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Five SOX pitfalls for shipping

US-listed companies often encounter internal control deficiencies under the Sarbanes-Oxley Act (SOX). Here are the top five issues identified by our experts:

1. Review of assurance reports from service organisations

The Committee of Sponsoring Organisations of the Treadway Commission (COSO) internal control framework indicates that management should document the relevant internal control systems of their own company and of any third-party service organisation used to process transactions. Assurance reports from service organisations, such as third party ship managers, must be checked for relevance to the company’s internal control requirements.

2. Testing of business continuity and disaster recovery plans

COSO specifies that business continuity and disaster recovery plans should be tested at least annually and updated for changing conditions. Although such plans are usually reviewed annually in the shipping sector, they are rarely subjected to an appropriate level of scrutiny and testing.

3. Classification of drydock costs

In the shipping sector, classification of drydock costs is a key area where an element of judgment is required, and where accounting treatment is often disputed by the statutory auditor. Making the distinction between expensed and capitalised drydock costs requires sound business and technical knowledge as well as accounting expertise.

4. Related parties

US GAAP’s definition of a related party is limited to someone related to a director or officer of the company. But the definition under both IFRS and UK GAAP includes a person or close family member who has control, joint control or significant influence over the entity. Therefore any US-listed shipping company complying only with US GAAP could be vulnerable to transactions where there is a potential conflict of interest. This may lead to adverse publicity and reputational damage to the business.

5. Board effectiveness

Lack of relevant expertise on the part of directors and non-executive directors, along with a poorly defined corporate charter, are common deficiencies. An independent board effectiveness review is a useful tool to ensure that board dynamics and roles are suitable for the organisational.
Source: Moore Stephens

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