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Compliance Journal: Article

Sarbanes-Oxley: The New Rising Star

Sarbanes-Oxley: The New Rising Star

Ineffectual corporate management has given a great gift to programmers, system administrators, and CIOs - endless corporate accounting scandals. Our federal government has not missed this scandalous behavior, as they have passed an extraordinarily strong, far-reaching law to contend with financial fraud.

Officially it's called the Public Company Accounting Reform and Investor Protection Act, but it's more commonly known as the Sarbanes-Oxley Act. Designed to keep corporate managers honest, the Sarbanes-Oxley Act rewards dishonesty with a 10- or 20-year prison sentence for CEOs and CFOs. It also has a provision for taking any and all ill-gotten gains from a dishonest executive. There are approximately 14,000 publicly traded companies in the U.S.

Recently, the Securities and Exchange Commission (SEC) charged Jeffrey Skilling, the former president and CEO of Enron, with fraud. The SEC is seeking to seize all of his ill-gotten gains and permanently bar him from acting as a director or officer of any publicly held company. On top of that, he is facing a maximum of 325 years in prison and hundreds of millions of dollars in fines. Considering that Andrew Fastow, who reported to Skilling at Enron, got off with 10 years in prison and forfeited $23 million in cash and assets, this is serious stuff!

Executives are now directly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting. The reports must contain a written assessment of the effectiveness of the internal control structure and procedures of the issuer with regard to financial reporting, as of the end of the most recent fiscal year of the issuer.

To put this in perspective, the average billion-dollar company has about 50 disparate financial systems running at any given time, some of which have been running for more than 30 years. Remember Y2K, with all of those old systems designed in the 50 years after World War II? The designers didn't anticipate ever needing to factor in the century change. Starting June 15, 2004, you need to ensure that everything coming out of the old mainframes, client/servers, and new application servers is correct and adds up perfectly.

Adding to the complexity of the corporate information-technology topology is the fact that most of them are running two or three enterprise resource planning (ERP) systems. These take years to install and configure - and no one can guarantee that any ERP system is 100% on the money 100% of the time.

The icing on the cake is that about 50% of the time this information is output to an Excel spreadsheet, opening the door for endless misinterpretations and mistakes.

Sarbanes-Oxley compliance is very different from Year 2000 readiness. With the Y2K fire drill all you needed to do was get the computer to roll over on January 1, 2000, and not shut off or miscalculate. Y2K was a one-time event - and there was no Y2.1K. Sarbanes-Oxley compliance is an every-day, every-hour issue that must be rolled up into a tight, neat package every three months to support the quarterly financial statements.

For a company to comply with Sarbanes-Oxley, the accounting, financial management, and legal departments all ultimately funnel their data through information technology, which opens issues as to the completeness and accuracy of every code fragment and algorithm in every project.

White-shoe law firms, the large accounting firms, and a myriad of management consultants have all begun Sarbanes-Oxley practices. In Silicon Valley and other technology hot spots, venture-funded Sarbanes-Oxley software companies are beginning to appear with increasing regularity.

A good example is Nth Orbit, which is offering a product called Certus that provides a systematic approach to compliance. Their lead investor is Sequoia Capital. Sequoia was an early investor in and worked with Cisco Systems, Yahoo!, Redback Networks, Google, Network Appliance, Cypress Semicon-ductor, Vitesse Semiconductor, Apple Computer, and Oracle. These are not stupid people! Merger and acquisition activity is also beginning in this space, exemplified by EMC's recent purchase of Documentum. And there is an entire magazine dedicated to Sarbanes-Oxley compliance - the Sarbanes-Oxley Compliance Journal (www.s-ox.com).

The Sarbanes-Oxley Act is changing the way the business world operates. High-quality staff, automation, and processes will be a must-have for all public companies. The long-term payback will ultimately be a significantly higher level of awareness and controls that will produce more stringent business processes throughout business units reporting to their corporate parents.

Sarbanes-Oxley will make the astute programmer, system administrator, and CIO indispensable within their organization. These positions cannot be rationally offshored or outsourced; the personal risk to the people running the corporation is too high. The requirement to attest that the systems are working as intended and described is so intense that only a madman would send this work halfway around the world to save a couple of bucks.

More Stories By Jacques Martin

Jack Martin, editor-in-chief of WebSphere Journal, is cofounder and CEO of Simplex Knowledge Company (publisher of Sarbanes-Oxley Compliance Journal http://www.s-ox.com), an Internet software boutique specializing in WebSphere development. Simplex developed the first remote video transmission system designed specifically for childcare centers, which received worldwide media attention, and the world's first diagnostic quality ultrasound broadcast system. Jack is co-author of Understanding WebSphere, from Prentice Hall.

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