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Read one of these past issues for Insightful tips:
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You Can't Legislate Ethical Behavior - Sarbanes-Oxley Act
by Dave Brookmire
August 2003
The implementation of Sarbanes-Oxley Act to date has been the primary responsibility of the Finance function to implement and monitor. The Act falls short in recognizing that people make decisions everyday to adhere to or not to follow policy and company guidelines. This is the flaw in the Act's intent since it does not go far enough with preventative solutions that will get at the root of the problem, unethical and illegal behaviors performed by employees in the company.
Public companies that don't closely monitor the sales training process risk the embarrassment of having to restate revenues and reported earnings when sales fall through because the company can't honor some terms or agreements sales personnel have made with clients. And worse, those companies risk attracting the attention of government regulators carrying out the mandate of the anti-fraud provisions of the Sarbanes-Oxley Act.
Although the sweeping accounting and oversight requirements in the Sarbanes-Oxley Act do not specifically address human resources functions, lax sales training and unclear sales policies and terms are ways the HR department can find itself ultimately responsible for a federal investigation. To regulators, an accounting error is a red flag, no matter its origin. Until now, human resources management personnel thought they were pretty much exempt from the long reach of Sarbanes-Oxley, but that clearly is not the case.
Several recent examples have come to light in which sales teams promised discounts the company could not honor, or entered into agreements without full knowledge of the company's terms, and the company reported the sales as revenue. When the sales fell through, a wholesale recalculation of earnings resulted for that quarter, triggering regulatory scrutiny and negative publicity.
Steps public and private companies can take to minimize risk in this area include:
- A clear definition of revenue recognition policies and development of contracts supporting those policies;
- Personal involvement by the CFO in regular audits of the sales training processes;
- Regular interaction between key executives in sales, HR and finance;
- Close attention by HR management to making certain sales teams are fully aware and regularly updated on sales policies and contract terms; annual training is not enough;
- Balancing the need to "make the numbers" at all costs, with quality terms, clear policies, and frequent reporting;
- HR systems in performance management, compensation and promotions that reward honest and ethical behaviors and results;
- Disciplinary processes for violators of company policies;
- Accountability of sales, HR and finance leaders in ensuring that all personnel are aware of, understand, and adhere to the company's policies;
- Improved selection processes that can detect applicants with a history or propensity for making unethical decisions under pressure;
- Continued education by HR departments on what the company standards are across all functions, including sales.
Dave Brookmire, President
Corporate Performance Strategies, Inc.
3340 Trails End Road
Roswell, GA 30075
Phone: 770-587-2265
dbrookmire@cpstrat.com
www.cpstrat.com
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