Financial Reporting
We will ensure that accounting and financial records are accurate, clear, and complete-
This means that each member of the campus community to whom this standard applies
- Is prepared to attest to the accuracy and clarity of the information provided on UCSC financial statements and disclosures
Perspective: A Real World Illustration
A March 2005 Washington Post newspaper article reported on the impact of the Sarbanes-Oxley Act (SOX) on a major, multi-national American-based consulting firm. A grand jury in California is investigating the company's federal contracts. The previous chief executive officer (CEO) left abruptly and not on good terms with the firm. And several overseas units are bleeding cash.
The company's new CEO said the biggest thing that makes him toss and turn at night is SOX. The act, passed in 2002 after accounting scandals at firms such as Enron Corp. and WorldCom Inc., is intended to protect investors by mandating that executives at publicly traded companies verify the accuracy of their financial results.
Critics of the law have emphasized its expense and the burden of meeting its requirements, but the experience at the consulting firm also shows that it can help companies uncover potentially damaging weaknesses -- for example, mistakes that led to the misclassification of millions of dollars.
The company already has spent more than $20 million and assigned a staff of 75 to get its books in shape to meet SOX requirements, but even so, the firm told investors late last year that it may not be able to comply with the regulation by the deadline next month. "This is just a massive effort. We view this as a difficult undertaking," the CEO said. Of the statement required of the chief executive by SOX, he said, "I don't take signing lightly."
Companies that cannot pass stringent reviews of their financial controls will receive a "qualified" opinion from independent auditors.
Meeting the requirements of SOX means getting deep into the details of how a company ensures that financial information it provides to investors is accurate. That means not just checking the math but also looking at where the information originates and how the company verifies its numbers.
For example, a pay increase for an employee requires approval by two company managers. If one of them forgets to sign a document verifying approval, a procedure has been violated. If the company's internal testers or auditors catch the mistake, it could qualify as a deficiency in the company's internal controls.
The document that the CEO must sign for his company to comply with SOX demands that he pledge to investors that he is confident each procedure is being followed properly.
Individual executives who knowingly certify inaccurate financial results could face substantial civil and criminal penalties under SOX. It calls for maximum prison terms of 20 years for a false certification.
SEC officials said reviews like the one being done by the consulting firm could be the most important step the agency takes to restore the confidence of average investors in corporate financial statements. "The act is working," said the SEC's chief accountant. "There are weaknesses in internal control systems. It's very helpful that the sunlight shine on them so they get fixed."
[Note: Many of the requirements of SOX, including one requiring the Chancellor and about 20 other high-level UCSC officials to attest to the accuracy of the campus’ financial statements and to the adequacy of internal controls, have been adopted by the Regents and apply to all campuses, medical centers and the office of the president.]
Last Revised 5/23/2006