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8/7/2019 HFTP_SOX_Presentation

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Sarbanes-Oxley Section 404

June 29, 2005


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SOX 404 Background 3

SOX 404 Goals 4

SOX 404 Requirements 5

SOX 404 Assertions 6 SOX 404 Compliance 7

COSO Internal Controls 8

COSO Internal Controls Framework 9

Why Do You Really Care About SOX 404? 10

Things You Can Do 11

Table of Contents


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SOX 404 Background

Due to the scandals in corporate financial reporting, Congress enacted in2002, the Sarbanes Oxley Act (SOX). The Security ExchangeCommission oversees the compliance by publicly traded companies to theAct. The Public Companies Accounting Oversight Board (PCAOB) drivesthe compliance.

SOX Section 404 rules require each annual report to contain an internal

control report which shall state the responsibility of management forestablishing and maintaining an adequate internal control structure andprocedures for financial reporting, and contain an assessment of theeffectiveness of the internal control structure and procedures of the issuerfor financial reporting.

Filing due dates:

Fiscal years ended on or after November 15, 2004 for acceleratedfilers (ie., market capitalization in excess of $75mm)

Fiscal years ended on or after July 15, 2006 for non-acceleratedfilers.


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SOX 404 Goals

no material weaknesses that must be reported at the registrantlevel by either management or the by external auditor;

no significant deficiencies that must be reported at the registrantlevel by either management or the external auditor to the AuditCommittee of the Board of Directors; and

no material misstatements of the companys financialstatements

The goals of a SOX 404 program are to ensure that enterprise internalcontrols are of such quality that there will be:


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SOX 404 Requirements

Client management must:

Document and test the internal controls over financial reporting

Issue an annual assertion on the effectiveness of internal controlover financial reporting

External Auditors must:

Determine nature, timing, and extent of testing

Review work performed by management

Perform some independent tests of controls

Attest and report on:

Managements 404 assertion process Design and effectiveness of internal controls


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SOX 404 Compliance


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COSO provides the PCAOBs accepted basis for establishing internalcontrol systems and determining their effectiveness.

Stands for Committee of Sponsoring Organizations

Originally formed in 1985 to sponsor the National Commission onFraudulent Financial Reporting (aka The Treadway Commission)

The sponsoring organizations include: American Institute of Certified Public Accountants (AICPA)

The Institute of Internal Auditors (IIA)

Financial Executives International (FEI)

Institute of Management Accountants (IMA)

American Accounting Association (AAA)

Published two documents and one pending

1992 Internal Controls Integrated Framework

Mid 90s Internal Control on Derivative Issues

Early 2004 Enterprise Risk Management Framework

COSO Internal Controls


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The control conscience of

an organization. The

tone at the top

The evaluation of

internal and external

factors that impact an

organizations

performance

The policies and

procedures that help

ensure that actions

identified to manage risk

are executed and timely

The process which

ensures that relevant

information is identifiedand communicated in a

timely manner

The process to determine

whether internal control is

adequately designed,

executed, effective and

adaptive

COSO - Internal Control Framework

Components

Objectives


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Non-profit (country clubs) and non-publicly traded (hotels) companiesare not required to comply with SOX 404 requirements.

Reasons to care:

Why Do You Really Care About SOX 404?

Board members, who are responsible for the establishment and

maintenance of good corporate governance ALL Financing sources (banks and investors) want assurance that the

financial statements are not misrepresented ALL

Owners want assurance that the financial statements are notmisrepresented Hotels

Risk of membership loss due to fraudulent practices disclosed tothe public Country Clubs

If acquired by a publicly traded company, SOX 404 compliance isrequired - Hotels


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Things You Can Do

Steps to take to enhance your internal controls: Establishment of an audit committee to provide financial reporting

and internal control expertise, along with oversight on suchmatters

Establish a Whistle-Blower policy to provide the means and

safeguards to those who identify fraudulent practices Assess the risk associated with the processes that make-up your

organization (ie., sales/revenue, cash, accounts receivable, fixedassets, accounts payable, payroll, etc.)

For high risk areas and processes ask yourself, What Could Go

Wrong and address the answers to the question (ie., segregationof duties)

Reference List: http://www.aicpa.org/audcommctr/homepage.html

http://www.pcaobus.org

http://www.sec.gov/rules/pcaob.html

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