Did you know that the global fixed asset management software industry is expected to hit $5.2 billion in 2024?
Companies are required to comply with the Sarbanes-Oxley Act (SOX) when it comes to their fixed assets.
It can be difficult for companies to keep up with the ever-changing regulations and ensure they have all of the necessary internal controls in place. Without these controls, a company could face hefty fines or other penalties.
Keep reading because this article will provide an overview of what fixed asset internal controls are required by SOX compliance so that you can make sure your business is compliant and avoid any costly mistakes.
What Are Fixed Asset Internal Controls?
Fixed asset internal controls are a set of procedures that companies use to monitor and protect their financial assets. These controls are designed to prevent the misappropriation, misuse, theft, or unauthorized disposition of fixed assets. The Sarbanes-Oxley Act (SOX) requires publicly traded companies to have appropriate internal controls over their financial reporting process.
What Are the Fixed Asset Internal Controls Required by SOX Compliance?
Now that you know what fixed asset internal controls are, let’s discuss the specific SOX compliance requirements for them. Generally, these controls can be broken down into two main categories – operational and financial.
Operational controls involve policies and procedures to guide employees on how to properly manage fixed assets. Examples of operational controls include
1. Formalizing Procedures for All Acquisition, Sale, and Disposal of Fixed Assets
Creating and implementing formal procedures is a must when dealing with fixed assets in any capacity. Formalizing rules and regulations around the acquisition, sale, and disposal of fixed assets allow for greater transparency for all parties involved in the transaction.
It also allows companies to keep up-to-date records of all consequential transactions, from purchase orders to invoices, to ensure proper asset tracking. Furthering a company’s dedication to good record keeping not only helps them keep track of what they own or owe but can also be used to improve its policy-making process by providing valuable insights into utilization rates or cost-effectiveness over long periods.
2. Maintaining a Physical Inventory of Fixed Assets
Having a physical inventory of fixed assets can be extremely beneficial to businesses, as it helps identify any discrepancies that may show up on the financial statements during an asset physical audit or asset compliance audit. It also creates a sense of greater accountability for both managers and employees and provides reassurance that company assets are not being misused or misplaced.
Conducting a physical inventory of fixed assets requires considerable time and effort, but it will help increase asset value in the long run and ensure that all essential accounting records accurately reflect the total amount of fixed assets owned by the company.
3. Establishing a Process for Periodic Asset Reviews
Asset reviews and audits are essential to the proper management of all aspects of financials. By conducting periodic reviews, companies can ensure that their assets are properly represented in their records and that they are effectively utilizing them.
Companies should have structured guidelines for performing efficient periodic asset reviews to ensure accurate accounting practices. During the review process, revenue from depreciation should be calculated as well as potential capital improvements to maximize the use of the asset.
Overall, regular asset reviews help organizations maintain an accurate depiction of their financial health which is necessary for long-term growth.
4. Establishing Controls Over the Use of Fixed Asset Tags
Establishing controls for the use of fixed asset tags is very important as it helps companies to keep track of their assets in a systematic and organized manner. Multiple departments within the company should be involved in ensuring that all assets are consistently tagged and kept up-to-date with accurate information.
This means that a standard process should be put into place, such as formal training sessions so employees know how to properly tag items and assign them to the accurate categories or locations. It is also essential that certain individuals are designated with managing these tags and periodically checking if they are being used correctly.
By implementing appropriate procedures, companies can ensure that all fixed assets are tracked accurately which leads to better asset management and performance.
5. Developing an Asset Retirement Protocol
When you want to retire an asset, there are some things you need to think about first. You need to decide if you want to repair it, keep it, or get rid of it. You also need to think about how much money you’ll need for a reserve fund in case there are future problems and estimate the cost of related services. Finally, you’ll need to make detailed instructions for selling or reallocating the asset.
For every step in the retirement process, you need the right paperwork to go with it. This way, you always have an up-to-date record of what physical inventory you have and how much money you involve.
It is important to have a plan for what to do with company assets when you no longer use them. This plan will help the company keep running smoothly and legally.
6. Regularly Updating Asset Records With Current Values
To manage assets effectively, it is essential to include regularly updated values in each item’s record. Depreciation or obsolescence, for instance, can lower an asset’s market value over time; this information needs to be tracked to ensure that the asset is managed with long-term financial goals in mind.
Additionally, threats such as natural disasters or unexpected costs may also manifest and damage an asset’s current value; determining such losses as soon as possible allows a business to adjust and plan accordingly. Keeping abreast of an asset’s changing values is a necessary step for businesses to remain profitable.
Financial controls involve procedures that help companies detect, prevent, and correct financial errors or fraud related to their fixed assets. Examples of financial controls include:
1. Establishing a Capitalization Policy
It is very important for businesses to have a clear policy about when to capitalize items. This means whether to expense an item in the current period or whether to add it as a fixed asset. This can have a big effect on the financial statements.
A capitalization policy tells when something should be treated as a long-term asset instead of a short-term expense. This is important because it shows the real costs of running a business.
Companies should have the policy to make sure their standards stay the same, even if regulations or market conditions change.
2. Setting up Segregation of Duties for Related Processes
Companies need to be careful about who does what when it comes to money. Different people should handle different jobs, like ordering supplies, billing, and payments. This will help keep things fair and under control.
By dividing these responsibilities among separate people, checks can be carried out at each step of the process. As a result, any errors or discrepancies will be observed quickly and accurate records will be maintained. This type of segregation of duties in related processes is essential if companies are to ensure that all their internal procedures are implemented effectively and efficiently.
3. Periodically Reviewing Fixed Asset Accounts
Performing periodic reviews of our fixed asset accounts is an essential step in ensuring that company records are accurate and up-to-date. By doing so, we can identify and address any discrepancies in the asset values that might arise due to changes in market value or depreciation.
Regular reviews help us keep track of our assets and money. It also helps us be more open with people who have a stake in the organization, like customers and investors. They can see that we are being honest about our bookkeeping.
4. Reviewing Depreciation Schedules Regularly
It is important for businesses to keep track of what they own. This is especially true for big things that the business buys, like machines or equipment. Companies need to make a plan that shows how these things decrease in value over time. This helps them keep track of money coming in and going out, and also understand how much something really costs in the end.
The company needs to check the depreciation schedule often. This is so the company can make sure it is following the rules. If the company does not check often, things might get mixed up and the company will not know where its assets are.
5. Reconciling the Book Value of Fixed Assets With Their Physical Inventory
Companies do better when they compare the book value of their fixed assets to their physical inventory. This lets them see how each item is doing and how much it is worth now. If there are any differences, businesses can find and fix them quickly.
Further, it allows companies to make informed investment decisions in the future based on reliable data. Reconciling fixed asset books can also aid organizations when filing tax returns as the most accurate records are available for taxation authorities to review.
Streamline Your Fixed Asset Management Today
By understanding the fixed asset internal controls required by SOX compliance, companies can ensure that their fixed assets are properly managed and accounted for. It is also important to note that some of these controls may differ depending on company size and industry.
Companies should always consult with a qualified accountant or financial advisor when setting up these controls to make sure they adhere to all necessary regulations.
Are you ready to take control of your fixed assets and internal controls? Contact CPCON today to learn more about how fixed asset management solutions can help you improve your business.