The
2002 Sarbanes-Oxley Act came on to the statute books as an attempt to rebuild
public confidence in the way corporate America governs its business activities.
The Act has far-reaching implications for the tourism, hospitality and
leisure industry, as well as for its corporate customers and supply chain.
The 1990s were some of the most prosperous and exciting times American
business has ever seen. This period of prosperity came to an abrupt end
in early 2000, when the infamous �Internet bubble � burst,heralding economic
turmoil in the USA. The disorder was only compounded when corporate giants
such as Enron and WorldCom came crashing down amidst deceptive and corrupt
business practices. Change was inevitably in the air.
The Sarbanes-Oxley Act was the answer to concerns about ethical and
legal issues in corporate America. This new law, passed by Congress in
2002, sets a new precedent for the way in which public companies function
and insists that they comply with rigorous corporate governance requirements.
Although Sarbanes-Oxley is long and complex, most of the attention has
focused on a few key areas. Section 302 imposes much greater responsibility
on top executives at public companies. Meanwhile, Section 404 requires
companies to gain an intimate understanding of their internal controls
and their effectiveness. Lastly, companies are required to disclose publicly
all significant deficiencies and material weaknesses relating to their
internal controls in their periodic financial reports.
Responsibility at the top
Section 302 has the most profound impact for upper levels of management
of public companies.CEOs and CFOs are now required to certify the financial
statements as well as the internal controls of their company not just annually,
but quarterly. This means they must take much greater responsibility
than before to ensure that the company�s annual and interim financial statements
are fairly represented.
The main change relates to the certification of internal controls. By
doing this, management is demonstrating that they are responsible for establishing,maintaining
and evaluating the effectiveness of the internal control environment. Although
on the surface this change may not seem particularly significant, the reality
is that Section 302 is causing quite a stir in the highest ranks of corporate
America. It is even more severe because if CEOs or CFOs misrepresent financial
statements or the internal control environment, their personal assets are
at risk, and they may face fines and/or imprisonment.
Internal controls: documented, tested, approved
As well as increasing management accountability, Sarbanes-Oxley requires
companies to define, document, and test their internal control structure.
This means that Section 404 is perhaps the most significant aspect of the
Sarbanes-Oxley Act. Under this Section, not only do companies have
to document their internal controls more rigorously, including financial
reporting systems, but their auditors have to confirm that these controls
are effective. This involves fully evaluating the process by which
management makes its assessment about the effectiveness of internal control.
If the auditors find what they consider to be any �significant deficiencies�
or �material weaknesses�, the company must report these publicly.
Having a significant deficiency or a material weakness can prevent a
company from producing reliable financial statements. If a particular internal
control process does not allow managers or employees to detect or prevent
financial misstatements whether because of poor design or operational practices,or
because it never existed in the first place then it is deemed to be deficient.
The most serious instances of this are known as �material weaknesses� under
the Sarbanes-Oxley regulations. This is a deficiency in controls that results
in a relatively high probability that a material misstatement of the financial
statements will not be prevented or detected.
Because the formal assessment and the independent auditor�s report relates
to the company�s year-end, there is generally time to correct potential
control deficiencies, even those that involve significant lead times. But
companies should not risk leaving these actions to the last minute.
New frameworks, new oversight
Complying with Sections 302 and 404 of Sarbanes Oxley and publicly disclosing
any internal control issues enables far more accurate depiction of public
companies. But at the same time it has created new challenges for
corporations and the accounting firms they work with.
Managers and auditors alike soon realised that they needed a suitable
framework for assessing internal controls. The Committee of Sponsoring
Organizations (COSO) of the Treadway Commission provide the solution.
As far back as 1995, COSO published its �Internal Control Integrated Framework�,
known as the COSO Report. This provides a generally accepted universal
framework which management can use to assess internal controls.
The COSO framework identifies five components of control, which when
integrated and operating within an organization, will help achieve internal
control objectives:
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Monitoring.
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Information and communication.
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Control activities.
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Risk assessment.
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The control environment.
It also categorises internal control objectives into:
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Efficiency and effectiveness of operations.
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Financial reporting.
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Compliance with laws and regulations.
To further protect the interests of investors, audit firms in the USA are
also now being subjected to much stricter inspection and regulation, with
the creation of the independent, non-profit Public Company Accounting Oversight
Board (PCAOB) to oversee the profession.
Challenges for Tourism, Hospitality and Leisure companies and customers
Sarbanes-Oxley raises a number of specific issues for Tourism, Hospitality
and Leisure enterprises, both in terms of their own internal controls and
the way they interact with their customers and supply chain. A key requirement
of the Act is to improve the way information is stored, tracked and made
available to auditors or other independent inspectors.
When it comes to the customers of Tourism, Hospitality and Leisure companies,
the requirements to control and accurately report expenditures will clearly
have an impact in areas such as corporate travel and hospitality. Executives
will have to be able to demonstrate the �business purpose� behind travel,
meetings and even meals in restaurants, as a result much tighter documentation
will be needed. This could be seen as a threat by the industry, but we
believe it is also a potential opportunity. Those travel and hospitality
companies who can provide slick, e-delivery of key information such as
bookings, confirmations and receipts could win significant competitive
advantage by doing so. Even more so if that information can be tailored
to the precise reporting needs of each customer.
Although much of Sarbanes-Oxley remains open to interpretation, the
impact on the travel industry will be substantial.
Purchasing departments will face much tighter controls on how they procure
meeting space, hotel rooms, airline tickets, food and drink, and other
THL related services.
With these greater controls over corporate procurement, hotel and transport
companies should also be working hard to attain �approved vendor� status,
in order to streamline their sales process with large account customers.
Being able to provide documentary evidence of all the due diligence checks
needed to satisfy rules on the safety of meeting attendees, for example,
could also help astute hospitality companies win in a competitive world.
Improving transparency
Due to their unique owner/manager split, many hotel companies will have
significant work to do on the transparency of their own internal controls,
with many having to review their management contracts in the light of Sarbanes-Oxley.
Hotels and leisure businesses have a particular challenge when it comes
to the treatment of fixed assets under the new Act. More closely
managing and documenting a complex and constantly changing inventory ranging
from real estate to beds, linen and crockery creates additional cost. And
the rules for writing-off demand that companies keep more detailed and
precise records. In terms of operational practices, those hotel companies
who have implemented a �shared service centre� model to manage activities
such as accounts payable and receivable, and cash management are already
starting to reap the rewards, not simply in terms of cost savings, but
also in their ability to demonstrate Sarbanes-Oxley compliance. The Act
may well prove a catalyst for significant growth in shared service centres
across the THL industry.
The restaurant sector is likely to be less widely affected than other
parts of the industry, but even here we may see a short-term fall in corporate
bookings, as companies hold back on hospitality as their new policies and
controls become established.
Time is running out
So how long do companies have before they must comply with Sarbanes-Oxley?
So-called �Accelerated Filers� under the Act (generally companies with
an aggregate market value of US$75 million or more) are required to comply
with the internal control reporting and disclosure requirements for fiscal
years ending on or after 15 November 2004. Other companies have until
fiscal years ending on or after 15 July 2005. That means many companies
have their work cut out for them. The Sarbanes-Oxley Act, with its
definitive guidelines for implementation is primarily aimed at restoring
the public�s trust in business. That trust is the essential cornerstone
in re-building confidence in �America Inc�. But what will the future hold
for corporate governance policies in the THL industry and more widely?
And at what cost? We shall see in the upcoming months, as theory meets
practice.
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