LinkedIn Answers knocks my SOX off!

In the last several weeks I have been thinking about the impact of the 2002 Sarbanes-Oxley legislation on supply chains.   

"SOX" isn't a subject I knew a lot about, so I set out to do some homework.  Fortunately in addition to research tools like Google, there is a fantastic facility within LinkedIn Network that allows you to post questions to not only your personal network of contacts, but to the entire network of LinkedIn members. 

This is an absolutely fabulous resource.  I posed the question on impact of Sarbanes-Oxley to the network and within hours I had numerous emails and online posts from senior VP's at several banks, senior supply chain practitioners, consultants and transportation experts from Hong Kong to the UK.   If you haven't availed yourself of this resource, you are missing a serious business weapon.

Back to Sarbanes Oxley...

The Sarbanes-Oxley Act of 2002 arose out of the financial scandals in large public companies such as Enron, Tyco and Worldcom.   The purpose of this legislation was to restore public trust in corporate America, protect investors from possible fraudulent accounting activities by corporations and establish new accounting standards.  SOX impacts supply chain management by the provision of supply chain data in support of true and accurate accounting practices that SOX enforces on public companies. 

SOX forces companies to keep good records, which in large public companies is already the case.  In smaller companies this can be a much bigger challenge.  As companies struggled to get their hands on their transportation business data, they found that this forensic process allowed them to discover a number of interesting things about their transport costs.

What some thought was a business headache turned out to be a benefit in unexpected ways.

A consultant friend and former colleague wrote me the following regarding his customer experiences:

"Many of the customers I worked with had very little in the way of TMS software that would help to structure their transportation business data.  This was a clear concern for the customers in a number of ways.  First, it meant that anyone could pass themselves off as a transportation agent on behalf of the company and make transactions.  In fact, there was one case where a manager was fired mysteriously just as we started a TMS project.  It  turns out that this person set up their spouse as a trucker in their systems and was able to 'pay' them for freight services.  SOX would prevent this from happening.

Accruals, the payment obligation for transport services after period end, are becoming  much more important with the advent of SOX.  Customer processes for determining the amount  of their monthly accruals have been painful because of all of the systems and methods used to manage transportation.  Since executives have to sign off on the accuracy of their financial statements they are pushing for more accuracy in these numbers.

Customers who have begun to invest in improving their transportation management have  started to realize not only the complexity of their transportation cost structures but have also noticed that they are not passing on their costs to their customers.  For example, one company did a study and found out that their transportation costs were either their second or third highest cost after the cost of materials (varied by division).  They also noticed that as they paid more in fuel surcharges their profit margin shrank considerably or turned to loss on a customer by customer basis. 

No technology or carrier negotiation strategy would mitigate the simple truth that they   needed to change the terms by which they sold to customers.  As a result, they began to pass along fuel surcharge costs in the same way that they were asked to pay for it by their carriers.  In the end, the pass through turned many of their sales at a loss into sales as a profit.  All of this came about due to SOX related questions.  So while SOX is often seen as an deterrent to doing business in this case it actually helped  profitability."

The net effect based on expert input seems to be that while SOX has limited direct impact on product movement and inventory, the quest for data discovery to support the more rigid accounting practices that SOX demands has resulted in companies knowing more about the costs of supply chains themselves.  That knowledge has thus enabled tighter cost control, improved profit margins and reduced fraud opportunities. I'm aware of one white paper on supply chain fraud due out soon.   I'm told it will contain information relative to Sarbanes-Oxley controls.  I'm looking forward to that.

A BIG thank you to all the experts who gave me feedback at LinkedIn and by private email.   Please continue the discussion in the comments section for this article!

Eric

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Comments

[Zale Tabakman (Success Stories)]

I like what you say about LinkedIn Answers.

I have found an interesting approach to LinkedIn Answers.

Every couple of weeks I ask a question about a specific technique in how people become successful. I call them Zale's Success Stories. I a have asked over 40 questions. I get between 20 and 70 answers each time.

Questions have included Time Management, Positive Mental Attitude, Coaching, etc.

And of course one on how LinkedIn helps people succeed.

The stories can be found at
http://www.zaletabakman.ca/stories/

I also have a LinkedIn group where I update the people when a new question has been posted in LinkedIn Answers. At the same time I update them with stories that have been posted.

Take Care

Zale

http://www.LinkedIn.com/in/ZaleTabakman <- An invite to me adds 1,600,000 people to your linkedin network

www.ZaleTabakman.ca

[Frederick Cox (CEO FDC Associates)]

Hello Eric,
I appreciate your insightful words on Supply Chain Fraud, and how, if undetected- and substantial it could adversely affect the accuracy of financial statements, perhaps forcing a re-statement, should the fraud be large enough to be considered to have a "material" financial affect on the statements. I was glad to observe that the PCAOB put greater emphasis on fraud in Audit Standard 5, (AS 5), and I appreciate that this standard sets the bar that ANY likelihood of fraud must be escalated and is not subject to materiality thresholds-- that should get the ball rolling! My firm was swept away in 2004 (like everyone else) with preparing assurances for firms that their process for the direct preparation financial statements was in place, could be relied upon, and would fairly and accurately describe business activity. The aspect of fraud from a financial statement preparation standpoint was reviewed, but underlying fraud in the supply chain or parts inventories was not. At the very least, a risk assessment and limited testing needs to be done to confirm that the likelihood of fraud in these areas is sufficiently remote and that fraudulent activity would be detected. My firm has developed a fraud risk assessment and testing model for this very purpose. The system (PCAOB) works, its time for the full picture of business risks be identified and addressed, which means I agree with AS 5 and the PCAOB for highlighting this area. Thank you for establishing this site and helping to raise awareness in this important area.

[Jeff Ashcroft]

Hello Eric,

Had to get back to you on your SOX query relative to supply chain impact.

One of the hidden potentials with SOX is to support the investment in and implementation of RFID.

This is due to the fact that all systems building up to your financials need to certified as accurate and any system which uses a barcode input is subject to inaccuracy as users may forget to scan the barcode or even scan the wrong barcode.

The below article was written about our recently completed RFID project with Staples here in Canada and on page four you can see some of my input on RFID/SOX.
http://supplychainnetwork.com/?p=100

Hope you're well!

Cheers

Jeff