Sarbanes Oxley and Lean Acct - BMA Inc. · PDF file8 Example of Lean Office Kaizen Standardized Work Primary Activity Accounting Controls (if required) Required Detail / Tools Charter

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© Copyright BMA Inc. 2004 Lean Accounting

BMA Inc.

Sarbanes Oxley and Lean Accounting

Integrating Verification into Lean Operations and Administration


BMA Inc.Sarbanes Oxley & Lean Accounting

• What is Sarbanes Oxley?

• Conventional Approaches to Sarbanes Oxley Requirements

• Lean Accounting Approach to Sarbanes Oxley• Three keys• Four tools• Benefits• Beyond compliance

BMA Inc. 100 Springdale Road #110, Cherry Hill NJ 08003 +1 609 239 1080 [email protected] www.maskell.com

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BMA Inc.What Is Sarbanes Oxley?• Regulatory response to recent accounting scandals

(Enron, Tyco, Worldcom, etc.)

• Tightened up on:• Corporate governance to provide more diverse

accountability & specific rules for the Audit Committee• Government oversight of financial reporting rules including a

new body; Public Company Accounting Oversight Board (PCAOB)

• Government oversight of audit firms.• Audit requirements for public companies.

• Sarbanes Oxley comes into force for public companies with market value greater than $75M in 2005. Other businesses must start compliance efforts after fiscal year 2005.


BMA Inc.Sarbanes Audit Requirements

• Two audits; financial audit & process audit.• Process audit is designed to assess the risk of known or

unknown misstatements.• Process audits are based on COSO (Treadway

Commission) guidelines.• Audit of the management assessment of the effectiveness

of internal controls.• External audit of internal controls.

• Annual reports must:• State the responsibility of management for establishing

internal financial controls & procedures• Contain an assessment of the effectiveness of the company’s

internal controls & procedures.


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BMA Inc.Fulfilling SOX Requirements for Internal Control Assessment

Narrative

Sarbane’sRisks

Gap Analysis

Internal Testing

Remediation

Thorough documentation of the company’s methods for each COSO process.

Identify steps in the process that represent a control risk.

Identify where the control activities are insufficient to offset the risk.

Design testing procedures and arrange for independent testing of processes.

Correct the deficiencies and re-test.


BMA Inc.Process Audit Reporting

Adverse OpinionMaterial

(greater than 5% pre-tax income)

More than remote(greater than 5%)

Material Weakness

Report to Audit Committee

Consequential(greater than 1% pre-

tax income)

More than remote(greater than 5%)

Significant Deficiency

Report to Management

Inconsequential(less than 1% pre-tax

income)

Remote (less that 5% chance)

Internal Control Deficiency

ActionPotential

Magnitude of Misstatement

Likelihood of Misstatement

Classification of Deficiency


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BMA Inc.

Conventional Approaches to SOX Compliance

Sarbanes Oxley & Lean Accounting


BMA Inc.What Most Companies Have Been Doing.

• Accountants and controllers have been developing detailed procedural documentation.

• Documentation reviewed with operational managers & supervisors.

• Training classes with operational personnel to emphasize the importance of working to the procedures.

• Financial controllers required to sign-off on their monthly reporting; CEO’s & CFO’s sign-off their external reports.


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BMA Inc.Problems with this Approach

• Development of the documentation is a huge amount of work for the finance department. Much has been done in a rush but already over-stretched people.

• Procedures are difficult to read & understand.• Documentation is not used by the operational people. It

sits unopened on a shelf in the accounting department.• Documentation soon becomes out-of-date and has to be

re-done each year.• Operations people have to be coerced. They see no

value in the Sarbanes Oxley process.

These issues are similar to the problems of ISO9000 (or other quality systems) in many organizations.


BMA Inc.

Lean Accounting Approach

Sarbanes Oxley & Lean Accounting


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BMA Inc.Three Keys to Sarbanes Oxley and Lean Accounting

Sarbanes Oxley Champion

Operational Process Owner

Integrate with Lean Office

A finance person must be assigned in each location to coordinate the Sarbanes Oxley process.

An operational manager or supervisor is assigned to each of the COSO processes. The Process Owner is responsible for the process and for the Sarbanes Oxley compliance within the process.

Lean office “kaizens” are conducted for each major process. SOX issues are included in the kaizen agenda and completed as a part of the lean improvement.

Process Owner ensures that SOX requirements are taken into account whenever changes and lean improvements are made.

Primary COSO Processes

Procurement Processes• Supplier selection• Analysis• Purchasing product• Determine inventory levels• Production needs• Expense purchases• P-card use

Inbound Processes• Receiving & inspection• Failed inspection• Move to stock• Goods not received in the

system• Communication with

receiving of goods ordered• Goods delivery to dock• Goods unloaded

Accounts Payable• Systems access• PO & non-PO invoices• Auto-vouchering• Debit memos• Month-end close

ProcurementPayroll & Benefits

• New employees• Process payrolls• Hiring & termination

Production• Launch production• Issue materials &

components• Report scrap• Track production process• Materials movement• Production completion• Quality control & lot

tracking

Fixed Assets• Purchase of asset• Capitalization• Completion• Process authorization

ConversionCustomer Service

• Quoting• Order taking• Pricing

Outbound• Pricing• Credit checking• Order changes• Producing the order• Shipping• Invoicing

Accounts Receivable• Collection• New customers• Return process• Credit memos

Distribution

Process Funds• Cash receipts• Cash application

Accounting• Analysis & reconciliation• Financial & management

reporting• Product costs• Reserves & allowances

Lean Office but not Sarbanes processes

• New Product Launch• Tool Room processes• Tool Design & Sourcing

Support

Manage IT• Security & record

availability• System process testing

There must be operational process owners for each of these processes.


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BMA Inc.Four Lean Accounting Tools Supporting Sarbanes Oxley

Office Kaizen

Process Flow Charts

Visual Documentation

Create lean improvement; improve flow, reduce cost, eliminate waste, maintain SOX

Use process flow charts to understand the process and to identify the SOX risks.

SOX documentation automatically included into the visual documentation of the process. The process maps are posted visually within the area of use.

Kaizen “Newspaper”

The “kaizen newspaper” is used to ensure that all the tasks defined in the kaizen are completed; including the SOX requirements.


BMA Inc.Lean Accounting Tools Supporting Sarbanes Oxley

• Office Kaizen• As a part of the Lean Accounting work, we use kaizen

to eliminate waste, eliminate transactions, and improve the flow in the company’s processes.

• Office kaizen process has standardized work. SOX requirements are included in the standardized work.

• Office kaizens have cross-functional teams including operations people, the Sarbanes Oxley coordinator, the Process Owner, and others.

• Office kaizens always result in significant improvement of the process; increasing speed of service and reducing costs & waste.

• Office kaizens are not regarded as Sarbanes Oxley events; SOX is just a part of the process.

• Everyone sees the benefit of lean office kaizens.


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Example of Lean Office Kaizen Standardized WorkPrimary Activity Accounting Controls

(if required) Required Detail / Tools

Charter Define Problem, Goal and ScopeProgress Report What are the measures?

Champion, Lean member, Steering CommitteePick Team (include 1 outside) Champion, Lean member, Steering CommitteeComplete Process Map Plaster wall to visually see process

Flow Chart, Spaghetti DiagramInclude Forms used in processTime studies for each step

Analyze Data Pareto, HistogramSanity Check - does it agree with Charter

Review Charter, Data Progress Report and Process Map with team Leader

Identify VA/NVA steps in Process Map SOX - List Control Risks

Generate Office Improvement Idea Lean out Risks. Brainstorm, Parking LotPrioritize Ideas Are controls in place? Low Hanging FruitCreate ITC List Implement controls. ITC WorksheetEliminate non-Value Activities Discuss with and inform customerReassign Value added activities If AppropriateKaizen Value added activities Improve Value added processesDevelop Standard Work For each operationPut Measures in place Measurement Chart

Create Training Plan for Standard Work For all effect employees

Audit STD Work and Measures Leader for 1 week than hand-off to champion

Prepare for Final Presentation OFFICIAL QUARTERLY EVENT ONLY

1 Week ITC's Follow-up

Day

1D

ay 2



• Process Flow Charts• These diagrams are an important element of all lean

office kaizens.• Used to identify the flow, the waste, and provide

information about the process.• The Sarbanes Oxley risks are identified on the process

flow charts by color-coding.• These diagrams are used to design the improvements

within the process. SOX requirements are automatically included in the design.


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Example of a Lean Process Flow Chart

Standard Work

Time Elements

Process Flow Chart

Sarbanes’ link to risks


BMA Inc.Lean Accounting Tools Supporting Sarbanes Oxley• Visual Documentation

• Sarbanes Oxley documentation is not separate; it is a part of the process documentation used in operations.

• Lean companies post their work instructions and documentation visually in the work area.

• Visual work instructions include the process flow charts, standardized work diagrams, check-lists, risk warnings, WDGLL charts, etc.

• Visual work instructions – including the control requirements –are used for training people. Both formal & informal training.

• Visual work instructions are the primary audit documents for SOX testing.

• There is sometimes a need for additional written reference materials & documentation. This is provided adjacent to people’s desks (as a part of 5S).


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BMA Inc.Example of Visual Work Instructions

Process Flow Chart

Instructions



• Kaizen Newspaper• Designing improvement is only the start of the process;

we must implement and sustain the effort.• When implementation tasks are not completed within

the kaizen event we use the kaizen newspaper to document and project manage the implementation

• Kaizen newspaper is visual management; it is posted within the area until all tasks are completed.

• The process owner is responsible for the completion of the tasks.


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Example of Kaizen NewspaperIDEA TRACKING CHARTPROJECT: PROCUREMENT (PURCHASING, RECEIVING, A/P) Idea - O

In-Process - ØGAP ANALYSIS IN BLUE Complete -

Dropped - ⌧

# Task Description Person Responsible Status Due Date Comments

13 Integrate SOX into workbook. Garbinski Ø 11/30/04

14 Make list of departments and details for purchasing Martinez Completed on 10/27

15 Create batch cover sheet. Black Completed on 9/17

16 Training Black Completed on 9/23

17 Change process for changing a remit-to address to include control Black / Cassada Completed by 9/30

18 Change default expense account number from P.O. Receipt to 28V240 Martinez Completed on 10/18

19 Start receiving electronic version of invoice from Butler Bros. Kelley / Cassada Completed by 10/31

20 Start receiving electronic version of invoice from Maine Lube Kelley / Cassada ⌧

21 Track reasons for invoice retrieval Black ⌧

22 Collect data on $ of Autovoucher vs $ total Black Completed during kaizen (9/15 & 9/16)

23 File invoices by batch instead of by vendor Black Completed during kaizen (9/15 & 9/16)

24 More ERS suppliers - measurement Black Completed during kaizen (9/15 & 9/16)

25 Print debits from July and August and review reasons why Black Completed during kaizen (9/15 & 9/16)

26 Quit writing voucher and check date on invoices Black Completed during kaizen (9/15 & 9/16)

27 Run tape of invoices, match to batch total of Manman / corporate Black Completed during kaizen (9/15 & 9/16)

28 Look into eliminating manual vouchering Black / Kelley / Cassada Completed during kaizen (9/15 & 9/16)

Completion LevelIDEA TRACKING CHARTPROJECT: PROCUREMENT (PURCHASING, RECEIVING, A/P) Idea - O

In-Process - ØGAP ANALYSIS IN BLUE Complete -

Dropped - ⌧

# Task Description Person Responsible Status Due Date Comments

13 Integrate SOX into workbook. Garbinski Ø 11/30/04

14 Make list of departments and details for purchasing Martinez Completed on 10/27

15 Create batch cover sheet. Black Completed on 9/17

16 Training Black Completed on 9/23

17 Change process for changing a remit-to address to include control Black / Cassada Completed by 9/30

18 Change default expense account number from P.O. Receipt to 28V240 Martinez Completed on 10/18

19 Start receiving electronic version of invoice from Butler Bros. Kelley / Cassada Completed by 10/31

20 Start receiving electronic version of invoice from Maine Lube Kelley / Cassada ⌧

21 Track reasons for invoice retrieval Black ⌧

22 Collect data on $ of Autovoucher vs $ total Black Completed during kaizen (9/15 & 9/16)

23 File invoices by batch instead of by vendor Black Completed during kaizen (9/15 & 9/16)

24 More ERS suppliers - measurement Black Completed during kaizen (9/15 & 9/16)

25 Print debits from July and August and review reasons why Black Completed during kaizen (9/15 & 9/16)

26 Quit writing voucher and check date on invoices Black Completed during kaizen (9/15 & 9/16)

27 Run tape of invoices, match to batch total of Manman / corporate Black Completed during kaizen (9/15 & 9/16)

28 Look into eliminating manual vouchering Black / Kelley / Cassada Completed during kaizen (9/15 & 9/16)

Completion Level


BMA Inc.Fulfilling SOX Requirements Using Lean Accounting Methods

Narrative

Sarbane’sRisks

Gap Analysis

Internal Testing

Remediation

Documented using Process Flow Charts as a part of a regular Lean Office Kaizen event.

Risks are identified during the kaizen process and the Process Flow Chart review.

Inadequate controls are identified and solutions developed as a part of the kaizen. Kaizen newspaper provides visual follow-up.

Tests are designed and independent testing performed to validate new visual, standardized work.

Test failures lead to additional kaizens.


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BMA Inc.Benefits of the Lean Accounting Approach to Sarbanes Oxley

1. The operational process owner is responsible for the SOX documentation and for maintaining the controls; not the finance department.

2. Everyone understands the SOX risks. They are color-coded on the process flow chart and included in the department’s visual work instructions.

3. The SOX documentation does not require a lot of work because it is a part of the larger lean office improvement.

4. Operating people see the benefit of the office kaizen because it creates improvement. SOX compliance is not seen as another piece of (useless) work; it creates much-needed improvement.

5. The SOX Champion becomes a change-agent for improvement within the company’s processes (instead of coercing people to use SOX documents that they do not know or understand).

6. The SOX documentation is automatically updated when changes are made because they are a part of the visual work instructions.


BMA Inc.Beyond Compliance

“Simply complying with the rules is not enough. They should, as I have said before, make this approach part of their company’s DNA. For companies that take this approach, most of the major concerns about compliance disappear.

Moreover, if companies view Sarbanes Oxley as an opportunity; to improve internal controls, to improve their own performance, and improve their public reporting – they will ultimately be better run, more transparent, and therefore more attractive to investors”

William Donaldson, Chairman SEC

Lean Accounting takes us beyond compliance to Sarbanes Oxley.We are creating improvement, integrating the business, improving

controls, and enhancing profitability.


Documents

Sarbanes Oxley and Lean Acct - BMA Inc. · PDF file8 Example of Lean Office Kaizen Standardized Work Primary Activity Accounting Controls (if required) Required Detail / Tools Charter