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4-2 Final Project Milestone Two: First Year of SOX Compliance
ACC675
SNHU
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A detailed analysis of Trinity Industries’ first year of Sarbanes–Oxley (SOX)
compliance has been conducted to ascertain how its functional workflows function and
identify possible gaps in its accounting systems.
Critical elements to Trinity’s decisive success
In the context of Trinity Industries’, a diverse range of elements may arise and play a
critical role in the organization’s decisive success in its first year of Sarbanes–Oxley
compliance. One of the main elements is the existence of a standardized reporting system
that is followed within the organization. Another chief element is the documentation of the
control environment within the organization. Considerable effort is involved in documenting
and testing the automated and manual controls. The other critical elements in the business
context are the evaluation of the gap relating to SOX compliance and the recommendations
that have been made to address the current gaps so that proper compliance can be ensured
by the business entity.
Internal Controls
According to the Public Company Accounting Oversight Board (PCAOB), a number
of internal controls need to be introduced for the purpose of preparing accurate and reliable
financial reports. One of the main internal controls is company policies, procedures, and
practices that have been designed to ensure reasonable assurance about the reliability of the
financial reporting of a firm. Policies also influence the processes that are adopted by firms
for preparing and accurately presenting financial statements as per the generally accepted
accounting principles (GAAP) (No, 2004,p . 4). The other internal controls are governance
framework, risk assessment, entry-level controls, and the testing strategy. In the context of
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Trinity Industries’, the specific internal controls that are in place to prepare accurate and
reliable financial reports include validation testing, roll-out organizational self-assessment,
and documentation of the control environment. aa
Material weakness
A material weakness in terms of SOX compliance refers to a deficiency or
combination of deficiencies relating to internal control over the financial reporting activity.
Due to the existence of such a weakness, there is a possibility of a material misstatement to
arise that may distort a company’s interim or annual financial statements (No, 2004). Some
of the signs of material weakness include identification of fraudulent activities in part of the
senior management, poor and ineffective oversight of a firm’s external financial reporting
and internal control over financial reporting by its audit team (No, 2004)..
Material weaknesses specific to Trinity Industries’
In the specific case involving Trinity Industries’ there exist a number of material
weaknesses that have the potential to compromise the accuracy and validity of the financial
statements of the organization. One of the chief weaknesses is the identification of 14
deficiencies according to the external audit testing that was conducted by E&Y. Another
vital sign of material weakness within the organization is the adoption of a practice-based
bottom-up analysis of the work practices within the organization. For identifying the internal
controls, input was taken from the organizational members, and then suitable flowcharts and
control matrices were designed for internal control purposes. Based on such an approach,
there was no proper framework in place that could be followed by the organizational
personnel to address gaps and deficiencies that existed in the organizational processes.
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Standards in PCAOB regarding material weakness
PCAOB has introduced a number of standards in order to effectively address the
issue relating to material weaknesses that may arise and distort the financial reporting
processes of organizations. The Auditing Standard 5 of PCAOB focuses on performing an
audit of internal controls over financial reporting that is integrated with the audit of the
financial statements. It mainly focuses on the steps that an auditor needs to take in order to
effectively perform an audit to ensure the effectiveness of internal control over the financial
reporting function and ascertain there exist no material weaknesses. According to Sarbanes–
Oxley (SOX) Section 404, it is essential for companies to include an assessment of the
overall effectiveness of internal controls (Sarbanes-Oxley Section 404 A Guide for Small
Business. SEC Emblem, 2017).
Factors contributing to Trinity Industries’ success
Some of the key factors that influenced the success of Trinity Industries’, as a
business include the existence of a diverse range of controls, namely ‘A’ controls, ‘B’
controls, ‘C’ controls and unranked controls. These controls played a key role in identifying
gaps in the business processes and operations. Another vital success factor involves a high
emphasis on training. Four levels of training were introduced, including high-level guidance
on SOX (for senior executives), COSO training for the controllers in Trinity, SOX
documentation training for diverse documentation teams, and control owner training. This
strategy empowered the staff members to gain a better insight into SOX and the need to
comply with it. A self-assessment process was also introduced to increase the accountability
of the management team. The flowchart captures the factors in a visual format.
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Introduction of controls
‘A’ controls
‘B’ controls
‘C’ controls
Unranked controls
Training
High-level guidance on SOX
COSO training for the controllers
SOX documentation training
Control owner training
Self-assessment process
For better accountability
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References
No, A. S. (2004). An Audit of Internal Control Over Financial Reporting Performed in
Conjunction with An Audit of Financial Statements. AUDITING.
Sarbanes-Oxley Section 404 A Guide for Small Business. SEC Emblem. (2017, July 14).
Retrieved December 2, 2022, from
https://www.sec.gov/info/smallbus/404guide/evaluation3#:~:text=Simply%20put%2C%20
a%20material%20weakness,annual%20or%20interim%20financial%20statements.
