Section 404: Management Testing

Section 404 of the Sarbanes / Oxley Act of 2002  (SOX) requires Management to    report on:  (1) The responsibility of Management for establishing and maintaining and adequate internal control structure and procedures for financial reporting; and  (2)   The responsibility of Management to make an assessment, as of the end of the   issuer’s fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial  reporting.

This SOX requirement basically compels Management of publicly traded Companies to: 

• Establish an internal control and financial reporting system, if one does not exist;

• Ensure the internal control and financial reporting systems are effective;

• To perform, on their own initiative, an annual audit to ensure the internal control and reporting systems are functioning properly; and

• To issue an annual report on the effectiveness of the internal control and financial reporting systems.

The first two of these areas is generally referred to as SOX internal control and financial reporting system development / implementation and was previously discussed under “Section 404 Services”.  The last two areas are generally referred to as “Management Testing Services” and will be discussed briefly in this section.  Once the internal control and financial reporting sections have been developed and implemented / remediated, then Management must turn its attention to the audit of  the systems of internal control and financial reporting for purposes of attesting to    their operating effectiveness, as required under SOX Section 404.  An audit of these areas  is quite different from most internal audits performed by internal staff or third parties.  In this regard, in order to render an opinion on the operating effectiveness of the systems, the auditors must:

1. Develop an opinion that the systems of internal control and financial reporting are adequate;

2. Test the controls and their operating effectiveness throughout the year, employing the “roll forward” technique at the end of the fiscal year to ensure their effectiveness throughout the year;

3.  Audit all information system platforms;

4. Secure SAS 70 reports on all financial processes performed by third parties, or perform an audit;

5. Complete testing of all “Entity Level Controls”;

6.  Ascertain whether any un-remediated audit deficiencies are: a) Material requiring disclosure to shareholders / public; b) Require disclosure to Senior Management and  the Board of Directions; or c) Require disclosure to Management only; and

7. Issue an audit opinion as to the overall adequacy and operating effectiveness   of the internal control and financial reporting systems.

These requirements alone represent a full fledged annual audit that will also need to be performed by the External Auditors. They will render an opinion as to  Management’s disclosures in regard to this audit of internal control and financial reporting systems.  Since   the External Auditors are precluded from performing Management’s audit and developing their opinion, this work must be performed by     the Company’s Internal Auditors or third party auditors such as those available here   at GTS Network, Inc. (GTS).

How Can GTS Help

GTS Financial Services Division is under the direction of an individual having over 30 years of Internal Audit, SOX, Accounting, Fraud, Ethics and other financial disciplines.    He has over four years of direct SOX experience and was responsible   for the development, implement-ation, remediation, auditing and monitoring of SOX  for a  Fortune 500 Company.  He is now bringing this knowledge and expertise to the marketplace for others to benefit from.  In addition, he has hired highly knowledgeable, experienced and competent financial professionals to ensure your work in this area is beyond reproach and completed in a timely and cost effective manner.

Please contact Michael L. Neely, Vice President – Financial Services Division, via e-mail at mneely@GTSnetwork.com or via telephone at (804-343-7400) to discuss any of your SOX needs.

 Global Technology Solutions, LLC (Your One-Stop SOX Consultants)