When you think about the Sarbanes-Oxley Act of 2002 – SOX – Section 404 what comes to mind? Large scale fraud that caused the act? Increased government regulation around financial reporting? Requirement of controls and the disclosure of the assessment of internal controls?
One of the last words that might come to mind is efficiency. I might argue that SOX Section 404 does, in fact, allow companies to become more efficient and more confident in their processes. So, should nonpublic companies pay attention? Absolutely!
Implementing controls requires management to take a step back and look at the bigger picture to discover tasks that are duplicative or implement tasks that may help to create a more efficient flow. Where should management start? With these three steps:
- Understand and map the process. Draw out the process – on a piece of paper, on a white-board, or using software. It is crucial to understand a process from inception to the product. Having a clear picture of the process flow allows for managers and executives to clearly see if there are any weak spots or if there are any duplicative tasks. For example, is an invoice being approved? Does it need to be? Is it being approved multiple times? Does it need to be? It is important to look at each step and understand the part it plays from both an efficiency stand point and an internal control stand point.
- Implement meaningful controls. Having a control over every step in the process is inefficient and can bog down a process. It is important to implement controls in the proper intersections. For example, an expenditure should be approved on the front end to avoid any work on inappropriate expenditures. Controls surrounding the reconciliation of accounts and schedules can be key to avoid any issues come time for financial reporting. Properly implemented controls not only keep the assets of the company safe and create a smooth financial reporting process, they also help decrease the rework required by management or those reviewing the work of staff.
- Educate staff. When your staff better understands the process and knows that their work is going to be reviewed, they will be less likely to make mistakes. When performing day-to-day tasks and focusing on their own responsibilities, team members can forget about the bigger picture of the process flow. When they understand it, they will be more confident in their own work, and in turn, management will be more confident in their staff.
With these three steps, companies (both public and nonpublic) will be able to properly understand their processes and implement appropriate internal controls. This will help increase confidence in employees, create a smoother financial reporting process and improve general efficiencies in the day-to-day activity of the company.
Chad M. Dewey, CPA