Workshop: Payroll and the Sarbanes-Oxley Act

May 20, 2009

Speakers:
Bernard Grotell, CPA, Partner, Loeb & Troper
Linda Obertin, CPP, Program Director, Fidelity Investments

Sarbanes-Oxley Can Help Keep Companies in Compliance

In an economic climate that seems to go from bad to worse and back again, the Sarbanes-Oxley Act of 2002 is even more relevant now for the payroll department than when it was enacted.

The act, known as SOX, was the federal government’s response to the accounting scandals at Enron Corp. and Worldcom Corp., where fraud and financial abuse led to losses of billions of dollars for stockholders, especially for those whose retirement funds were invested in the failed Enron and Worldcom.

“Sarbanes-Oxley was a reaction to a terrible time in the financial world,” said Bernard Grotell, a certified public accountant and a partner at Loeb & Troper. “At the time, there was no credibility to financial forms in the accounting profession and financial world.”

Grotell and Linda Obertin, CPP and program director for Fidelity Investments, addressed the workshop “Payroll and the Sarbanes-Oxley Act” Wednesday at the 27th annual American Payroll Association Congress in Long Beach, Calif.

While SOX was supposed to prevent financial disasters, financial and accounting fraud continue apace, as seen in the collapse of the insurance company AIG and the mortgage company Fannie Mae, both of which were bailed out by the federal government, in addition to receiving hefty penalties. The goal of SOX is to ensure that companies implement strong financial and accounting controls and remain in compliance.

“It’s payroll’s job to make sure that the company is always in compliance and that its reputation is not damaged,” Obertin said. “We have a high ideal of what compliance is.”

The Enron collapse was a landmark case, with the energy contract trader losing more than $3 billion in retirement funds for stockholders after the Houston company collapsed. Accountants moved poorly performing assets off the balance sheets, keeping track of them on Excel spreadsheets to conceal the poor operating performance, Obertin said, adding that in any SOX audit financial data stored in Excel are closely scrutinized.

Checks and balances, along with a number of controls, are key components of SOX, especially where compensation is concerned, Grotell said. “SOX is all about internal controls.”

The controls a company puts in place help improve efficiency of operations, ensure compliance with applicable laws and regulations, and improve the reliability of financial reporting.

“It’s obvious that you want the reports that come out of your department to be accurate,” Obertin said. “This helps your company make accurate decisions. The controls are designed to detect and prevent errors or misstatements on financial statements.”

When errors do occur, Obertin said, they must be reported promptly to the Securities and Exchange Commission.  Such errors can be uncovered in the initial one-year SOX audit. More serious matters—such as ghost employees, overpayment schemes, diverting wages or payroll taxes, and paycheck theft—can also be uncovered if tight controls exist. A detailed plan documenting the controls will help a company stay in compliance.

A SOX audit, while sometimes painful, is now a part of every publicly traded company’s checkup.

“It’s similar to a medical exam,” Grotell said. “You do it, but you hope they find nothing.”