Basic Accounting

Sarbanes-Oxley requires documentation of all expenses including where the transactions occurred, how many times, and how much the activities cost. It also requires businesses to implement internal systems for keeping track of this detailed information and for monitoring whether the activities actually occurred.

For example, say your company participates in co-op advertising, and you give a retailer $10,000 for marketing ($5,000 for the cost of the co-op ad, plus $5,000 designated for “marketing expenses”). The unspecified “marketing expenses” are where the problem lies. Before Sarbanes-Oxley, you could deduct the entire $10,000 as a business expense, regardless of how the retailer actually spends the unspecified $5,000. Now, to prevent companies from using funds for other operations, everything has to be documented in detail to be eligible for subtraction from your revenue.

“In detail” means Sarbanes-Oxley requires your company’s information storehouse has to include the following information:

1. Processes capable of identifying the value of any pending activities.

2. Plans that specifically identifies what activities for which money is allocated.

3. Processes that identifies whether the money was actually used for those planned activities.

4. A method to determine whether the activity occurred at the specified time and place.

5. A designated representative who is responsible for identifying any deviation or variance from the plan

6. And a course of action in case the activity did not take place or occur as planned.

Once all the proper reports have been filed your CEO, and CFO must sign-off on the accuracy of the information. If the numbers are not accurate, you face a $10-20 million fine, and 10-20 years in prison for noncompliance.

Using Sarbanes-Oxley to Your Advantage

The Sarbanes-Oxley Act of 2002 (SOA) focuses on public companies. However, many private firms should also adapt this same law to their practice by adopting its provisions to their own practices. Thus ensuring them that they are also consistent with what is becoming the new standard for business conduct.

Most progressive privately held companies should view today’s accounting reform environment as a significant opportunity to improve internal control and governance processes in their own organizations.

Sarbanes-Oxley already having a huge impact on corporate governance practices even though legislation is directed at public companies, private or small business companies are by no means immune to the need for improvements to governance and internal controls. By just taking a small cue from what is being implemented to public firms and make sure their own practices are sound and reflect a strong focus on financial disclosure and integrity to can make a huge improvement on profit building strategies. Including all Non-profits and Small Business’.

Many private companies are finding that the most practical approach is to voluntarily adopt key reform standards appropriate for their business. Such as establishing an internal audit function and adopting a formal code of ethics, providing formal certifications of financial information and enhancing accounting competencies. Complying to SOX just makes “good business sense” accepting corporate America’s template for effective finance and accounting practices.

Identification of change within a small business or non profit organization can decrease the disaster of poor financial reporting and poorly created accounting policies and procedures and all other underlying problems that ranges all the way to corporate misconduct and unethical standards, thus leading to corporate scandals.

Here are a few fundamental principles of ethical corporate practices:

1. Financial statements must fairly present the condition of the business. (Sec. 401)

2. Chief executives must take personal responsibility for the accuracy and completeness of corporate financial statements. (Sec. 302)

3. Non-audit services by external auditors should be restricted to prevent real or perceived conflicts of interest that cast doubt on audit integrity. (Sec. 201, 202 and 206)

4. Companies need independent, knowledgeable boards and audit committees that will uphold shareholder interests by challenging management and auditors on important issues. (Sec. 301 and 305)

5. A strong system of internal controls is necessary to stem fraud and abuse. (Sec. 404)

6. Companies must articulate and demonstrate an ethical culture from the top down. (Sec. 406)

Even though this seems like a tedious, time-consuming, and maybe even time-wasting task. Your efforts don’t have to be worthless. You can use all the new information gained from compliance as a strategic advantage for your organizations well-being.

Author, Sarah R. Duncan

Elite Financial Services

P.O. Box 27434

Fresno, CA 93711

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