Effects of S-OX on Supply Chain Professionals

The benefit of the Sarbanes-Oxley-Act of 2002 have been widely discussed. Most people have either a negative or a ambivalent view of the resulting compliance activities.
Usually S-OX is seen in the domain of the accounting and finance departments. Effects on other corporate functions are often neglected.
The article by Kros and Nadler (2010) analyzes why and how supply chain professionals and supply chain activities might be affected by S-OX.

Elements of S-OX

The purpose of the Sarbanes-Oxley-Act is “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes”

The major part of S-OX activities usually focus on the correct publishing of the financial statement (accuracy and presentation), but section 401 also includes off-balance sheet activities.
The article of Kros and Nadler (2010) mentions the following activities which are relevant for the supply chain manager.

• vendor managed inventory agreements
• long term and short term purchase agreements
• long term and short term purchase agreements
• outsourcing agreements
• inventory accuracy

Compliance activities are directly induced by section 404, requiring the “Management of Internal Controls” and indirectly by section 802, which contains the criminal penalties for executives for non-compliance.

Research

The research was conducted using a survey of supply chain professionals.
The respondents had as average more than 10 years work experience. The industries were widespread, with the major industries being manufacturing (41%) and construction and healthcare (each 11 %).

Results and implication

The majority of respondents were familiar with S-OX. Publicly held firms had a greater level of familiarity than privately held companies.

Furthermore, stronger S-OX compliance led to more positive effects on off-balance sheet activities such as vendor managed inventories, short-term purchasing agreements, long-term purchasing agreements, and outsourcing agreements

Lastly, supply chain managers who spent more than 15% of their time to ensure S-OX compliance showed a more negative perceptions of S-OX.

So can a company learn from these results:

• More focus on achieving S-OX compliance can have other positive effects on off-balance sheet activities as well. (eg. better information flows)
• It is important to keep the time spend on S-OX activities per person as low as possible, either by reducing the manpower needed as a whole (eg. by automation of control activities) or by distributing the tasks among more employees.

Conclusion

Other studies like Stengel et al. (2010) show that ensuring S-OX compliance can help achieving other goals as well. This seems to be founded in the heavily structured approach to document and test every relevant control found.

Overall the study leaves some open issues. For example, prior to the main survey a pilot survey was started (100 participants, using email). A overwhelming response rate of over 30% was achieved here! The response rate of the whole sample was only about 10% and I am missing a explanation for this gap.