The SarbanesOxley Act and its Effect on Purchasing

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The Sarbanes-Oxley Actand its Effect on
Purchasing

• Carl Liles, C.P.M.
• Director of Enterprise Management
• Western Farmers Electric Cooperative
• Anadarko, OK
• c_liles_at_wfec.com

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Sarbanes Oxley Act of 2002

• Due to corporate scandals and accounting
  misdeeds, the Sarbanes-Oxley Act was enacted July
  30, 2002
• Designed to restore trust in U.S. corporations
  and markets
• Effect on public companies are significantperhaps
  private companies as well
• Most significant legislation affecting the
  accounting profession since 1933

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Not everyone in corporate America is
ethical! (Enron WorldCom)
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When you are deep in trouble, say nothing, and
try to look inconspicuous...
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The Sarbanes-Oxley Act (Public Law 107-204)
impacts

• Publicly traded companies
• Accounting firms
• Auditors of a publicly traded company
• Auditors for a publicly traded company
• Any CPA working in the management area of a
  public company

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The Sarbanes-Oxley Act (Public Law 107-204) may
indirectly impact non-profit companies

• Provisions relating to penalties for obstruction
  of justice (document destruction whistleblower
  retaliation) apply to non-profits
• By voluntarily adopting principles of the Act
  related to good governance practices
• External forces auditors, RUS, members,
  creditors, directors, accreditation or rating
  agencies (ex. DB)

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Section 401a

• Requires the listing of off-balance sheet
  transactions and obligations
• Requires disclosure of the nature and business
  purpose of the off-balance sheet arrangements,
  why and how they are needed in running a business

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Section 401a
Examples of off-balance sheet obligations that
MAY need to be accounted for

• Long-term purchase agreements
• Used to ensure a reliable source of goods and
  services.
• Many public companies are moving their direct
  materials programs to vendor managed inventory
  systems which are controlled by LTPAs.
• Section 401a clearly requires a time-phased
  listing of obligations (Year 1, 2, 3, etc.) in a
  tabular format specified by the SEC.

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Section 401a
Examples of off-balance sheet obligations that
MAY need to be accounted for

• Cancellation restocking charges
• Most LTPAs include these clauses.
• The SEC intent on this is not clear.
• A company suffering a major downturn and paying
  restocking and/or cancellation charges would
  probably find it very difficult to defend not
  listing these as off-balance sheet obligations.

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Section 401a
Examples of off-balance sheet obligations that
MAY need to be accounted for

• Lease agreements
• Capital and operating lease agreements must be
  accounted for.
• Includes fees for early termination of agreements.

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Section 404

• Calls for the creation maintenance of viable
  internal controls
• Includes policies, procedures, training programs,
  other processes beyond financial controls
• Must document test the accuracy of the controls

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Section 404
Examples of inadequate process controls that may
require corrective action

• Insecure and unreliable communications
• Many companies use e-mail to communicate a
  majority of purchasing, inventory and planning
  information to their suppliers. This includes
  attaching documents to these e-mails. Chronic
  security breaches virus-caused disruptions will
  make it difficult to claim adequate communication
  control.

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Section 404
Examples of inadequate process controls that may
require corrective action

• Poor purchase commitments visibility
• Many companies do a poor job of maintaining valid
  open purchase commitments visibility. The best
  evidence of this is an examination of open
  purchase commitments with a past-due date. The
  dollar value of these past-dues can be
  significant and frustrate finances efforts to
  forecast cash requirements.

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Section 404
Examples of inadequate process controls that may
require corrective action

• Inventory write-offs
• Poor practices around forecasting, vendor
  collaboration and end-of-life product management
  often result in excess and obsolete inventory
  being written off. Many companies struggle in
  projecting the magnitude of the write-offs as
  well. Companies will need to demonstrate that
  they have implemented formal process controls to
  minimize and forecast excess obsolete inventory.

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Section 409
Requires the timely reporting of material events
that impact financial reporting. Timely has
been interpreted to mean two working days. Once
a company declares a material event, it must
document a permanent corrective action before it
can claim to have adequate process controls under
Section 409.
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Section 409
The following events may meet the reporting
threshold

• Late supplier deliveries
• A supplier suffers a major disruption in a
  sole-sourced item. That causes the supplier to
  notify you that it will fail to ship on time,
  reducing your ability to meet revenue
  projections. You should report the material
  event immediately and not wait until shipment
  dates are missed.

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Section 409
The following events may meet the reporting
threshold

• ERP system crashes
• A company replaces and consolidates a variety of
  legacy ERP/planning systems with an ERP system.
  On the go live date, various glitches shut down
  the system disrupting construction and
  maintenance activities that hinder or disrupt the
  delivery of electrons.

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Section 409
The following events may meet the reporting
threshold

• Poor inventory accuracy
• A company takes its annual physical inventory and
  the resulting adjustments show the inventory to
  be financially overstated/understated with
  significant quantity imbalances. The imbalance
  results in excess/insufficient inventory levels
  which can affect the co-ops financials and
  perhaps disrupt the delivery of electrons.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• Role of Board
• Board should oversee the operations of the co-op
  in a manner that will assure effective ethical
  management.
• Importance of Independent Directors
• The independent non-management board members
  should b used to assure the exercise of
  independent judgment in key committees general
  board decision-making.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• Audit Committee
• Composed solely of independent directors to
  assure the independence of the co-ops independent
  auditors, review the critical accounting policies
  decisions, the adequacy of internal control
  systems, oversee the accuracy of financial
  statements reports.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 4. Governance Nominating Committees
• One or more committees composed of independent
  directors that focus on governing documents
  criteria, evaluation nomination of directors
  appropriate board size, leadership, composition,
  committee structure codes of ethical conduct.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 5. Compensation Committee
• Composed of independent directors that determines
  the compensation of the CEO determines or
  reviews compensation of other executive officers
  and that compensation decisions are tied to the
  executives actual performance in meeting
  predetermined goals and objectives.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 6. Disclosure Integrity of Information
• Financial information disclosed should be
  accurate complete should fairly reflect the
  condition of the co-op be presented in a manner
  that promotes, rather than obscures
  understanding. CEOs CFOs should be able to
  certify the accuracy of informational disclosures
  and the adequacy of the co-ops internal controls.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 7. Ethics Business Conduct Codes
• Adopt implement ethics business conduct codes
  applicable to directors, senior management,
  agents, and employees that reflect a commitment
  to operating in the best interests of the members
  and in compliance with applicable law, ethical
  business standards, the co-ops governing
  documents.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 8. Executive Compensation
• Executives should be compensated fairly in a
  manner that reflects their contribution to the
  organization. Compensation cant include loans,
  but can include incentives that correspond to
  success or failure in meeting performance goals.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 9. Monitoring Compliance Investigating
  Complaints
• Co-op should have procedures for receiving,
  investigating, taking appropriate action
  regarding fraud or non-compliance with law or
  organization policy, should protect
  whistleblowers against retaliation.

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Ten Governance Principles of SOX for
Consideration by Nonprofit Organizations

• 10. Document Destruction Retention
• Co-op should have document retention policies
  that comply with applicable laws are
  implemented in a manner that does not result in
  the destruction of documents that may be relevant
  to an actual or anticipated legal proceeding or
  governmental investigation.

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CONCLUSION
It is only prudent for supply professionals to
keep the communication lines open with your
auditors, accounting staff, corporate counsel,
statewide organization, and NRECA to receive up
to date information and interpretations of the
Sarbanes-Oxley Act and its future impact.
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REFERENCES
Guide to Nonprofit Corporate Governance in the
Wake of Sarbanes-Oxley, ABA Coordinating
Committee on Nonprofit Governance 2005 The
Impact of the Sarbanes-Oxley Act on Supply
Management, Anthony Tarantino, Ph.D., C.P.M.
2004 Personal interviews with WFECs Brian
Hobbs, General Manager of Legal Services and Jane
Lafferty, Chief Financial Officer Sarbanes-Oxley
Act of 2002 HR3763 - 2002
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The End ...Any Questions?