Sarbanes-Oxley Act Basics and ERP Systems

Sarbanes-Oxley Act Basics

From year 2000 to 2002 several large corporate companies are caught in series of frauds in area of financial practices and reporting. Examples of Enron and WorldCom lead to creation of Sarbanes Oxley Law, also called as SOx and known as  ‘Public Company Accounting Reform and Investor Protection Act’ (in the Senate) and ‘Corporate and Auditing Accountability and Responsibility Act’.

The SOx Act was activated in year 2002. The Act was named after Paul Sarbanes and Michael G Oxley who sponsored and helped in creating this law to implement stricter controls for companies financial reporting, auditing and corporate responsibility.

Reason for the Act and its implications

The SOx (Sarbanes Oxley Act) act was created in response to the financials frauds of Enron and WorldCom companies. The Act applies and puts in place stricter controls for all publicly listed companies in US as well as it applies to all companies the audit US based publicly listed companies. The Act does not apply to private companies.

Securities and Exchange Commission is accountable for checking that public companies adhere to SOx compliance, rules and regulations. Additionally the Public Company Accounting Oversight Board is helping to ensure the accounts auditing firms are doing their roles correctly and independently ensure SOx compliance of companies audited by them.

The SOx Act has eleven sections with several sub sections detailing each section. The sections are focused on Public Company Accounting Oversight Board, Auditor Independence, Corporate Responsibility, Enhanced Financial Disclosures, Analyst Conflicts of Interest, Commission Resources and Authority, Studies and Reports, Corporate and Criminal Fraud Accountability, White Collar Crime Penalty Enhancements, Corporate Tax Returns and Corporate Fraud and Accountability.

The Key Implications of SOx Act are,

Section 302 – Corporate responsibility for financial reports: Requires the CEO and CFO to be fully accountable and responsible for financial reports accuracy. It requires both officers to be responsible for internal controls that enable full transparency, accuracy and timely reporting of changes affecting financial reports. It also requires the officers to highlight any gaps in the internal controls and required corrective action.

Section 401 – Disclosures in periodic reports: Asks for full transparency of financial reports on period basis (e.g. quarterly). It requires companies to submit financial reports with full clarity on deviations like off balance sheet transactions reporting.

Section 404 – Management Assessment of Internal Controls: Focuses on defining the internal control measures and responsibility for internal controls implementation and day to day use. It also requires an audit and information on yearly basis of the effectiveness of the internal controls being practices by the organization.

Section 409 – Real Time Disclosure: Requires companies to do real time disclosure of change in financial situation due to material and operation changes in the company.

Section 802 – Criminal Penalties for altering documents: Defines the penalties for companies for altering financial documents, document/transaction audit logs and alteration of audit results.

Section 806 – Whistleblower protection: Empowers employees in organization to be able to report back on any fraudulent activities by protecting them.

How does MySAP ERP meet these implications

MySAP ERP is created based on leading industry best practices that meet, suite and support company needs from process automation to compliance to creating transparency and control. The solution helps companies to deploy industry standard internal controls that help companies to practice and comply easily.

SOx require companies to be faster, timely, accurate and transparent in their financial reporting and accounting practices. My SAP ERP is helpful in enabling companies to achieve above with industry standard processes and automation tooling.

MySAP ERP has internal control management sub module that helps in business process modeling, internal controls documentation and identifying improvements required in any control processes. It makes available management reports and dashboard that help C-level executives to check the state of accounting and internal controls used. This helps in enabling SOx compliancy for Section 302 – Corporate responsibility for financial reports and Section 404 – Management Assessment of Internal Controls.

MySAP ERP provides fully configurable financials and accounting module that helps organisations to setup their organisation structure and reporting flexibly. The general ledger in MySAP ERP helps in full transparency and disclosure. Its available in such a way that using one information source, multiple reports can be generated which could be suitable for various needs like legal and management reporting. It helps companies to have periodic, timely, accurate and transparent reporting. This helps in enabling SOx compliancy for Section 302 – Corporate responsibility for financial reports, Section 401 – Disclosures in periodic reports and Section 409 – Real Time Disclosure.

MySAP ERP has a sub module available for capturing whistle-blower complaints. The sub module helps employees to send messages about accounting irregularities noticed, directly to the audit committee using electronic form which can also be made anonymous if required. This helps ensure whistleblower policy can be enabled with ease and with employee protection while keeping the company focus on improving the accounting practices. This helps in enabling SOx compliancy for Section 301 – Public company audit committees and partly Section 806 – Whistleblower protection.

MySAP ERP helps deploy stronger internal controls and segregation of duties by creation of authorisation profiles that restrict users to specific roles and transactions in the system. This helps in ensuring strong authorisation control and prevention of possible miss use of data due to clear visibility of segregation of duties related conflicts. All in all it helps improve audit compliance and reinforcement of controls and governance. This helps in ensuring compliance for SOx Section 802 – Criminal Penalties for altering documents.

MySAP ERP has an in built audit information system, that allows internal and external independent auditing firms to do structured audit reviews. The system has preconfigured set of reports and activities that help auditors go through to validate required compliance as well as find out gaps and improvements. This helps internal and external SOx auditors in performing relevant audit checks in a structured manner.


Financial Accounting Basics and ERP Systems


Financial accounting and reporting needs at high level are still the same and basic transactions and calculations required by all companies are also similar. The growing globalization of businesses and cross country, overseas business handling has created some complexity as well as need for more standardization in reporting for international companies. Needless to say that for several countries there are still their own local legal accounting and business needs that has to be complied by the companies operating internationally.

On one hand for publicly listed and traded companies the shareholders require full transparency and standardized reporting of their financials that are audited by independent auditors and are accurate plus trust worthy. On other hand the international companies still have to deal with the complexities of import, export, taxes, and local fiscal requirements fulfillment.

This leads to need of enterprise wide resource planning system that can bring together all functions and related transactions of production, purchasing, supply, sales and internal organization operations costs. This is more and more required by all companies having international presence, by international it means operations and sales in more than 1 country.

Let’s initiate with understanding of financial accounting needs of companies and then move towards the international legal and compliance needs followed by how MySAP ERP can help in meeting the required needs as well as what needs to be taken care for implementation.

Classification of Accounting

Accounting of companies and enterprises are done using two broad categories namely Financial Accounting and Management Accounting. Financial Accounting is outward focused to meet the needs and standards of outside world (e.g. Shareholders, Legal, International Accounting practice standards etc.)

Management Accounting focuses inwards on company financial reporting needs internally. This helps give financial overview in terms of reports at various levels of the organisation. Management accounting helps companies keep track of internal spending, cost allocations and cost controls.

Why Accounting is classified

The Accounting information is classified in two broad categories to ensure that the Organisations use standard accounting practices for reporting their costs and revenues in a standard way that can be understood by shareholders, customers and society in one standard way. On the other hand, given the globalization and growing needs of the companies to expand, it’s essential to have some flexibility for companies to be able to manage their internal costs and revenue reports as per their business needs.

Classification helps companies to use one standard reporting practice for outside world while having the flexibility to arrange internal financial reporting as per their own needs in various businesses and locations.

What Activities Are Undertaken in Accounting

The accounting information is classified and required to accurate, up to date and in required standard industry format to be able to present it to outside world as well as for the company to practice it effectively for internal accounting with full transparency.

For Financial Accounting to work effectively the key activities and features required are,

  • accounts receivable and payable transactions management in the general ledger
  • company’s assets management and accounting to handle assets registration and depreciation
  • Banking Transactions, Cash and Funds Management of the company
  • Consolidated financial reporting with full drill down to details of each section of the report as per industry and government standards.

For Management Accounting to work effectively the key activities and features required are,

  • Cost centre accounting and management for the ability to track internal organization’s respective department costs
  • Profit centre accounting and management for the ability to track company’s profit and loss details at various levels of the organization
  • Profitability Analysis and Reporting for the ability to review company’s profit at various levels of the organization.
  • Product costing analyses to be able see actual product costs which can help in deciding products price.

What Feature MySAP ERP has to meet the Accounting Requirements

MySAP ERP has two modules in financials management for companies. One of them is Financial Accounting (FI) focused on company’s external sales and legal reporting needs. The second module is Controlling (CO) focused on company’s operations management and internal management reporting needs. Controlling module helps company’s management in effective planning and decision making.

The seamless and real time integration of financial management modules with other modules like sales and distribution, material management, logistics, human resource management etc. makes MySAP ERP a top leading system for enterprise resource planning.

Financial Accounting (FI) Module

The FI module is made up of several sub modules that help cover the needs of financial accounting based on industry standard – best practice processes. The FI sub modules with brief features are described below.

General Ledger – Accounting postings are recorded from various modules using General Ledger. The postings are real time and latest with full audit log details.

Special Purpose Ledger – For any financial records from external applications to be accommodated, MySAP ERP has special purpose ledger that can be used to capture data and make them available for reporting and analysis purposes.

Accounts Receivable – This sub module focuses on financial postings and records management resulted from customer sales. General Ledger is auto updated for every posting.

Accounts Payable – This sub module posting generated from supplier / vendor purchase activities. General Ledger is auto updated for every posting.

Asset Accounting – As the name suggest the sub module is used for fixed assets management. It allows comprehensive configuration and setup for assets of all types and their depreciation methods.

The financial accounting module also has sub modules that help in travel related transactions, banking transactions, funds management and consolidation (reporting of financial statements in required consolidated way.

Controlling (CO) Module

The CO module is made up of several sub modules that help cover the needs of internal company management reporting and operations management. The CO sub modules with brief features are described below.

Cost Center and Cost Element Accounting – This sub module helps in capturing all costs incurred by a department within a company. Cost Centers are assigned to various departments in an organization. Cost center are assigned to Cost Elements that capture the sub details of costs incurred.

Internal Orders – This sub module is used for detailed level costing and collection of costs spend on internal tasks.

Profit Center Accounting – This sub module is used to check company’s profit and loss visibility. Profit centers in a company are setup for production lines (like factories), geographic business divisions. Profit Centre enables company’s management to have internal controls and reviews. Profit centers show the cost and revenue balance.

Product Cost Controlling – This sub module helps in analyzing product cost details and helps the organization to decide on product pricing based on costs. Product Costing has two sub sections that help in product costs analysis based on costs object controlling and actual costing.

Profitability Analysis – This sub module helps in bringing full visibility on company’s or specific business division’s profit. The analysis can be done using two methods namely Cost based analysis and Account based analysis.

Activity-Based Costing – This sub module helps in identifying the costs source and the driving process. It helps in having a process oriented view for cost centers.

Convergence from Technology to Life – Part 1

We just completed a decade in the Millennium. In this 21st century; technology is playing key role in changing lives in every part of earth. I bet you to pick up any sector, any field of expertise, any job everything is touched by the automation and technology. Specially the Information technology is playing the key role in the everyday changes and is also responsible for the speed of change we all are experiencing day in day out.

Let’s talk about a few areas of our daily life and see how technology and especially information technology is enabling the change as well as a little glimpse of where the future is taking us.

Let’s start with communications. In 1990s we started using mobile phones which gave us an ability to be able to reach out to people as and when we need and every individual could hold one or more telephone numbers. Great leap in making communications speed up and ability to reach people much faster. On one side it helped everyone have their own communications device, although initially not everyone could have one but eventually it spread like utility service and became the need for everyone to have one phone at least. The mobile phones then took a leap in early 2000 to become smart phones to be able to do more than phone functions, like playing music, receiving emails, having calculators, calendars, contact books with more detailed information of individuals. This further enhanced with in few years of last decade to become as powerful as a laptop and also it continued to enhance its processing and storage capabilities to the level that its able to run most of the laptop functions. Today it has enhanced to the extent that it can be used like a mini PC/laptop to do automation activities. Its still not over as it continues to converge itself to be able to do even more sophisticated things that we couldn’t even do with our laptops as these services would only make sense on the mobile device, things like GPS navigation, GPS Image location tagging, Picture scan to know where we are and future unveils that soon we would be able to point our mobile device cameras to any location, landmark on the road and it would bring real time information about that location and possible services, promotions, businesses that exists in that location. Gone are the days of needing a yellow page, green pages to browse for business listings, its an online world where we need the information real time and its of value only when its real time available.

Let’s look at another example and this time focus on entertainment, let’s take TVs for example which are converged from small size CRT displays to large size plasmas to long lasting LCDs and now even more slimmer LED TVs. The core function of the TV has also enhanced itself from playing TV stations, to movies, to games, to photos, to music and now comes the time to bring the TVs to be Online connected to internet. The new ranges of TVs come with internet connection and possibilities to use them for internet browsing, live videos and movies streaming from internet. On one end the current LED TVs are bringing a very high end rich experience of HD images and 3D viewing right at your home then on the other end the convergence and disruptive innovation continues to evolve. The TVs are destined to converge fully using the latest lighting solutions, the Laser rays and Projection devices. The TVs as big size display device in a home will converge to a small size palm device projecting an High Definition Light Displays.