The Sarbanes-Oxley Act And
The Freight Transportation Implication
success, fueled by financial fraud was the soup from which the
Sarbanes-Oxley Act of 2002 (SOX) sprung forth. Perhaps driven by a
new business model or old fashioned greed or Wall Streets demands
for short term profits at any cost, manipulated financial
information satisfied all bases. The corporate wreckage and
financial devastation of real people, young and old, rich and poor
that were left in the wake of the schemes looked like a highway
strewn with the destroyed promises of tomorrow.
Viewed from the
highest observation point, it might appear that fraud was the sole
cause, but the significant impact on the general population, the
effects of which were felt around the world, would clearly implicate
complexity and complicity. Certainly, deceit is no stranger to fraud
and this unholy alliance, when coupled with opportunity forms the
essential mix necessary to easily attract opportunistic predators
and investors alike. The combined power of egregious financial
abuse, and the publics aggressive stock purchasing response produced
an environment ripe for global financial devastation. The
significant public losses coupled with the corporate demise of some
of Wall Streets shooting stars demanded swift government
intervention which resulted in the enactment of the Sarbanes-Oxley
Act of 2002.
developed and signed into law rapidly, such uncharacteristic
congressional action seems to have been instantly effective.
Evidenced by such high profile cases like Enron and WorldCom as well
as the continuing revelation of fraud portrayed by the perp walk on
the one hand, and delayed filings by a host of companies on the
other hand, demonstrates the importance that regulators and
prosecutors alike have assigned to protecting the public from
efficient, and timely implementation of the immediate requirements
of the Sarbanes-Oxley Act are facing delays allegedly caused by high
costs. Timely implementation is important in order to properly
address both the spirit and terms of the Act and to overcome the
current delays and associated obstacles alternative methods of
approach need to be identified.
will briefly describe the Sarbanes-Oxley Act of 2002; and discuss
freight transportations unique ancillary capabilities as a timely,
cost efficient and effective resource for exposing and reducing the
potential financial abuses understood by SOX as well as meeting its
Act of 2002
known as H.R. 3763, and enacted by the 107th Congress of
the United States at its Second Session, on January 23, 2002 as An
Act, to protect investors by improving the accuracy and reliability
of corporate disclosures made pursuant to the security laws and for
consists of three (3) preliminary sections which include a table of
contents, eleven (11) titles which comprise 1107 parts or sections;
it is complex and reasonably complete.
Institute of Certified Public Accountants (AICPA) has succinctly
described The Sarbanes-Oxley Act of 2002 as follows:
Sarbanes-Oxley Act was signed into law on 30th July 2002, and
introduced highly significant legislative changes to financial
practice and corporate governance regulation. It introduced
stringent new rules with the stated objective: "to protect investors
by improving the accuracy and reliability of corporate disclosures
made pursuant to the securities laws".
Sarbanes-Oxley was passed in 2002 with the aim of making companies
more financially transparent and better at handling business risks -
a reaction to the financial scandals at Enron and WorldCom.
President Bush, SOX is intended to, "deter and punish corporate and
accounting fraud and corruption, ensure justice for wrongdoers, and
protect the interests of workers and shareholders".
Sarbanes-Oxley was designed to address financial abuse and
accounting fraud for the purpose of protecting investors in public
companies, it has become abundantly clear that many private
companies are changing the composition of their boards as well as
their relevant governance practices. A
January survey by the Foley & Lardner law firm found that, 78% of
the private companies responding have self-imposed corporate
governance reforms. While not adopting all the requirements of
Sarbanes-Oxley, especially those calling for extremely sophisticated
monitoring of accounting and information systems, many private firms
are doing more basic things, such as reorganizing their boards and
having their chief executives certify audited financial statements.
Provisions of Interest
The above descriptions are shared by the general public and
influential corporate leaders alike. In agreement with the general
understanding that, improving the accuracy and reliability of
corporate transparency and disclosure will reasonably achieve the
objectives of SOX, the provisions of Section 404 seem to be
industries current focus and therefore the primary interest for this
white paper. However, all eleven (11) titles of the Act are
important; they should be reviewed and understood by everyone who is
or may become directly involved with their implications. Four (4)
titles and in particular Sections: 302; 401; 404; 409; 802 and 906
speak to compliance and internal control; they appear to engender
the most interest amongst officers and executives.
According to a recent N.Y. Times article (April 17, 2005), all but a
very few executives agree with the importance of Sarbanes-Oxley;
executives are pushing for what they describe as specific changes in
the implementation of the law, while singing its praises in general
terms. Section 404s requirement for
monitoring of accounting and information systems seems to be the
current area of officer and executive complaint.
Section 404 requires management to assess the effectiveness of the
company’s controls and procedures and present a written assessment
to their auditors. The outside auditors are then required to attest
to managements assertions. “404” is also responsible
for ensuring that service providers of any outsourced functions
have: documented their financial processes; carried out a risk
assessment; and have in place adequate controls over financial
reporting which have been thoroughly tested for their effectiveness.
Outsourcing however does not relieve the company of its burden and
therefore, the responsibilities identified in Section 404 can never
be delegated to the service provider by the user organization.
Neither Section 404 nor any other provision of SOX is independent;
they reasonably relate to each other and in some cases rely heavily
upon each other. It can be reasonably assumed that it is not a
coincidence that many of the SOX provisions integrate with the
Securities and Exchange Act of 1934. Clearly, both Sarbanes-Oxley
and the SEC Act of 1934 were the result of real and perceived
corporate abuses. The SEC Act contains many fundamentals such as
definitions of words used by SOX as well as containing the
underlying premises for a number of SOX provisions. Finally, SOX
also modifies and appends a number of provisions in the SEC Act
Section 404 holds a great deal of interest for many executives,
primarily with respect to its cost. As an example, executives at a
recent roundtable hosted by federal regulators in Washington
complained about the high cost of complying with Section 404.
Additionally, several recent surveys prepared by the following
companies support this conclusion and identify the high average cost
of compliance incurred by their respondents:
Financial Executives Internationals study of 217 publicly traded
companies conclude that the average cost of 404 compliance was $4.36
The Big Four Accounting firms (Deloitte Touche Tohmatsu, Ernst &
Young, KPMG, and PricewaterhouseCoopers) survey demonstrates that 90
of their clients spent an average of $7.8 million on compliance.
Perhaps as a direct consequence of these surveys, William McDonough,
Chairman of the SECs Public Accounting Oversight Board said that the
Agency is considering ways to provide guidance on 404 requirements.
While costs will probably drop as companies become more familiar
with 404, there may be other methods of approach that could more
expeditiously reduce the implementation costs of Section 404, and
satisfy the need to timely address the general understanding and
concerns of the Act.
Freight Transportation and Sarbanes-Oxley
you accept the notion that timely and accurate information is the
essence of understanding as well as the basis for compliance, than
extracting data from the corporate transaction stream is a method of
approach that should be considered as an effective alternate means
for solving the current cost complaint. Therefore, minimizing the
number of information sources can immediately reduce the cost of
monitoring the accounting and information systems.
corporate information base that is continuously refreshed with
timely and accurate detailed transactional purchasing and sales data
provides a single source for the rich and robust information
necessary to meet the objectives and purpose of Section 404.
Freight transportation in general; todays
freight transportation paradigm, the freight lifecycle, and the
freight alter ego, are immediately and readily available to
create the required corporate information or knowledgebase.
Terms of Sale/Purchase and Freight Terms, the transportation
transaction stream is highly capable of delivering the required
financial data. Flowing within a company and amongst the trading
partners, the aggregated data forms the
The pervasive license granted to the freight alter ego allows
standard data mining tools, such as those found in
InsourceAudit, to extract the relevant financial data directly
from the transportation transaction stream. To further ensure data
integrity, terms compliance is effectively addressed by
RoutingGuides. As the supply chain engine, freight
transportation also provides access to all of the trading partners
associated, relevant data. Another important freight transportation
resource is its costing ability; its application with respect to
fulfilling some of Sarbanes underlying requirements can be
effectively addressed with information contained in TransportGistics
Cost Accounting white paper. Finally, the
corporate view from the transportation and logistics perspective
offers every enterprise the opportunity to identify and recognize
all of the underlying financial data necessary for SOX compliance.
documentation is highly recommended; it will establish the
understandable basis upon which the compliance program was created;
and serve to provide the necessary confidence that will allow the
officers and executives to place their signatures on all SOX
required filings. Beginning with the documented
transportation purchasing profile, the documented
Terms of Sale/Purchase and Freight Terms, and concluding with
conforming SOX reports, the process will be complete.
Sarbanes-Oxley and the Freight Connection
financial areas contemplated by SOX focus attention on the typical
financial section of a company, such as accounting, finance, and
treasury. However, other areas of exposure exist and can also serve
to address the Sarbanes-Oxley mandates. Specific departmental
budgets, regardless of their size, can at least serve as indicators.
Freight transportation, because of its budgetary rank and its unique
abilities can be both a bellwether and provide the actual financial
data to be used for the intended purpose defined by SOX.
The total freight transportation spend, including other financial
areas such as loss and damage claims, when accounted for properly
can reveal potential financial abuse.
Freight transportation offers collateral financial information areas
that can be used to support the primary data as well as invoked as
an additional control device.
Loss and Damage claims have long been an area for potential
financial abuse. Notwithstanding the total claims dollar value,
claims dollars directly relate to inventory. Abuses can be
identified in a number of ways. As an example, if the claims dollars
exceed their respective inventory value, incrementally by SKU or by
product such imbalance should be considered, at least as a financial
anomaly and require further investigation. Similarly, claims paid by
the carrier, when compared with the respective claimants inventory
could also reveal financial abuse. Discovery of financial error here
can be indicative of the kinds of abuse addressed by Sarbanes-Oxley.
Risk and SOX
Given the attention focused on SOX by the media, and the ongoing
discussions amongst colleagues regarding performance and compliance,
great care must be taken so as not to lose sight of the potentially
grave risk to vulnerability created by the Act. Compliance demands
the development of a corporate information base; its contents would
properly describe the aggregated data as a corporate knowledgebase.
If such information would ever get into the wrong hands it is highly
probable that even the best damage control would be insufficient.
Data security breaches are becoming a regular occurrence; recent
examples such as: Lexus Nexus; Time Warner; and HSBC demonstrate
that even large and purportedly well managed companies have been
compromised. The confidential and essential corporate data and
information required to meet the SOX mandates must be absolutely
protected and controlled by its owners. Clearly, known security
systems have been successfully penetrated, but the corporate
knowledgebase demanded by SOX will require new and innovative
methods, systems and procedures to protect the confidential
corporate essentials. TransportGistics
Convergence white paper suggests that new opportunities and
paradigms can be created by converging like and disparate knowledge
bases and disciplines. Invoking the principles of convergence as
described by TransportGistics offers a proven method of approach in
creating a primary and effective defence against sophisticated
intrusion. In addition to using convergence as a method of approach,
strong consideration should be given to continuous security change.
The Sarbanes-Oxley Act of 2002 is an extremely large blip on the
radar of every company, regulator and prosecutor. All but those
individuals who are currently under scrutiny agree with its purpose
and the reason it was enacted. The primary complaint with SOX is the
alleged cost of implementation. Since the only choice that is
available to a public company is how they implement a compliant
program, finding alternatives that will satisfy the fundamental
requirements is a mission worthy of pursuit.
Freight transportation has long been an invisible commercial and
industrial resource. Its universal data production capabilities are
uniquely capable of creating a rich and robust information base; it
therefore represents a significant opportunity for companies,
regulators and prosecutors alike. Aggressive prosecution of the
financial abuses defined in the Act demand that every company
develop a process whose financial accounting is above reproach and
is capable of withstanding intensive investigation. A universal
corporate information base that provides the companies officers and
executives with a corporate knowledgebase may make it more palatable
for their signatures to appear on their financial reports. The size
of the freight spend together with the unique capabilities of
freight transportation again positions the transportation and
logistics executives in another important corporate role.
we have seen from many of TransportGistics previous white papers,
freight transportation can be a highly beneficial resource in
addition to the mission critical role it is known for. Freight
transportation is common to all companies, but each company is
unique and therefore a specific program must be developed that will
allow the results of efficient and effective transportation,
distribution and logistics management to provide a viable cost
efficient and effective SOX compliant program. TransportGistics,
Inc. has the tools and management experience to assist a company
with the development of highly successful SOX compliant programs. To
learn how TransportGistics can help you develop cost efficient and
effective compliance that utilizes the power and resources of a
professional transportation and logistics system, simply contact
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logistics functions within the supply chain.
TransportGistics commitment to
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partner at the
Center of Excellence in Wireless Internet and Information Technology
at the State
University of New York-Stony Brook.
consider this white paper as a continuum in this subject area,
succeeding white papers will address common issues and address them
with common solutions. We encourage our readers to direct any
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information presented herein represents the opinion of the author, but
not necessarily the opinion of TransportGistics, Inc. This white
paper is not presented as a legal position or as a recommendation.
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