Enron and the “red flagging” of other businesses during the 1990s committing financial reporting fraud showed the world that some corporate companies weren’t playing fair. To ensure this did not happen again, the government created the Sarbanes-Oxley Act of 2002 to force transparency into business finances. We all saw the news headlines and the court cases, but breaking through the lines of government verbiage is the fact that this Act affects the way airlines and ground handlers do business on a corporate level, which affects everyone on the operational side as well.
Sarbanes-Oxley
For all companies, private/public, large/small, the passing of Sarbanes-Oxley to stop financial reporting fraud changed business practices. Brian Bowman, attorney and business consultant working as product manager for compliance at Workbrain Inc. writes that because of Sarbanes-Oxley’s Section 302, executives must personally certify the accuracy of their company’s financial statements and disclosures — and their certification is regularly required (no loop hole there thanks to Section 404).
In this way it makes executives responsible if the company’s finances are found to be inaccurate and dishonest. The executives face jail time and/or personal fines in these instances.
Bowman reports that Sarbanes-Oxley accounts for 40 percent of all dollars allocated for 2005 compliance initiatives. He also insists that the most pressing priority for a company attaining compliance is the workforce, since employee wages, benefits, etc. account for 40 to 60 percent of an organization’s budget. Bowman makes a case for automating scheduling and payroll to minimize errors, ensure consistency and leave that all important paper trail for the auditors required by Sarbanes-Oxley.
If companies take his advice, this Act could mean scrutinizing of current procedures and/or more e-Solutions for scheduling ramp workers. But this new window into corporate financial data also touches airline’s and ground handler’s purchasing departments by how they can sell their used equipment.
Carol Romashko, GSEmarket.com says, “Sarbanes-Oxley increases company executives accountability as a result of the Enron debacle, but the Act has tentacles.” As a representative for GSEmarket.com, primarily a broker site for auctioning used ground support equipment, Romashko talks to the directors of purchasing at many airlines. In fact that was how the company began, when Delta said it needed help with all the hand written bids it was getting for equipment. “It really is quite time consuming,” says a spokesperson from Continental Airlines, who uses GSEmarket.com to assist in selling used equipment.
And there are stories at every airport of out of service equipment on the books ideal to auction off, but when someone goes out to get the item, it’s lost (or at least misplaced for whatever reason). Romashko brings up the problem of limited airport real estate, “It costs money to store unusable equipment.”
Add into the mix the new requirements from the Act, including being able to prove the sale was done impartially in a fair market, sold for a certain price, that price was received by accounting and the item was removed from the books as an asset. It looks suspicious when the record of sale is incomplete, not to mention it will cause financial problems for the company and the executive who certified it. “Keeping track of equipment is very important,” agrees Romashko, “if that equipment is sold it changes the balance of assets.”
With the frequent internal audits as well as a third party audits required by Sarbanes-Oxley, the more documented the paper trail is, the better. “It’s just a matter of how much hassle you want to go through later,” adds Romashko. “You are accountable to auditors and then later shareholders.” And according to business consultant Bowman, even if no scandal exits, the rumors of fraud alone can make stocks plummet.
A Few Solutions
Bowman elaborates in his article from Sarbanes-Oxley Compliance Journal about what a workforce management program should look like, and there is software out there. On page ? of this issue, Doug Peterman talks about how these programs can also add to efficiency, employee retention and profitability.
Romashko offers GSEmarket.com as a solution to maintaining compliance while selling used equipment. “We provide the tool and the venue for [airlines] to sell,” says Romashko. “Our sweet spot is helping airlines, as sellers, connect with all the middle market refurbishers and remanufacturers who want to pick up what the airlines had bought new and reuse it.” These third parties often sell to other airlines, usually outside the United States.
With GSEmarket.com’s centralized, online system, the process is straight forward and leaves an electronic record of the transaction. At any time, registered sellers can review their accounts through reports organized by month, type of equipment, sale price, etc. in three different formats. There are also other airline-orientated features online.
Conclusion
Sarbanes-Oxley adds more restraints and requirements to the monitoring of company assets and more transparency into their reporting. Sarbanes-Oxley has made auditors referees calling corporations on foul play.
Continental’s spokesperson elaborates: “While the 2002 Sarbanes-Oxley Act is important to restore investor confidence in the transparency of financial reporting, the Act reinforces what have always been good business practices at Continental Airlines relative to the safeguarding of assets, including those relating to GSE. Continental Airlines continues to employ sound internal controls and accountability over its GSE assets through a regular program of physical inventories and other monitoring actives.”
And Romashko agrees. “We always trusted it, now we have to prove it,” she says about the process of selling used GSE.
The new lines have been painted, but like any field, opportunities exist to take advantage of Sarbanes-Oxley to improve processes and prove to stockholders financial stability and profitability.
