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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 Trinity Industries’, the specific internal
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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. c
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.
Standards in PCAOB regarding material weakness
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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.
