Accounting and Taxes | "Accounting and Tax" Archive

Got SOX under control? Words encourage, deeds inspire

By C. Franklin Spasoff
for Virginia Business
March 1, 2007

We are often asked what factors have the greatest impact on internal controls. What drives an organization to set up and maintain an effective and balanced system of controls? Of the many elements involved in creating a superior system of controls, the tone at the top of an organization, meaning the words, actions and commitment of senior management, is most vital. Consider recent history.

December 2006 was the fifth anniversary of Enron’s Chapter 11 bankruptcy filing. Trading at $85 per share in 2000, Enron’s stock was at $0.25 the day prior to the bankruptcy filing in 2001. Enron’s bankruptcy marked the beginning of a string of high-profile corporate failures and scandals that went on to include WorldCom, Adelphia, MicroStrategy and Tyco. As a result, new laws were enacted to restore public confidence. The Sarbanes-Oxley Act of 2002 and related rules required corporate America to make costly revisions to their systems of governance and internal controls. While each scandal was different, they all had one similarity — there was a breakdown among the C-level executives (i.e., CEO, COO, CFO, Chief Accounting Officer, etc.) that led to wrongdoing.

Each company had ethics policies in place and internal materials that stressed the organization’s values — including integrity. All of the right things were said in writing, so it appeared that management was sending the right message. But management’s actions did not match their words, and this information wasn’t evident to outsiders until it was too late.

But what about management and key employees inside these companies below the C level? Some had knowledge of the activities of the executive team, while most had at least an awareness that the executive team’s actions belied and ultimately undermined their tone-setting words. Does your immediate supervisor consider ethical conduct important? Does he or she act accordingly? Does your company’s management? Asking employees these few simple questions can tell someone a tremendous amount about the tone from the top.

When disconnects between executives’ words and deeds occur, they place tremendous strain on line management and test the resolve of the rest of the organization. The inability of the C-level executives to act appropriately and in a manner consistent with their company’s stated vision and tone represents a failure of leadership at the highest levels.

Perhaps you’re reading this article thinking, “I don’t work for a publicly traded corporation, how does this relate to me?” In many cases, we see private companies as well as not-for-profits and governmental entities adopting SOX-like internal control systems as a best practice measure for their organization.

Senior management of any organization holds the key to an effective system of controls. In setting the proper tone, executives’ words encourage, but it is their deeds that can inspire people to act. As management, if there is a disconnect between your words and deeds, employees will be inspired to follow your deeds. Saying the right thing is easy, doing the right thing is harder. Failing to do the right thing jeopardizes the existence of your organization.

Management must commit in words and deeds, including resources, to set up and administer good governance and internal control systems. Organizations large and small can have well-documented control systems. Staff members can be trained to routinely identify and resolve problems. Internal and external auditing can measure adherence to policies and procedures to improve controls, efficiency and profitability.

Do the right thing. Let your deeds inspire. Set the right tone. Give your team the tools and support they need to protect and promote your organization’s health. The payoff of the right action by top management is a good control system, well-operated by your team and capable of supporting a more effective and successful organization.

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Frank Spasoff, CPA, designs internal control systems, provides internal and external audit services, assesses risk management and consults on corporate governance and Sarbanes-Oxley. He is a partner in the Northern Virginia/Greater Washington office of Cherry, Bekaert & Holland L.L.P., and can be reached at fspasoff@cbh.com.