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Fiduciary Responsibilities and SOX

Structuring the business as a corporation generates the trust obligation or fiduciary responsibilities. Primarily, officers and corporate directors owe the fiduciary responsibilities with regard to the organization and its stakeholders. The director’s board implements the policies of the organization and engage and allocate some responsibilities to the organizational officers (de Colle,  Henriques & Sarasvathy, 2014). The officers like corporate secretary, treasurer, chief financial officer, chief executive officer undertake day to day operations for the non-profit or profit organization. In certain situations, the fiduciary responsibilities are also applied to the controlling shareholders who are entitled to the major interest or have maximum control over the business activities of the organization. Breach of fiduciary responsibility may lead to personal legal obligation for the controlling stakeholders, officers, executives and director (Aedtner & Teubner, 2015).

If various project management procedures are analysed, it can be seen that most of the planning procedures have the enterprise environment as the input. Government regulations and laws are the significant part of the environmental factors of the organization. All of the planning procedures have the probability of getting affected by the Sarbanes-Oxley Act (SOX). This act is enforceable on the companies that are publicly traded financial and accounting statements and burden these organizations with more responsibilities with regard to the duties of the executives to offer assurance for the members. It is a crucial fact to understand that the SOX does not affect all the projects of the organization. For instance, if the organization has 2 projects, 1 project is on marketing and another is on creation of balance sheet or income statement, then the 2nd one is likely to be affected by the SOX and the 1st one will not get affected by the SOX (Blair, 2016).

Effect on Deadline - The outcome of a project plan comes from establishment of critical path, defining the objectives, defining the checkpoints and milestones, identification of external advisors. The timeline of the project should be estimated carefully to assure that adequate time is allowed to complete the entire task. If the complexity of the company is more, then the auditor will take more time to complete the process of attestation. Irrespective of the estimated deadline, the management shall back up from the date of planning procedures and allow sufficient resources and time to complete the project (Funchal & Monte?Mor, 2016).

Performance Expectation – It is identified that the organizations that implement a strategic approach for establishment of the clear vision and maintenance of the risk factors. The five characteristics of SOX excellence are:

  • Integrated Structure – Under SOX multiple stakeholders are involved for execution, compliance activities and leveraging, wherever applicable.
  • Clear Vision – Under SOX the organization has regular focus for the cost-efficient program, quality driven sustainability that is constructed to maintain pace with the business changes and the regulatory environment.
  • Focussing on Risk – A top-down approach for the risk associated with financial statement throughout the SOX compliance to enable the right-sized approach and scope.
  • Flexible Talent Model – An efficient balance is maintained between the management and the specific expertise to align with the demands for delivering the quality products with minimum possible cost
  • Innovative Technology – Innovation and technology aligned with SOX activities assist in driving efficiencies and offer wider insight with minimum possible cost.

SOX and Project Management

Effect on Contract Management – When the act is applied to a contract management, section 802 of the act requires special concentration. Within the section, SOX requires all the records of business including the electronic messages and records and these shall be saved for a period of not less than five years. The punishment for non-compliance is imprisonment, fines or both. This means the organization is required to implement a cost-effective measurement to maintain the records to satisfy the requirements under SOX.

SOX require an internal control procedure to handle the risk within an organization. Various ways are there to mitigate the impact of SOX. These are:

Monitoring Activities – at the level of processing, the monitoring activities assist in maintain the efficiencies in the major control activities that is created in the process and to maintain the efficiency in controlling the environment, assessment of risk and the information components. Monitoring of the activities involves separate evaluation as well as ongoing monitoring. Ongoing monitoring comes from the supervisory activities and regular management, reconciliations, comparisons and any other informal and formal mechanisms in the day to day activities of the business to provide efficient internal control. Examples of the monitoring activities are –

  • Daily monitoring by the process owners and supervisors
  • Comparisons between recorded balance of physical assets
  • Follow-up of feedback obtained through employee suggestions, planning meeting and training sessions
  • Analytical review of financial systems to maintain the data correctly

Risk Assessment – The process of business are exposed to various internal as well as external risk. These risks shall be analysed with regard to their effect on the process objectives. The owner of the process must implement a procedure or take up an established procedure to evaluate and identify the risks effectively associated with the internal as well as the external environment that threatens the achievement of project objectives. Following are some of the questions that are associated with the component of risk assessment at the activity level.

  • Whether the owner of the process have sufficient resources for fulfilling the stated objectives or not
  • Does the owner of the process regularly anticipate, react and identify to routine alterations in the circumstances, conditions and events that may affect the attainments of the project objectives
  • Whether the owner of the process have an efficient procedure to (1) analyse the significant risks associated with the internal as well as external source to attain the major objectives of the project (2) evaluating the impact of the risks and find out the alternative actions to reduce the impact of risks (Provost, 2015).

Control Environment – The owner of the process must implement an efficient control environment to offer structure, strong foundation and discipline to control the process. The environment of control process involves control owners and other people those are responsible for implementing the environment and the process in which they are going to operate. It assists in efficient functioning of the procedure and influence the control awareness for everyone involved in the processing activities. It is the base for other components of the internal control procedures.

Effective Communication and Information – Reliable and relevant information are required to get the clear idea about the happening in the business processes and external environment. The right measurement for the performance and efficient communication procedure are required to assure that the crucial messages related to the internal control are managed and communicated within the process (Kaya & Banerjee, 2015).

Effect of SOX on Contract Management

The application of SOX assists in removing any misstatement or errors that can lead to restatement of financial statements. The process and systems for monitoring the discounts, pricings and services must be applied consistently. The control and visibility must assure that the cost and pricing are measured accurately and on proper time. The discount procedure and pricing services often represent and involve most of the people and largest segment of risk (Gu & Zhang, 2017).

While most of the agencies and their objectives do not come directly under SOX, considerable effort must be taken to alter the procedures to be complied. Where compliance is mandatory, non-compliance can lead to criminal analysis to establish whether:

  • The required information was transferred through mail
  • The required information is held back from the investigators

In these cases, felony charges may be brought (Franzel, 2014).

However, in other cases, the agencies can be ordered to align with the statements of auditor and the requirements that:

  • Add the expensive procedures with no additional source of funds
  • Add the reporting requirements that are not necessary otherwise.

All the applicable organizations must apply the frame work for financial statements that are readily traceable and verifiable from the source data. Apart from negative publicity and lawsuits, an officer from the corporate organisation who fails to comply with the SOX, is subject to fine up to $ 1 million and 10 years of imprisonment, even if it is done by mistake. Further, if the wrong certification is purposely submitted, fine for that can be extended to $ 5 million and imprisonment of twenty years (Basile, Handy & Fret, 2015).

Reference:

Aedtner, K., & Teubner, G. (2015, May). Virtual enterprises: liability problems in one-and multi-level networks. In Business Networks Reloaded (pp. 381-394). Nomos Verlagsgesellschaft mbH & Co. KG.

Basile, A., Handy, S., & Fret, F. N. (2015). A Retrospective Look at the Sarbanes-Oxley Act of 2002-Has it accomplished its original purpose?. Journal of Applied Business Research, 31(2), 585.

Blair, E. B. (2016). The Effect of the Sarbanes-Oxley Act of 2002 on Earnings Quality.

 de Colle, S., Henriques, A., & Sarasvathy, S. (2014). The paradox of corporate social responsibility standards. Journal of Business Ethics, 125(2), 177-191.

Franzel, J. M. (2014). A decade after Sarbanes-Oxley: The need for ongoing vigilance, monitoring, and research. Accounting Horizons, 28(4), 917-930.

Funchal, B., & Monte?Mor, D. S. (2016). Corporate Governance and Credit Access in Brazil: The Sarbanes?Oxley Act as a Natural Experiment. Corporate Governance: An International Review.

Gu, Y., & Zhang, L. (2017). The impact of the Sarbanes-Oxley Act on corporate innovation. Journal of Economics and Business, 90, 17-30.

Kaya, H., & Banerjee, G. (2015). The Short-Term and Long-Term Impacts of Sarbanes-Oxley Act on Composition and Characteristics of Corporate Board of Directors. International Journal of Financial Management, 5(4).

Provost, E. (2015). The Effects of the Implementation of the Sarbanes-Oxley Act on Audit Quality: An Examination of Financial Restatements (Doctoral dissertation, Texas Christian University Fort Worth, Texas).

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