes to Sarbox compliance. Without an accurate method of keeping track of those assets, it would be very easy for a company to lose control of them.
It is possible that an evaluation of internal controls will meet Sarbanes-Oxley compliance requirements, but that will not fix bad data from previous reporting periods. Instituting process improvements of internal controls alone does not ensure a material weakness has been repaired.
Conducting a physical inventory and instituting improved business processes, if needed, is the only way to accomplish the quantitative and qualitative requirements to meet Sarbanes-Oxley compliance.
Tom is a blogger currently working for a company specializing in asset tracking and inventory management software. He enjoys picking through issues of money and economics and figuring out what it means for businesses and people.