Awareness of Management Risk

Sarbanes Oxley's focus on instituting controls over the finances and operations of companies has made them transparent for their own managements. The detailed and on-going monitoring of these controls also increases the knowledge of the risks that they are expected to mitigate. Since Sarbanes Oxley requires reporting on both the financial and operating risks, companies now have the ability to analyze their financial performance based on their knowledge of their operations. For example, theft in retail chains is endemic and can have deleterious effect on their financial performance. Auditing of controls would reveal how the managements of the retail store try to stem losses from theft and the problems they face in doing so. The information about incidents about theft is made available not only to the store managers but also to the senior management and the boards of directors who can then consider means to lower the losses from theft by either buying insurance or reinforcing security or use video technology as a deterrent to theft.

The greater awareness of risk within the enterprise paves the way for using analytical methods to find its causes and to find strategies to overcome it. For example, store managers have to make decision about the inventory they need to stock. If they make mistakes, the company is likely to suffer losses. The sharing of information within the company that Sarbanes Oxley enables helps senior management to bring to bear analytics such as the impact of economic, demographic and competitive factors on sales to make better decisions about stocking.

In the past, individual departments in marketing or operations made assessments of their own risks and very rarely shared them with others. Sarbanes Oxley has put in place an institutional process where the risks effecting all departments can be gathered and analyzed in all its inter-dependence. Companies can now look at their business, financial and operational risks and understand how they interact with each other. Companies have a measure of the risk associated with their strategies and make decide on how much risk they are willing to undertake.

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