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back to index backAMERItalk August,  2005

Logistics and Transportation Play Part in Financial Compliance of Corporations

The top corporate officer's seat may seem like a long distance away from the day-to-day operations of the supply chain manager, but that's changing as federally mandated financial compliance requirements increasingly permeate American corporations.

The Sarbanes-Oxley Act (SOX), passed by Congress in 2002 in response to a host of corporate financial scandals such as Enron and WorldCom, has many companies taking a serious look at all their corporate functions that influence spending and financial processes.

Securities and Exchange Commission penalties for non-compliance with SOX can be severe for the chief executive and financial officers of those publicly traded companies who sign off on inaccurate financial statements.

Even supply chain managers "understand this is something you can't push off," said John Hagerty, analyst for Boston-based AMR Research, a consulting firm that tracks the impact of federal regulations on corporations.

The supply chain often plays a significant role in a company's financial success. For example, if an auto manufacturer does not receive its parts on time and has to shut down its assembly line that could result in a huge financial loss to the company.

According to a 2003 study by the Georgia Institute of Technology and the University of Western Ontario, some supply chain failures of corporations caused stock market prices to decrease by as much as 10 percent. The study also revealed that companies with supply chain problems averaged about 7 percent lower sales growth, 11 percent higher costs and a 14 percent increase in inventories.

"The essence behind SOX is that all processes across the supply chain should be clear, consistent and traceable without any scope of manipulation," wrote Satish Panchapakesan, a senior supply chain consultant for Wipro Technologies, in a recent white paper. "All financial figures or transactions should be drillable down to their origins."

Transportation Payments. Thomas Craig, president of LTD Management, a logistics consulting firm based in Pennsylvania, said defaults on so-called "guarantee contracts," such as those involving carriage for ocean transportation, should be included in any corporate SOX compliance program.

Many companies are unaware of how large a role transportation payments management plays in their overall corporate SOX compliance.

Richard G. Langer, senior vice president and general manager of Minneapolis-based U.S. Bank's online transportation payment program PowerTrack, said in a recent interview he generally asks companies three SOX-related questions:

"Who are your carriers?"

"Show me the contracts that govern your trading partner relationship with those carriers?"

"Tell me how much you pay those carriers for which services."

"About 95 percent of companies are unable to accurately or fully answer those questions," Langer said. "We're talking about a huge potential for SOX violations because not only do these companies not know who they are paying, but they have no idea what they might be paying for or how much? The financial controls for many companies need to be tightened."

Langer said PowerTrack provides its 70 shipper-users consistent, automated and documented processes that aid any company in its own SOX compliance efforts. The program provides efficient coverage for complex payment processes such as freight transportation payments.

"We're a bank that offers one of the largest payment systems," Langer said. "We believe it's a core competency for us to provide for our customers in an area that they are likely to have the biggest problems."

A number of other supply chain tools, such as the Supply Chain Council's Supply Chain Operations Reference model, have been developed during the past two years to help companies meet their SOX compliance obligations.

While some supply chain aspects are not directly affected by SOX, many companies are including the entire process in their overall SOX compliance initiatives. "They're managing it as a risk," Hagerty said.

Some corporations have complained to Congress that SOX goes too far and simply pads the pockets of consultants and auditing firms. According to a study by the University of Nebraska-Omaha, 633 Fortune 1000 firms have spent more than $3.6 billion so far for 2004 audits, compared to $2.2 billion in 2003.

In April, one lawmaker considered introducing legislation to repeal SOX, while another suggested making it a voluntary compliance program.

Dennis Nally, chairman and senior partner Price Waterhouse Coopers, called any legislative changes to SOX "ill conceived."

"Yes, there are questions and issues around Sarbanes-Oxley ... the same as with almost every new piece of major legislation," Nally told reporters at an April 28 press conference in Washington.

He added: "Implementation is hardly ever smooth in the beginning. But it would be foolhardy for all of the stakeholders not to ride out the bumps, address the areas where improvement is called for, and give the law time to work.

"As companies continue to identify and remediate control deficiencies before material misstatements can occur in financial statements, I believe, over time, we'll see fewer major restatements, fewer SEC financial reporting cases, and ultimately fewer incidents involving accounting fraud," Nally said.

Source: American Shipper magazine - GAI

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