Sarbanes-Oxley is a law passed in 2002 by the U.S. Congress in response to a series of accounting scandals that impacted several major corporations. The act contains a number of sections, or titles, that require certain activities related to registering with the Public Company Accounting Oversight Board (PCAOB), as well as requirements related to financial disclosure of senior management’s stockholder transactions (Table 1). There are significant criminal penalties for a failure to follow the act’s regulations.
Lean Six Sigma practitioners can help their organizations increase their Sarbanes-Oxley process compliance by using various tools within the Design for Six Sigma IDOVI [Identify, Define, Optimize, Validate, Incorporate] roadmap. These tools can be used to create an accounting system that will ensure compliance.
|Table 1: Key Elements of the Sarbanes-Oxley Act of 2002|
|Title I – Public Company Accounting Oversight Board||Board registration, auditing, quality control and independence standards and rules|
|Title II – Auditor Independence||Services that are outside the scope of auditor practice as well as conflicts of interest|
|Title III – Corporate Responsibility||Corporate responsibilities and rules for professional attorneys, as well as improper audit influence|
|Title IV – Enhanced Financial Disclosure||Transactions of senior management as well as major stockholders and the disclosure of auditing committee financial experts|
|Title V – Analysts Conflict of Interest||Responsibilities and requirements of security analysts by registered securities associations|
|Title VI – Commission Resource and Authority||Authorization of appropriations and federal court authority|
|Title VII – Studies and Reports||General Accounting Office (GAO) of public accounting firms and enforcement actions|
|Title VIII – Corporate and Criminal Fraud Accountability||Criminal penalties for altering documents or defrauding stockholders|
|Title IX – White Collar Crime Penalty Enhancements||Criminal penalties for mail and wire fraud|
|Title X – Corporate Tax Returns||Signing of corporate tax returns by chief executive officers|
|Title XI – Corporate Fraud and Accountability||Increased criminal penalties for tampering with records|
Setting the Standards
Before working on a system to ensure compliance, it is important for practitioners to review the environment in which the Sarbanes-Oxley Act functions, including the accounting standards that are created and published by several independent, but integrated, accounting organizations (Figure 1). A critical organization is the Financial Accounting Foundation (FAF), which consists of members of the Financial Accounting Standards Board (FASB), as well as the Governmental Accounting Standards Board (GASB).
FASB sets accounting and reporting standards for non-governmental organizations and the GASB sets accounting and reporting standards for state, local and national governmental organizations. FASB also oversees the Financial Accounting Standards Advisory Council (FASAC), which deploys committees to address various accounting issues. There are also numerous member organizations of FASB.
Improving the Process
Although not immediately apparent, these integrated oversight organizations, as well as their numerous rules and regulations, are a set of integrated process workflows. These workflows have many of the problems found in any process. As a result, Lean Six Sigma methods are directly applicative both in analyzing a current process and in designing various accounting systems, especially in an environment containing several information technology (IT) platforms.
As an example, an organization could use Lean methods to directly compare its current work activities with an idealized and compliant Sarbanes-Oxley process. The goal of this analysis would be to simplify, standardize and mistake-proof work operations within the accounting process to make them compliant.
On the other hand, DFSS methods can be used to design an accounting process to ensure it is Sarbanes-Oxley compliant. This is especially important in organizations with numerous legacy systems or disparate accounting platforms. In addition, the Sarbanes-Oxley Act has numerous requirements relative to the disclosure of financial information and reporting to prevent accounting fraud, for which the design of audit systems is also important. In other words, after the initial application of Lean Six Sigma methods, process standardization and audits will become important to ensure compliance. In this context, the International Organization for Standardization (ISO) quality standards would be useful in ensuring that the accounting process is functioning as required by Sarbanes-Oxley and that its controls are effectively sustained.
Designing an Accounting System
There are several specific Lean and Six Sigma tools and methods that can be useful in helping an organization become Sarbanes-Oxley compliant through the design of their accounting system (Table 2). In the Identify phase of such a project, these tools include a project charter, voice of the customer (VOC), voice of the business (VOB), stakeholder analysis, high-level process maps and communication planning. In the Design Phase, a DFSS team creates detailed specifications and process maps of the required accounting workflows that comprise the overall process. This enables the DFSS team to fully understand how the new system must be designed, including all its information technology (IT) interfaces, and data entry and reporting requirements. In the Optimize phase, the DFSS team simplifies, standardizes and mistake-proofs the newly developed process workflows. The goal is to create simple and robust accounting workflows that self correct, are easy to manage and signal non-compliance if it should occur. The Validate phase confirms that the new process works over a wide range of typical process conditions. Finally, in the Incorporate phase, the control plan is created and strategies to monitor and audit the accounting process are determined to ensure the system will be Sarbanes-Oxley compliant.
|Table 2: Relationship Between Key DFSS Tools and Sarbanes-Oxley|
|DFSS Phase||Major Tools||Purpose|
|Identify||Project charter, voice of the customer, voice of the business, stakeholder analysis, high-level process maps, communication planning||To identify organization needs relative to Sarbanes-Oxley and FASB requirements|
|Design||Detailed specifications, process maps, brainstorming and measurement systems analysis||Fully understand how the new system must be designed, including all its IT interfaces, and data entry and reporting requirements|
|Optimize||Simplification, standardization, mistake-proofing strategies and should-be process workflow||Create the simplest and most robust accounting workflows, which self-correct, are easy to manage and indicate signal non-compliance|
|Validate||Confirm new process controls, update or create work and audit procedures, and train people||Test the new system to ensure it works over a wide range of typical process conditions|
|Incorporate||Control plan, monitoring and audits||Ensure the process is sustainable and Sarbanes-Oxley compliant|