Introduction
Sarbanes-Oxley Act (SOX) compliance work majorly focusses on testing, implementing and designing of internal controls to ensure implicated processes of financial information production are correctly completed. Additionally, it ensures that the generated financial information is reliable. The paper analyzes Trinity Industries, a company that made processes and information technology changes in order to be compliant with the new set of SOX regulations.
Decisive elements
Two elements play a crucial role in the final decisions to engage SOX compliance. The first of these elements was enhanced financial disclosures. These are internal controls that are necessary to ensure that the most accurate data and records are kept with regard to finances in each department and in the entire company. Two aspects play a role in the efficiency of financial reporting and these are: timely report which allow for the right decisions to be made in good time for the benefit of the company. The second is accuracy, where small errors can be very costly in the financial analysis and decisions. The second element considered was investor confidence. The company relies on investors to inject capital which is then used to run and implement executive decisions. Braganza and Franken (2007) points out that investor confidence allows the company to enjoy high returns as the risk involved is perceived to be much lower.
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Internal controls
There are several aspects that play a crucial role in ensuring proper financial reporting. Montana (2007) highlights that all these aspects can be summarized into enhanced financial disclosures. The fourth chapter of SOX compliance describes enhanced financial disclosures as reporting measures which include balanced equations and reports. Internal controls ensure accurate reports, through daily reporting and evaluation of the systems and their weakness. The company does not rely on one system for financial reporting but rather supplements one system with the other often comparing results not on an annual or monthly basis but rather on a daily basis. This shows and identifies errors at an early stage so that they can be traced, identified and corrected before they accumulate making such identification difficult.
Marital weakness
This is defined as a weakness in the system and reporting that could lead to the misstatement of the materials in the financial and interim statements. Material weakness is a major concern for two reasons: the first is that the company is often assumed to be unable to run without proper access to material. Material is therefore the most basic component for the running of the company. On the other hand, misquoting and misstatement of the material component could lead to high losses and risk on either side. Understatement could lead to misquotation of profits on products which may otherwise not be existing. Overstatement on the other hand could expose the company to the risk of loss, and closure of profitable product lines and departments.
Trinity material weakness
The trinity management requires monthly reconciliation of all financial reports. This is a requirement which has been clearly stated in the company reports. However, there lack a proper and structured process which includes responsibility for each company official with regard to their role in ensuring the successful running of the financial reconciliation. Because of this, the reconciliation is often ignored or completed hurriedly. This has resulted in the company having to endure higher risks and explore due to faulty accounting and poor reports. The report highlights the lack of segregation of duties which also includes improper security in system access controls. There are instances where transactions have been poorly recorded or recorded after a while, which in turn means that the reports produced during such duration lack the accuracy that is necessary to ensure impact decisions from the management and executive for the company.
PCAOB regarding the concept of material weakness
PCAOB highlights that the first step towards addressing the challenge of material weakness is recording and documenting all forms of fraud within the system. This also means giving special attention to the risk of fraud. Senior management should be in the forefront of identifying potential points of fraud and addressing them before the actual event. Trinity has often fallen victim of fraud by leaving the system open so that it is profitable to engage in fraud without being identified and such action ahs often proven quite costly to the company. Cannon and Byers (2006) indicates that PCAOB relies heavily on the auditor to identify the previous and current misstatement of company. The auditor is trained and has the skill to identify and make known material misstatement. In some cases, management is yet to identify any form of material misstatement. It is also a requirement for the management to restate previous cases of material misstatement and measures that have been put in place to correct such misstatement as a form of evaluation
Trinity success
Trinity success was hinged on the development of the project management.
Pilot SOX projects
Gain insight into the amount of time and effort process and control documentation would require and the kinds of control gaps Trinity
Partnering with oracle.
Allowed for the building of a right system, training and access to independent auditor
Accounting Service Center (ASC),
Which provided centralized, outsourced
Services for routine, organization-wide transaction processing
Such as billing, payroll, and AP
Project planning and development
Developing the right structures for the process of SOX compliance. Making a case for the need of participating in the process
Project scoping
Identifying the right methodology for all participants
Conclusion
The paper discussed some of the critical elements to the decisive success of the Trinity Industries Company in its first year of compliance. Moreover, it discussed some of the internal controls significant in preparing reliable and accurate financial reports. Moreover, the paper defined what a material weakness is in terms of compliance to SOX. Assessment has also been done on the material weaknesses that are specific to Trinity. standards addressed in PCAOB in regard to material weaknesses concept in development of internal controls compliance has been analyzed. Lastly, some of the factors that made Trinity Industries be successful has ben described and illustrated in a process flowchart
References
Braganza, A., & Franken, A. (2007). SOX, compliance, and power relationships. Communications of the ACM, 50(9), 97-102.
Cannon, J. C., & Byers, M. (2006). Compliance deconstructed. Queue, 4(7), 30-37.
Montana, J. (2007). The Sarbanes-Oxley Act: five years later: corporate America still finds SOX compliance requirements to be burdensome, vague, and frustrating. Information Management Journal, 41(6), 48-53.
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