Sarbanes Oxley Compliance Journal

Jacques Martin

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Sarbanes Oxley: Article

Tightening The Reins

Tightening The Reins

Another month is upon us and the world continues to change. The world of corporate governance is making its presence felt in all corners of information technology as the Sarbanes-Oxley Act requirements begin to take effect with regard to Section 404. You only need to read the daily newspaper or watch some television to get a feel for the level of corporate scandals that pervades our society.

The scandals run the gamut from whales like Enron and WorldCom to the growing trouble within the corporate and consumer insurance industries.

As I write, the attorney general of Ohio, Jim Petro has offered up an 87 page securities fraud class action lawsuit in federal court on behalf of the State of Ohio and all other shareholders in the Federal National Mortgage Association (Fannie Mae), alleging that the mortgage buyer manipulated its earnings to artificially inflate the price of its common stock.

"These defendants manipulated earnings in a fraudulent scheme to deceive investors about Fannie Mae's true financial state. This deception could cost shareholders billions of dollars," Petro said.

The complaint alleges that Fannie Mae and its top executives Franklin D. Raines, J. Timothy Howard, and Leanne G. Spencer artificially inflated the company's publicly traded common stock through false public financial statements. "Because these executives were compensated primarily on Fannie Mae's stock performance, this artificially high stock price allowed the executives to get rich at the expense of the company's shareholders," Petro said.

It seems Krispy Kreme is also stepping up to the plate with recent disclosures that the company has been financing their franchisees to keep them from going out of business.

Krispy Kreme management refused to take questions on its earnings call recently, instead demanding that questions be submitted by e-mail with the answers to be posted later on the company's Web site. Krispy Kreme CEO Scott Livengood cited the "legal environment we're navigating through" as the reason for not taking live questions. Yikes! Could there be a hole in Krispy Kreme's business story that matches the ones in their donuts? If you remember, Krispy Kreme was one of the few companies to go public during the era that was not a technology company made of vaporware. Stay tuned for the latest on the high calorie baker that was run by geniuses (until recently), which seems to have a few holes in its business model.

Several independent analysts predict that during 2005-2006, public firms will accelerate business and IT projects to ensure they are in compliance with SOX and a host of other regulatory edicts, consolidating in a corporate governance office. Firms will seek to optimize compliance processes through IT infrastructure (e.g., business applications, security), and many will also seek to improve business efficiency by using the compliance justification. Industry analyst firm Meta Group concludes a recent worldwide survey stating "by 2007, global compliance will raise control expectations for all multinational firms."

Sarbanes-Oxley compliance costs average $16 million per company and have caused companies like GE to spend a reported $30 million on internal control requirements alone. AIG chairman and CEO Maurice Greenberg recently indicated that the world's largest insurer was spending $300 million a year fulfilling the new requirements.

Deloitte & Touche has rolled out a sustained compliance solution framework as part of an integrated offering that is designed to help organizations move beyond the first year legal requirements of the Sarbanes-Oxley Act of 2002 and achieve sustained compliance.

According to Deloitte, most companies have focused principally on documenting, evaluating, testing, and remediating controls in preparation for the first year internal control reporting requirements mandated by Section 404 of Sarbanes-Oxley.

A recent survey found that 93 percent of corporate IT executives were unaware of their Sarbanes-Oxley compliance responsibilities. Interesting, considering that for the most part all of the money that has been spent has gone to information technology. I guess some people are planning to go to Club Fed next year.

More Stories By Jacques Martin

Jack Martin, editor-in-chief of WebSphere Journal, is cofounder and CEO of Simplex Knowledge Company (publisher of Sarbanes-Oxley Compliance Journal, an Internet software boutique specializing in WebSphere development. Simplex developed the first remote video transmission system designed specifically for childcare centers, which received worldwide media attention, and the world's first diagnostic quality ultrasound broadcast system. Jack is co-author of Understanding WebSphere, from Prentice Hall.

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