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Sarbanes-Oxley
Act - Section 404
No More "It's not my fault"
By
Rob Hand
Reprinted
with permission from Rob Hand's April
27, 2003 Monday Morning Memo, a weekly
on-line Newsletter addressing issues
pertaining to trade allowance management.
Rob is president of Hand Promotion
Management, a consulting firm he operates
from Austin, TX.
Almost
everywhere I go these days, I am asked
about what I think of the new Sarbanes-Oxley
Act as it pertains to trade channel
promotion issues. Although I don’t
want to make the Monday Morning Memo
appear to be a communication organ
of the SEC, it does seem that this
is the biggest news in our industry
today. So what is this all about?
The
act was initiated as intent to curb
bad accounting practices and to provide
guidance for manufacturers in the
tracking, reporting and evaluation
of financial transactions that make
up the foundation for legal and formal
reporting to shareholders and the
public in general. Although the act
specifically covers public companies,
it is expected that most privately
held companies will no doubt comply
as well.
Recent investigative
action taken by the Securities and Exchange Commission against
Ahold, NV, Sara Lee, ConAgra and others illuminates and
draws down on the practices associated with the reporting
of trade promotion funds expenditures. With the FASB rules
on financial reporting of trade channel promotion funds
expenditures now revenue reversal, this is a major development.
At issue here is the credence given to the reporting of
trade promotion allowances. Ahold’s problem stems
from the improper reporting of trade allowances to the tune
of a half a billion dollars! As the inspectors get closer
to examination of these issues, I'll bet you that Sara Lee
and ConArgra aren’t going to be the end of the tale.
One SEC investigator told me that they already suspect a
number of very large industry suppliers in the mix; and
“it looks to be a long hot summer for some of them!”
My colleague,
Ron Lunde, an expert at these sorts of financial issues
in trade channel promotion, says that “the other shoe
drops” to refer to the issue now brought to light.
But what I contend is a major problem is HOW the information
is reported now relative to what appears to be the new mandate
borne out of the S-OX Act. Not to bore you with detail and
legal stuff, here is a brief “snippet” about
the section 404 of the SOX Act. The overview of the Act’s
key section 404 (as it applies to we trade channel promotion
folks in particular) can be summarized from the following
excerpt:
”Section
404, requiring the Commission
to adopt rules requiring a company's
management to present an internal
control report in the company's
annual report containing: (1)
a statement of the responsibility
of management for establishing
and maintaining an adequate internal
control structure and procedures
for financial reporting; and (2)
an assessment, as of the end of
the company's most recent fiscal
year, of the effectiveness of
the company's internal control
structure and procedures for financial
reporting. Section 404 also requires
the company's registered public
accounting firm to attest to,
and report on, management's assessment.”
Notice the second
part of this paragraph – item (2). It discusses an
“assessment” of the effectiveness of the internal
control structure of a company’s financial reporting
systems. And what would that be for trade channel promotion?
The key to effective accounting procedures is divided into
two main areas: (1) the accuracy and reliability of processes
and supporting system technology that enables the capture,
tracking and analysis of the financial transactions, and
(2) the enforcement of execution for those human beings
responsible for the entry, maintenance and verification
of the data. Track this down to the world of promotional
allowances and it is rapidly going to deteriorate isn't
it?
I've said many
times that the euphoria and pride companies have in their
newly developed or licensed system technology is trumped
only by their ability to adequately USE it. What we always
see is a wholesale failure to enforce disciplines for entry
and data collection at both the planning and input functions.
Now before you sales, admin and finance people begin to
shout, let me also remind everyone that the problem often
begins with the trade channel customer itself, failing to
provide the data in the first place. Of course without that
information, the system indeed breaks down and no self-respecting
financial analyst or auditor will sign his or her name to
a financial report based on the tenets of SOX So there is
a significant amount of work to be done there.
The
SEC, however, is apparently already
on THAT job!
What
would happen, for instance, if at
the end of the day it was declared
that Ahold, Sara Lee, ConAgra and
others are guilty of improper accounting
procedures and that failure to report
accurate expenditures of trade channel
promotion allowance funds resulted
in horrific fines, jail terms and
bad press? What, then, would the nation’s
largest retailers and manufacturers
change in the way they plan, report
and settle co-op, MDF, channel rebate
and other such expenditures? Would
there be a sudden break in the collaboration
between these two players such that
promotional activities planned were
ACTUALLY PERFORMED and/or that changes
would be made BY THE CHANNEL to update
the manufacturer and…when the
deduction was taken it was FULLY AND
COMPLETELY IDENTIFIED?
In truth, this
is what must happen. Retailers have long relied on trade
promotion funds to support the bottom line - that is not
new. But over the years, field sales reps have taken a stand
on this. I've heard a chorus of “Not my fault!”
from this group and although it is often true, it is also
not an excuse. It never was – and we don’t need
Sarbanes-Oxley to know it. However NOW, the game is up.
The buyers, reps, brokers, distributors, and rep firms have
to look upon this as a new day and a new program. Manufacturers
may need to have serious discussions both among themselves
as well as with their channel partners to ensure that financial
reporting ON BOTH ENDS remains accurate and representative
of the intended performance. In fact, the value here is
the return analyses - what we know has direct impact on
our analytical capability doesn't it?
We
wish no ill will toward any of our
channel friends or manufacturer supporters.
But you know, if it takes a couple
of jail sentences and perp walks,
then maybe it is a good thing. When
you consider the impact to the bottom
line, share prices and other negative
issues now being faced by Ahold, Flemming
and others to come, is it worth it
to continue concealing the information
about trade promotion performance?
The question is directed primarily
at you CPG manufacturers, because
for most of the other industries,
there already exists the practice
of documented claim submission wherein
that performance and cost is proven
(to a large degree, anyway). If not,
and the exception is made to pay,
you had better look over your shoulder
before signing off and saying, “It’s
not MY fault!”
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Created
February 27, 2004
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