The Impact of Sarbanes-Oxley on Supply Chain Management

The financial accountability law offers an opportunity to elevate the importance of Supply Chain to the C-level suite


When the Sarbanes-Oxley act (SOX) was signed into law on July 30, 2002, it changed the way executives at nearly every public company thought about their business. While SOX gained attention in 2003 and 2004 for its focus on financial and accounting issues, the focus in 2005 has shifted to other functional areas such as Supply Chain, Human Resources and Information Technology. Looking toward 2006, it is clear that this trend will continue, and for supply chain leaders, the time is right to establish an active role in your company's corporate governance strategies.

As we know, SOX legislation was enacted in response to the serious misconduct of the 1990s, which had a profound impact on institutional and private investors' 401(k) accounts. The legislation has brought the need to have transparency in financial statements to the forefront of corporate issues. For publicly traded companies listed on U.S. exchanges, there are three primary areas addressed by SOX:

  1. Internal process controls (Sections 302& 404): Calls for the creation and maintenance of viable internal controls.


  2. Off-balance sheet obligations (Section 401a): Requires the listing and disclosure of off-balance sheet transactions and obligations.


  3. Timely reporting of material changes (Section 409): Requires the timely reporting of events that materially impact financial reporting.


The Issues and Implications for Supply Chain Leaders





Are Your Processes Under Control? (Section 404)



  • Inventory and Fixed Asset Reconciliation and Inventory Write-offs: Accurate and timely accounting requires a systematic and consistent review of materials to ensure that the material is physically there and that the inventory value is correct and accurately represented within the accounting system.

    Because CEOs and CFOs must validate financials quarterly, the law significantly raises the importance of inventory reconciliation as well as the pressure on executives to accurately account for their inventory. Traditionally, inventory reconciliation has been done on a yearly basis. Under today's compliance laws, however, processes must be in place to confirm that what a company says it owns each quarter is truly in its possession. For example, if a company says it has $40 million in inventory but can only definitively account for $35 million, it will have to make an adjustment and write off $5 million for the quarter. The underlying process generating this discrepancy also needs to be investigated and corrected.

    There have been some cases in which a company will conduct a physical inventory and find that a particular machine is obsolete. If this obsolescence is not communicated to Accounting, the asset will remain on the financial statements at an inaccurate value. In some situations the value may have decreased based on market conditions, which should be shared with Accounting in order to adjust the value of the asset if necessary.

    Another example of an inventory valuation issue is when a company is carrying a raw material, work in process or finished goods inventory and the asset or a key component of the asset drops in value. Carrying original cost without devaluing or adjusting to the new, lower market value leads to inaccurate financial statements.


  • Material Transfers and Poor Inventory Accuracy: As more and more supply chain leaders are being asked to assume responsibility for materials management, internal procedures and controls are being scrutinized to ensure inventory accuracy. When organizations operate in a lean environment, inventory control often takes a backseat. Too often material transfers are not processed in a timely manner and a true "inventory to records" situation is difficult to achieve. Under SOX, all movements of inventory or fixed assets must be recorded in a timely fashion given their definitive financial impact.


  • Segregation of Duties in the Procure-to-pay Process: While many companies have fundamentally sound policies and procedures in place that segregate the duties of receiving, order placement, invoice processing and establishing vendor masters, supply chain executives need to ensure that adequate approval processes and procedures are also in place to help ensure that fraud or theft will not occur. Furthermore, they need to document the controls and completed testing to validate that these controls are working.


  • Viable SCM Processes: SCM organizations utilize numerous tools to either assist or monitor the execution of company expenditures. These include, but are not limited to, procurement cards, e-procurement and blanket order releases. To be SOX compliant, companies must establish adequate controls to monitor expenditures and to ensure transactions have appropriate approval authority.
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