A. reporting is overseen by an organization’s top executives

A.    Elements critical to the company’s
decisive success in its first year of compliance

Trinity Industries began their SOX compliance journey while
the legislation was still making its way through congress. The first year of
compliance included substantial modifications to the companies financial
reporting processes and procedures. (Schultze, 2011). The proactive approach the company took in the first
year of compliance was the right approach to take when implementing SOX
compliance changes. There were several key changes the company made during the
first year of compliance which were critical to the company’s decisive success during
first year of compliance.

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One of the most significant changes the company made during
the first year of compliance was the standardizing of their financial reporting
process. The company moved to Oracle Financials which replaced the four general
ledger packages that had been previously used. Another important change the
company made was the implementation of an Accounting Service Center which
provided services for areas such as billing, payroll and accounts payable. This
allowed there to a centralized accounting location which provided standardized
accounting services across the organization. With effective project and time
management the team involved with the new ventures were able to implement the
changes both on time and budget. (Schultze, 2011). All these elements helped the company in their success
during the first year of SOX compliance.

B.     Internal controls important for
preparing accurate and reliable financial reports

 

PCAOB Auditing Standard No. 5 Section A5 provides details
relating to internal control over financial reporting and how this process
promotes accurate and reliable financial reports. Internal control over
financial reporting is overseen by an organization’s top executives and
involves the board of directors, management and other significant personnel. Internal
controls effecting the preparation of financial reports revolve around
accounting transactions, procedures and compliance with accounting principles.
These internal controls help ensure transactions and changes involving the
company’s assets are accurate and fair, promoting record maintenance. Compliance
is a key issue supported by financial reporting internal controls, reasonable
assurance that transactions are recorded pursuant to generally accepted
accounting principles is vital to accurate and fair financial reports. Internal
Controls also help provide reasonable assurance that unauthorized transactions
regarding an organization’s assets are prevented or detected in a timely
manner. (PCAOB, 2007). It is important that internal controls overseeing
financial reporting help prevent and detect activity which may have a material
effect on the financial statements leading to inaccurate and unfair reports.

Sections 302 and 404 of SOX involve management certifications
involving internal controls and the assessments of internal controls. To comply
with SOX, it was essential for the company to include internal controls in the
compliance journey. Trinity Industries implemented a self-assessment process to
increase accountability for internal controls, holding controls owners
responsible for each control. The project management team involved with the SOX
compliance journey worked to identify control gaps and address corrective
actions which needed to be taken to close the gaps. Control activities and the
self-assessment process were tested as part of the compliance journey leading
to the identification of 284 testing gaps. These efforts paid off as the
external auditor’s evaluation found no material weaknesses and just 14
deficiencies. (Schultze, 2011). Remaining in
compliance with SOX involves implementing, monitoring and testing internal
controls for efficiency and accuracy as Trinity demonstrated.

C.    Definition of material weakness in
terms of SOX compliance

 

In defining material
weakness in terms of SOX compliance one needs to look at PCAOB Auditing Standard
No. 5. According to Appendix A of PCAOB Standard No. 5 a material weakness involves
a deficiency or a combination of deficiencies within the internal controls over
financial reporting. The deficiency or combination of deficiencies create an
environment where there is a reasonable possibility that a material
misstatement may not be prevented or detected within a sufficient amount of
time on the company’s annual or interim financial statements. (PCAOB, 2007).
SOX relies on this auditing standard to define material weakness and provides a
cross reference to the Public Company Accounting Oversight Board standards. (Ramos,
2004).

D.    Material weaknesses are specific to
Trinity

 

To remain in compliance with SOX, Trinity and industry
competitors were required to make significant modifications to financial
reporting processes and procedures. For companies like Trinity who utilize
diverse business units that are using separate systems for accounting
functions, there is risk of material weaknesses. Before SOX, Trinity had separate
controls in place for the different accounting and scheduling systems used by
each business unit. It would be difficult to remain in compliance with SOX
without a centralized accounting system and standardized reporting processes.

Many companies faced the same issues om regards to becoming
SOX compliant, there were other complexity issues aside from the decentralized
accounting system. Companies in the transportation and railway industries have
diverse product and service lines which can impact controls. Before SOX
compliance companies lacked documentation of processes and controls along with
lacking the ability the show that controls were performed. (Schultze, 2011). These
material weaknesses were addressed during the SOX compliance journey, helping
ensure accurate and fair reporting on the financial statements.

E.     Standards addressed in PCAOB
regarding the concept of material weaknesses in development of internal control
compliance

 

PCAOB Auditing Standard No. 5 provides a listing of
indicators which may show that there are material weaknesses within the
internal controls over financial reporting. Any detection of fraud by senior
management may indicate there are material weaknesses within the internal
controls. Another indicator may be the restatement of previous financial statements
which correct a material misstatement. A material misstatement during the
current financial period which likely would not have been caught by the company’s
current internal controls is an indicator of material weaknesses. Also, the
audit committee lacking proper oversight of external financial reporting and
internal controls over financial reporting can signify material weaknesses. (PCAOB,
2007). It is important for companies like Trinity to take the necessary steps
to protect from material weaknesses and ensure proper internal controls over
financial reporting are in place.

 

 

F.     Factors that made Trinity successful

 

There
were several factors which made Trinity Industries successful in the first year
of their SOX compliance journey. The company began making significant changes
to their financial reporting processes while the SOX legislation was still
going through Congress. Taking this proactive approach to the compliance
journey allowed the company to implement changes while providing themselves
with a time buffer for any unexpected problems which arose. The project team
that handled the standardization of the financial reporting process also led
the SOX compliance journey. The team was able to take the valuable lessons they
learned from the first projects into overseeing the compliance related
projects. Leveraging this type of experience and knowledge helped ensure that
the compliance projects were successful. (Schultze, 2011).

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