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HR's role in Sarbanes Oxley

By Elizabeth Rice, SPHR

Named after its authors, Sen. Paul Sarbanes, D-Maryland and Rep. Michael Oxley, R-Ohio, Sarbanes Oxley (SOX) was developed to improve corporate compliance and rectify the fraud committed by the companies such as Enron, WorldCom, and Tyco International. The act was designed to review dated legislative audit requirements, thereby protecting investors by improving the accuracy and reliability of corporate disclosures. The act covers issues such as establishing a public company accounting oversight board, auditor independence, corporate responsibility and enhanced financial disclosure.

In order to get a deeper understanding of HR's responsibility in compliance it is important to understand the two key sections of SOX:

• Section 302 - Has been in effect since 2002 and requires CFO and CEOs of public companies to certify financial reports.
• Section 404 - Went into effect in November 2004 and requires companies to thoroughly investigate and take responsibility for all of their internal operational and financial controls. Internal controls are controls which are instituted by the higher management of corporations to ensure documentation of processes are done throughout all levels of the organization

Even though SOX is primarily oriented towards responsibilities shared by CEOs and CFOs, many aspects of the legislation have direct impact on HR processes and systems. The HR department manages a large percentage of an organization's finances. Human capital, accounts for 40-60% of a company's expenditure. Furthermore, many key processes within HR have financial impact on the organization including payroll, salary, bonuses, training, and stock options. General HR compliance has a direct effect on the bottom line of the company. HR is responsible for complying with such requirements such as equal opportunity, OSHA and fair labor standards. If there these are not adhered to a company can face penalties, fines and possible litigation. By aligning the objectives of the HR department with those of the Finance department companies will be most successful in adhering to the new compliance regulations.

One way that HR can increase compliance with the requirements as outlined in SOX is to avoid or minimize risk within the department. Some processes that HR can ensure are in place and encourage compliance is to institute:

• Consistent hiring practices to avoid fraud. HR should conduct thorough reference checks and/or background checks and security clearances if warranted by the position. Additionally they should make sure that compensation is fair amongst employees and diversity issues are addressed.
• Practices to encourage company retention and minimize turnover. To do so HR should keep up-to-date with current salary levels and remain competitive in the market.
• Maintain favorable labor relations and avoid employee descent such as sick-outs and strikes.
• Institute administrative processes to ensure accurate pay and bonuses that have an effect on the company's bottom line.

Compliance with Sarbanes Oxley needs to be adopted throughout all levels of the organization, however the HR department has the ability to set the tone of management and lead the cultural change. Communication of policies and procedures, building accountability processes into employee training and establishing a code of conduct will steer the company in the direction of organizational compliance to prevent unfortunate incidents - such as those incidents being tried in the courts today.

¹Hamerman, Forrester Research 2005