Ingersoll-Rand: Hidden NuggetsBy Larry Barrett | Posted 2004-10-01 Print
In its race to comply with a Sarbanes-Oxley rule, Ingersoll-Rand found where it had been performing tasks twice—or not at all.
John Fletcher, manager of audit services for Ingersoll-Rand, has spent more than a year leading the industrial equipment manufacturer's frantic race to document each of the 100-plus internal controls and processes used to create the Fortune 500 company's financial reports.
Unlike the other massive information collection and dissemination projects he's been involved with during his 11 years with the company—including preparations for Year 2000—this is a race to the starting line. He and the rest of Ingersoll-Rand aren't sure if they should be training for a marathon or a sprint.
For Ingersoll-Rand, the starting line comes in January when it releases its annual report, marking the deadline for complying with Section 404 of the Sarbanes-Oxley Act. That section, in brief, requires companies to identify and document the processes used to collect information for their financial reports.
"It's involved every part of our organization, and it's been very costly," Fletcher says. "We feel we're going to be in compliance by the end of the year. But there's always that fear in the back of your mind that your auditor won't reach the same conclusion you have."
Ingersoll-Rand started to work on compliance in March 2003, a full two months before the Securities and Exchange Commission made the rule official. Ingersoll-Rand began by creating a Sarbanes-Oxley management task force comprised of 15 people including high-level executives, managers and representatives from PricewaterhouseCoopers, its independent auditor.
Making sure the company's books are in order is something Fletcher and the rest of the accounting and auditing departments are used to managing with meticulous precision. But alleged fraud committed by executives at Enron, Adelphia and WorldCom prompted sec regulators to force about 300 companies with market capitalizations of more than $75 million, including Ingersoll-Rand, to document the internal controls used to create financial reports. Companies must have this additional report filed with their 2004 annual report.
The internal-control report assesses the control structure and procedures used at each step of the financial reporting process. The idea is that an independent auditor can now drill down from any piece of information in a financial report, such as sales, profits and expenses, and track each individual component all the way back to the original transaction, payment and employee who contributed to the final totals. In the end, the outside auditor will issue separate statements attesting to both the company's general ledger and its control processes.
The sec believes this report will restore investor confidence not only in the numbers but the process by which the numbers are generated, largely eliminating the opportunity for one person or a small group of people to doctor financial reports.
Failure to comply with this requirement won't result in any fines or criminal penalties—at least not yet. But a qualified opinion, essentially a no-confidence vote from the auditor, could be reason enough for investors to sell their shares or not purchase shares in the future.
More threatening, Ingersoll-Rand's CEO, Herbert Henkel, like any ceo, could be fined up to $5 million and sentenced to as many as 20 years in prison if he signed off on a financial report that was accidentally or deliberately misleading or incorrect.
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