Sarbanes-Oxley Act Section 404 Demands More Robust Financial Reporting

Ernst & Young has released a new report titled CREs are Cruising in the Unsure Waters of Sarbanes-Oxley. With a focus on Section 404 of the Sarbanes-Oxley Act (SOX) of 2002, the report highlights how company’s efforts to address financial reporting issues are only the tip of the iceberg. The industry is beginning to realize that the underlying processes to develop the financial statements also need to be more robust, with corporate real estate executives (CREs) playing a more integral role in achieving corporate goals.Compiled and written by John Heywood, the report details the purpose and history of SOX and includes an explanation of Section 404. As described in the report, Section 404 “requires management of public companies to report annually on the effectiveness of their internal control over financial reporting.”CREs are Cruising in the Unsure Waters of Sarbanes-Oxley highlights the risk management framework described in a September 2004 report from the Treadway Commission’s Committee on Sponsoring Organizations (COSO). Titled Enterprise Risk Management: An Integrated Framework, the published report breaks down a company’s objectives into four categories: strategic, operations, reporting, and compliance. COSO’s eight components (internal environment; objective setting; event identification; risk assessment; risk response; control activities; information and communication; and monitoring) of risk management are also included in Ernst & Young’s report as well. Additionally, the report details how the role of the CRE and the materiality of real estate have increased in importance because of SOX’s Section 404. According to the report, “Operational controls should now be a major concern of CREs and their companies. CREs will find themselves having to explain to senior executives how they derived the value of the real estate, what they are doing with surplus real estate, whether the company should lease or own, and if any risks are present the expose the corporation to non-compliance.”Among the many sustainable benefits resulting from SOX, the Ernst & Young report highlights the following:Better processes and controls.Better budgeting and forecasting.Greater productivity.Reduced occupancy costs.Higher visibility of CRE.To read CREs are Cruising in the Unsure Water of Sarbanes-Oxley in its entirety, download the report by visiting the Ernst & Young website (www.ey.com/global/content.nsf/US/AABS_-_Specialty_Advisory_-_REAS_-_Overview).