Sarbanes/Oxley and the impact on the Supply Chain
The recent financial scandals have shaken the financial markets to the point of driving Congress and the Securities Exchange Commission to act. Congress created the Sarbanes Oxley Act of 2002 to address the fairness and accuracy of financial reporting of public companies. While the requirement that CEOs and CFOs personally certify quarterly financial statements (Section 302) has received the most publicity, other requirements like Section 404 will have a greater impact on your company. Section 404, adopted by the SEC in May of 2003, and to be enforced starting June 15, 2004, requires an annual evaluation and reporting of internal controls and procedures for financial reporting. Your company will be required to document, in the annual report, the soundness of these procedures and controls, reporting any gaps or deficiencies. External auditors will file their own report that will attest to management’s findings on the effectiveness of these controls and processes.
What does this mean to the operational side of your business? At first look, this seems like an exercise for the financial and audit teams. Intertwined with your key financial figures like inventory, costs, and revenue, are core processes within Operations. Ineffective processes and controls in the supply chain increase the likelihood of financial misstatement and erratic financial performance. This effect is further magnified if your company has a predominantly outsourced manufacturing model, where the majority of the control is with the outsourcing partner. Basic building blocks that establish business levels such as sales and operations planning, sales forecasting and master production planning will be under review. Fundamental controls such as purchase order transactions, material movement and inventory controls, among others will also need evaluation. This sounds like common sense, but due to the magnitude of some of the recent reporting transgressions, Sarbanes-Oxley compels a focus on fundamentals in these areas.
So what should your company be doing to ensure compliance with Section 404? At a minimum you should be evaluating and testing the soundness of your current processes and controls. Gaps and deficiencies should be identified, and then prioritized to create a comprehensive task list prior to your first annual report after June 30, 2004. Those companies with fiscal year-end on June 30th must be the first to comply in their annual report/10K filings in August 2004. While the requirements of Section 404 may seem burdensome, your company may benefit from enhanced supply-chain performance as you scrutinize critical processes that in the past may have received too little attention.
Preparing companies to meet the needs outlined by Section 404 is one of Symphony’s services. We provide expertise, objectivity and bandwidth to ensure a thorough assessment and appropriate remediation. If you have questions on how you can position your company to meet these new requirements, please feel free to contact us.
Bijan Dastmalchi
bijan@symphonyconsult.com
408-245-5894
John Holton
john@symphonyconsult.com
650-948-3909
Steve Perotin
steve@symphonyconsult.com
408-417-0253
www.symphonyconsult.com