1. Impact of SarbanesImpact of Sarbanes--Oxley (SOX)Oxley (SOX)
onon
Equipment ManagementEquipment Management
Presenters:Presenters:
Mark BelecMark Belec
BearingPointBearingPoint
Jason GrossJason Gross
Siemens Financial ServicesSiemens Financial Services
2. Compliance with SOX for Your OrganizationCompliance with SOX for Your Organization
This presentation is designed solely toThis presentation is designed solely to
provide a general overview andprovide a general overview and
awareness of the Sarbanesawareness of the Sarbanes--Oxley ActOxley Act
and its impact for information purposesand its impact for information purposes
only. Specific rules and practices foronly. Specific rules and practices for
ensuring compliance to the Act shouldensuring compliance to the Act should
arise from and be guided by yourarise from and be guided by your
respective Organizationsrespective Organizations’’ Program orProgram or
Policy Office.Policy Office.
3. SOX PenaltiesSOX Penalties
Establishes severe penalties for corporateEstablishes severe penalties for corporate
level management (CEO, CFO) of publiclevel management (CEO, CFO) of public
companiescompanies
$5 million and/or up to 20 years of
imprisonment
The Act sets the obligation of accurate andThe Act sets the obligation of accurate and
reliable financial reporting and disclosuresreliable financial reporting and disclosures
with the CEO and CFOwith the CEO and CFO…….no excuses for.no excuses for
being uninformed!being uninformed!
4. Key Objective of SOXKey Objective of SOX
To protect investors by improving theTo protect investors by improving the
accuracy and reliability of financialaccuracy and reliability of financial
reporting and disclosuresreporting and disclosures
Reinvigorate investor confidence in theReinvigorate investor confidence in the
financial marketsfinancial markets
Most significant reform that the US financialMost significant reform that the US financial
markets have had since SEC Act of 1933 andmarkets have had since SEC Act of 1933 and
19341934
5. Why does SOX Exist?Why does SOX Exist?
1970s1970s –– Foreign Corrupt PracticesForeign Corrupt Practices
ActAct
Prevent bribery and fraudPrevent bribery and fraud
19871987 –– Treadway CommissionTreadway Commission
formedformed
Define internal controlDefine internal control
19921992 –– Internal ControlInternal Control –– IntegratedIntegrated
Framework (COSO) issuedFramework (COSO) issued
Recognized framework forRecognized framework for
evaluating internal controlevaluating internal control
Proved insufficient to preventProved insufficient to prevent
accounting scandals and unethicalaccounting scandals and unethical
practices of the late 1990s andpractices of the late 1990s and
early 2000searly 2000s
EnronEnron
WorldComWorldCom
AdelphiaAdelphia
And othersAnd others
Governmental reaction to the uproar and frustration in the financial
markets and the lack of investor confidence in the financial reporting
of public companies
2002 – Sarbanes-Oxley Act of 2002
6. Formation of the PCAOBFormation of the PCAOB
(Public Company Accounting Oversight Board)(Public Company Accounting Oversight Board)
The Act resulted in the SEC appointmentThe Act resulted in the SEC appointment
of the PCAOBof the PCAOB
Duties of the PCAOB:Duties of the PCAOB:
Establish auditing standards regardingEstablish auditing standards regarding
publicly traded entitiespublicly traded entities
Conduct inspections of registered publicConduct inspections of registered public
accounting firmsaccounting firms
Enforcement of the ActEnforcement of the Act
7. Structure of the ActStructure of the Act
Rules Affecting Registered PublicRules Affecting Registered Public
Accounting Firms and Audit ServicesAccounting Firms and Audit Services
Auditor IndependenceAuditor Independence --Sec. 201Sec. 201--209209
Rules Affecting Corporate ResponsibilityRules Affecting Corporate Responsibility
Corporate disclosure/representationsCorporate disclosure/representations–– Sec 301Sec 301--308308
Corporate governance and oversightCorporate governance and oversight –– Sec 401Sec 401--409409
Rules Affecting Corporate FraudRules Affecting Corporate Fraud
Various sections: 501, 601Various sections: 501, 601--604, 701604, 701--705, 801705, 801--807, 901807, 901--906, 1001, 1101906, 1001, 1101--11071107
8. What is 404 ?What is 404 ?
404 (a)404 (a) –– Internal Control SystemInternal Control System
Management is responsible for theManagement is responsible for the
development and monitoring the effectivenessdevelopment and monitoring the effectiveness
of an adequate internal control structureof an adequate internal control structure
CEO and CFO provide an annual certificationCEO and CFO provide an annual certification
404 (b)404 (b) –– Independent AuditorIndependent Auditor
External auditor provides attestation toExternal auditor provides attestation to
managementmanagement’’s assessment of its controlss assessment of its controls
over financial reportingover financial reporting
9. Internal Controls over FinancialInternal Controls over Financial
Reporting and DisclosureReporting and Disclosure
Reasonable assurance thatReasonable assurance that
the Companythe Company’’s processes wills processes will
ensure that:ensure that:
Transactions are properlyTransactions are properly
authorizedauthorized
Assets are safeguarded againstAssets are safeguarded against
unauthorized or improper useunauthorized or improper use
Transactions are completely,Transactions are completely,
accurately, and properly recordedaccurately, and properly recorded
and disclosedand disclosed
Records are accuratelyRecords are accurately
maintained and safeguardedmaintained and safeguarded
Financial Statements in
Conformity with GAAP
10. External Auditor OpinionExternal Auditor Opinion
PrePre--SOXSOX
Opinion on theOpinion on the
financial statementsfinancial statements
alonealone
PostPost--SOXSOX
Opinion on theOpinion on the
financial statementsfinancial statements
alonealone
Opinion onOpinion on
managementmanagement’’ss
assessment processassessment process
Opinion on theOpinion on the
effectiveness ofeffectiveness of
internal controls overinternal controls over
financial reportingfinancial reporting
11. What is Involved in the 404 Process?What is Involved in the 404 Process?
Identification ofIdentification of
significant accounts andsignificant accounts and
disclosuresdisclosures
Identification of keyIdentification of key
processes and classesprocesses and classes
of transactions that feedof transactions that feed
into the significantinto the significant
accountsaccounts
Identification andIdentification and
documentation of thedocumentation of the
objectives, risks and controlsobjectives, risks and controls
related to these key areasrelated to these key areas
impacting financial reportingimpacting financial reporting
Not just Accounting!Not just Accounting!
Testing and evaluation of theTesting and evaluation of the
controls over financialcontrols over financial
reporting:reporting:
For adequacy of the designFor adequacy of the design
For effectiveness in operationFor effectiveness in operation
Identification and remediationIdentification and remediation
of control deficienciesof control deficiencies
Retesting to ensureRetesting to ensure
effectivenesseffectiveness
Adequacy of
documentation
is Critical
12. COSOCOSO –– 5 Components of Internal Control5 Components of Internal Control
Control EnvironmentControl Environment
Risk AssessmentRisk Assessment
Control ActivitiesControl Activities
Information & CommunicationInformation & Communication
MonitoringMonitoring
13. 5 Financial Statement Assertions5 Financial Statement Assertions
Existence or OccurrenceExistence or Occurrence
CompletenessCompleteness
Rights and ObligationsRights and Obligations
Valuation or AllocationValuation or Allocation
Presentation and DisclosurePresentation and Disclosure
14. Processes ImpactingProcesses Impacting
Equipment/Portfolio ManagementEquipment/Portfolio Management
Establishment of residual valuesEstablishment of residual values
Monitoring of residual valuesMonitoring of residual values
Pricing using approved residual valuesPricing using approved residual values
FAS 13 Capital versus operating leaseFAS 13 Capital versus operating lease
Remarketing valuations of equipmentRemarketing valuations of equipment
Collateral valuations impacting reservesCollateral valuations impacting reserves
Booking accuracy in lease accountingBooking accuracy in lease accounting
systemsystem
15. Other Key ConsiderationsOther Key Considerations
Use of service organizations (3Use of service organizations (3rdrd parties)parties)
SAS 70 Type II (or other control assurance)SAS 70 Type II (or other control assurance)
Identification and testing of IT controlsIdentification and testing of IT controls
Application controls (Application controls (edit checks, calculations,edit checks, calculations,
segregation of dutiessegregation of duties))
General controls (General controls (system access, datasystem access, data
safeguardingsafeguarding))
Identification and testing of antiIdentification and testing of anti--fraud controlsfraud controls
Practices that prevent and detect fraud by:Practices that prevent and detect fraud by:
EmployeesEmployees
SuppliersSuppliers
CustomersCustomers
16. Success FactorsSuccess Factors
Those Organizations that find innovativeThose Organizations that find innovative
ways to embrace the intent of the Act intoways to embrace the intent of the Act into
their ongoing business practices such thattheir ongoing business practices such that
their system of internal controls istheir system of internal controls is
continually monitored, measured, andcontinually monitored, measured, and
improved will succeed in the longimproved will succeed in the long--run.run.
17. Daily Workflow ImpactDaily Workflow Impact
Forecasting (Pre Booking)Forecasting (Pre Booking)
Methods ( metrics management review)Methods ( metrics management review)
Drivers of asset ( S Curve, oil/energy, etc.)Drivers of asset ( S Curve, oil/energy, etc.)
Valuation used for proper residual accretion in lieu ofValuation used for proper residual accretion in lieu of
““supportingsupporting”” a transaction (Treasury document)a transaction (Treasury document)
New Transactions (Booking)New Transactions (Booking)
Capital v Operating lease classification (IncomeCapital v Operating lease classification (Income
recognition)recognition)
RestrucutresRestrucutres
RenewalsRenewals
Reserves upfront v specific allocation (I.e. aircraft)Reserves upfront v specific allocation (I.e. aircraft)
Residual accretion (Pricing/income recognition)Residual accretion (Pricing/income recognition)
Useful life test (50% of model is retired from industry)Useful life test (50% of model is retired from industry)
18. Daily Workflow ImpactDaily Workflow Impact
Portfolio Management (FAS 13)Portfolio Management (FAS 13)
Monitoring of residual valuesMonitoring of residual values
Internal v external and/or combinationInternal v external and/or combination
BudgetingBudgeting
Reserves (Basel II, etc.)Reserves (Basel II, etc.)
Residual v Inventory valuationResidual v Inventory valuation
% of Inventory portfolio% of Inventory portfolio
Inventory StaticInventory Static
PortfolioPortfolio –– monthly accrual incomemonthly accrual income
Financial reportingFinancial reporting
Income recognitionIncome recognition
InventoryInventory
Valuation processValuation process
ArmArm’’s lengths length
19. Impact on overall departmentImpact on overall department
Working with outside third partiesWorking with outside third parties
Internal v external resourcesInternal v external resources
Budget (valuations going forward)Budget (valuations going forward)
Understand drivers of industry/assetUnderstand drivers of industry/asset –– notnot
bluebook static snapshotbluebook static snapshot
Auditors are focusing more in these areaAuditors are focusing more in these area’’ss
based on the perceived/actual risk withbased on the perceived/actual risk with
income recognitionincome recognition
