Internal Controls and Corporate Governance under Sarbanes-Oxley:
Planning and Audit Processes in Outsourcing

© 2005 William B. Bierce. All rights reserved.

   Outsourcing poses a challenge to corporate governance principles.  

   Compliance Mandate.  The rules are both simple and complex.  They are set forth in the Sarbanes-Oxley Act of 2002 and related regulations of the Securities and Exchange Commission, the Internal Revenue Service, the Department of Labor and the U.S. Sentencing Commission and the fiduciary duties of directors and officers to shareholders. 

   Personal Assets of the Directors.  Directors are now putting their personal assets at risk.  The agreements by certain former corporate directors of Enron and WorldCom, announced in early January 2005, to pay millions of dollars to shareholders from the personal funds of directors highlights the seriousness of the director's fiduciary duty to exercise due care in managing a corporation.

   Compliance Solved.  How can directors manage their statutory and common law duties without assuming unfair risk?   Simply put, directors must understand the business, and all aspects of the business.  Outsourcing is a normal element of any business.  

   Internal Controls.   Internal controls and effective management of any business enterprise depend on four basics.  These basics apply to internally and externally sourced business processes.  

       Source:  Bierce & Kenerson, P.C.

• Design of process; 

• Dialogue on design, auditability and monitoring of the process;

• Documentation of the process as it is to be performed and as performed; and

• Disclosure of the financial impact of the process as performed.

   Compliance Enhanced.  Properly conceived and structured, outsourcing can enhance compliance with Sarbanes-Oxley "internal control" procedures.  The design and implementation of any outsourcing agreement should contain appropriate safeguards and procedures to ensure that the processes performed by the service provider meet these internal audit and control criteria.  

   Planning for Compliance and Audit.  Your outsourcing service provider, as well as your internal business developers and lawyers, should have a clear plan to comply with these elements.   If you want advice, Bierce & Kenerson, P.C. can provide value.  wbierce@biercekenerson.com.

Further Reading under Sarbanes-Oxley Act of 2002:

Outsourcing and Sarbanes-Oxley: Basic Issues
Outsourcing as an "Off-Balance Sheet" Operation
Role of Attorneys in Corporate Governance
Role of Auditors in Corporate Governance under Sarbanes-Oxley
Role of Auditors for Private Companies (not under Sarbanes-Oxley)

Text of Sarbanes-Oxley Act - by section number

    302 - Compliance Certification by CEO and CFO
    307 - Professional Responsibility of Attorneys
    401 - Disclosures in Periodic Reports
    404 - Internal Controls of Issuers (Outsourcing Customers)
    408 - "Enhanced Review" - SEC targets for investigation
    409 - Real-time Disclosure by Issuers (Outsourcing Customers)
    802 - Altering Documents 
    806 - Whistleblower Protection 
    906 -  Certification of Financial Statements - Penalties
    1102 - Tampering with a Record
    1107 - Whistleblower Protection - Penalties for Retaliation against Informants

Articles
Accelerated Reporting Rules are Delayed: Sarbanes-Oxley On Hold (Once Again). On August 25, 2004, the U.S. Securities and Exchange Commission proposed a rule that would delay for one year the implementation of shortened filing deadlines for "accelerated filers" under its September 5, 2002 amendments to certain rules and forms that accelerate the filing of quarterly, annual and transition reports under the Securities Exchange Act of 1934. For an analysis of the impact of this proposal on outsourcing generally, see www.outsourcing-law.com/articles/SOA_OnHold.asp (Registration Required)

Bierce & Kenerson, P.C. submitted general comments to the SEC in support of such delay with particular reference to the outsourcing industries. If you would like special outsourcing legal counsel to develop and state your position on Sarbanes-Oxley to the SEC, Bierce & Kenerson, P.C. can offer a unique perspective. See www.outsourcing-law.com/SEC_Comments.htm.  

Sarbanes-Oxley in Offshore Outsourcing: Whistleblower Issues.  Consider the extraterritorial extension of U.S. law to foreign employment law.  

Home

   Posted: January 11, 2005