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SOX Compliance: Trinity Industries

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SOX Compliance: Trinity Industries

Since its formulation in the year 2002, the Sarbanes-Oxley of 2002 has forced organizations to scrutinize their spreadsheets in financial reporting. Many corporations have not liked what they see after this examination. Surveys that financial reporters conducted in response to SOX show that most companies use spreadsheets in corporate financial reporting. The research has also shown that almost all the large spreadsheets have numerous errors and the errors of material size are common. The first round of the SOZ assessment raised concerns about the accuracy of spreadsheets. Another concern is that spreadsheet fraud was so easy to perpetrate. Very few corporations have adequate internal controls to handle cases of fraud and even errors. One of the companies that has become SOX compliant is Trinity Industries. It is an industrial firm that manufactures products for the energy, construction, agricultural, and chemical sector (Schultze, 2011). The purpose of this paper is to examine the application of SOX by Trinity Industries, its first-year success, internal controls, weaknesses, PCAOB, and factors.

1. Success

During the first year period following the compliance, SOX was still making its way through Congress. TRN, on the other hand, was making critical changes in its process of financial reporting. It remade and regulated its financial recording system, which means that it replaced the 22 financial reporting procedures with a centralized process(EY, 2014). In the first year, Trinity replaced the four general ledger correspondences at TRN with a case of Oracle Financials. The corporation also developed an Accounting Service Centre that outsourced centralized services for the usual corporation-wide transaction processing including AP, payroll, and billing (Ingram, 2014). Therefore, in place of individual business units handling their own accounts payable, they completed the transactions centrally, which resulted in standardization.

2. Internal Controls

For an effective internal control, the company needs to maintain records, and books of accounts, ensuring that they reflect the company’s transactions fairly and accurately. It should also devise and uphold internal controls that are satisfactory to provide reasonable assurance that transactions are performed in agreement with the management approval, recorded as necessary, and there is permission to access the assets in accordance with the authorization by the management. Section 103 directs the PCAOB in meeting the set standards in which the auditor is required to report on, amongst other things, the range of his testing of internal control arrangement and processes of the issuer (Schultze, 2011).

3. Material Weaknesses

A material weakness in ICFR refers to an instance where there is a defect in the general internal control system so that it is likely that a material error in the firm’s financial statement cannot be stopped or corrected. The error or misstatement may happen on a yearly basis or through the interim financial reporting. In Trinity’s case, misstatement occurred due to inadequate duties segregation. A good example of this challenge was where the same person who received a sales commission also reconciled the bank account and approved loan agreement. There also lacked personnel with sufficient expertise to prepare the financial statements accurately (Schultze, 2011). The corporation did not also reconcile the important account balances, weaknesses that the firm did not recognize.

4. Specific Weaknesses

Trinity’s particular weakness was its lack of centralized information systems. Its operations, unlike many companies, were decentralized and diversified and the information systems fragmented. The corporation had foregone the implementation of an integrated business system citing the Y2K scare and the exclusive nature and necessities of its twenty-two business units. The company had seven distinct BPCS versions, a cost accounting and production application that were running in about 67 plants. Like other companies, Trinity faced challenges associated with the wide-ranging lack of procedure, control certification, and an indication that control had been executed (Ingram, 2014). Regardless of these many challenges, the SOX compliance audits could not identify a single material weakness at the company.

5. PCAOB

The PCAOB Auditing Standard (AS) No. 2 provides that revealing of misstatement in a financial report is a constant pointer of a material weakness. AS No. 5 also states that the objective of testing controls is assessing their effectiveness and supporting the auditor’s judgment about the corporation’s internal control over financial recording. The auditor’s assessment relates to the efficiency of the firm’s internal control over the financial reportage as of a certain point, taken as a whole. In the case study, Trinity Industries addressed several PCAOB risk controls. They saw the need for a central and standardized accounting and reporting system and process (Schultze, 2011). TRN was able to identify deficiencies and develop internal controls to reduce the potential for SOX related material weaknesses.

6. Factors

The PCAOB has subjects to give a general view of the company’s material weakness, but it did not provide ways to provide internal control. Below is a flow chart explaining the controls that Trinity Industries put in place to resolve the material weakness.