Accounting

Sarbanes Oxley act also referred to as the public company accounting reform and investor protection act was formulated and enacted to law in the year 2002 following the collapse of major corporations such as WorldCom and Enron during this period. The main intention for the formulation of the Sarbanes Oxley act was to punish and deter accounting and corporate corruption and fraud, protect the shareholders and workers interests and ensure that justice is carried out for wrongdoers. Sarbanes Oxley act will have a great impact to our company, ABC Company, a manufacturing firm dealing with production of household goods and accessories. Under section 404 of this act, companies are required to make yearly assessment on internal control over reporting and also to have such assessment being attested to by independent auditor of the company after reviewing them. Being a medium sized company, the cost of ABC Company is bound to increase. Assessment of internal control is a detailed and labor intensive process that may require training of employees to carry out this function. Hiring an independent auditor to verify the assessment after reviewing them is also a costly venture. As such, internal control assessment is bound to become more costly (Cerullo  Cerullo, 2003).

One of the major benefits or positive impact that the Sarbanes Oxley act would have on the internal control in my company is that it would lead to increased efficiency. Sarbanes Oxley act requires continuous assessment and reporting on the status of the internal control to the public. With this continuous assessment, my company will be in a position to spot all discrepancies and shortcomings in the internal controls and correct them on time hence avoiding costs associated with wrong valuation of stock. Improved internal control systems would also improve the public image of my company hence increasing its goodwill and sales.

Sarbanes Oxley act is meant to check on corruption and fraud in an organization by ensuring that all the internal controls are working correctly. Improved internal control systems as a result of Sarbanes Oxley act and other reforms would enable ABC Company manage risks efficiently and avoid its failure as a result of fraud or corruption. An improvement in the internal controls of ABC Company as a result of compliance with Sarbanes Oxley act would also improve the investor confidence since all such improvements are made public (Cerullo  Cerullo, 2003).

Auditing around the computer and through the computer
Auditing around the computer refers to any form of audit that takes the assumption that computers are right hence only non computerized information is audited, or carries out correction of information like inventory based on the results given by the computer. This kind of audit is quick and simple as only non computerized information gets to be audited. It can also be cost effective to an entity. However, using this audit approach in ABC Company would have various negative impacts. To begin with, auditing around the computer is ineffective especially for manufacturing companies such as ABC Company. In our company, inventory information is computerized. Using this approach, it would mean that audit would not be carried out on such information. Throughout the year in my company, inventory is lost via counting errors, breakage and theft and as such, a physical inventory needs to be carried on an annual basis to correct computerized quantities obtained in a year (Donaldson, 2005).

Auditing through the computer is the complete opposite of Auditing around the computer. This approach uses the computer to verify all information. An auditor using this method follows all audit trails via the internal operations of a computer, tries to verify that all the controls of processing are functioning and lastly tests whether the controls are able to prevent errors. This is an efficient and effective auditing method although it can be costly and time consuming as compared to Auditing around the computer. This approach of auditing would benefit ABC Company in that it would help in ensuring that all computer process are working well and are able to prevent errors. This approach also identifies potential weaknesses in the internal controls hence allowing for timely corrective measures to be taken (Donaldson, 2005).

This study intends to evaluate the implementation of Balanced Scorecard in Best Value PLC. The study will analyze advantages and disadvantages associated with implementation of Balanced Scorecard through various sources. Various aspects of BSC are studied through reliable sources to assess the feasibility of system relative to organization.

The main aim of Balanced Scorecard implementation is to establish strategic links between financial performance and operational strategies of firms. The performance measures are also designed on basis of firms main goals and strategies and thereby, elevating the importance of Balance Scorecard as a key instrument in analyzing a firms performance.

As with any other management tool, implementation of Balanced Scorecard requires careful consideration of common threats and conflicts that might arise. If not strategically implemented, BSC approach can result in increased costs for the firm in terms of conflict between human resource and management of firm. The management needs to include all strategic factors and their weight-age accurately to obtain precise results. Such strategies can lead to formulation of appropriate strategic and policies that can help firm in long term.  

Best Value PLC being one of the leading supermarket chains in US and UK, basis its performance in services and products on customer satisfaction and revenues generated. The management of Best Value PLC is considering implementation of Balance Scorecard approach to evaluate its strategies and performance, identify key improvement areas and formulate future strategies to overcome any weaknesses in process. Implementation of Balanced Scorecard provides a framework for management to follow an integrated approach towards achieving strategic goals through efficiency of non-financial means (Evans, 2002 Indu, 2006). The use of Balance Scorecard not only improves financial performance but involve human resource at each level to understand the strategic goals of firm and implement necessary actions to achieve those goals (Albright and Lam, 2006).

The management of Best Value PLC is particularly interested in the non-financial aspects of Balance Scorecard that are difficult to filter out in an organization but are of utter importance to strategic goals of a firm (Horngren, 2004). However, implementation of Balanced Scorecard requires certain considerations that are needed to be evaluated before execution of process.

There are certain elements related to Balance Scorecard which are evaluated in this study to provide an optimal solution for Best Value to integrate this approach into its system while avoiding any issues or conflicts. These issue and conflicts arise when erroneous inclusion or exclusion of factors like importance of each elements, its weightage and link to strategy occurs. The report analyzes restraints related to Balance Scorecard implementation and develops strategies and suggestions that can counter the negative prospects to provide feasibility plan for Best Value PLC.  

History and Foundation of the BSC

The main aim for existence of corporations has always been considered to earn profits. This financial approach of firms started to change during recent years, when increase in customer awareness gave rise to importance of non-financial factors while keeping financial goals as one of primary goals (Drury, 2004). The changing dynamics of industries gave rise to need of integrating both financial and non-financial approaches towards strategic goals. The scenario of service oriented firms has changed the focus of firms from financial factors towards non-financial factors (Kaplan and Norton, 1992).

Balanced Scorecard was initially launched during early 1990s to cater to the need of management personnel in formulating strategies that integrate both financial and non-financial perspectives (Cobbold and Lawrie, 2002). The earlier model of Balanced Scorecard developed by Kaplan and Norton (1992) was limited to four approaches of performance measurements which was later improved to include several others aspects of performance measurement including six sigma and performance prism.

Issues of the Balanced Scorecard

Importance and Benefits of the Balanced Scorecard

The main purpose of a Balanced Scorecard is to analyze non-financial measures apart from financial measures and integrate the two approaches to establish relationship between firms strategy and its goals. However, like any other management approach, Balanced Scorecard has its own advantages and disadvantages.

Advantages of Balance Scorecard
Additional Measures
Apart from traditional performance measures, Balanced Scorecard uses a unique management approach which integrates elements like customer satisfaction and operational efficiency which provide additional effectiveness in model (Kaplan and Norton, 1992). Given below is the traditional Balanced Scorecard which depicts four major elements of BSC.

Useful for Managers
Balanced Scorecard is an extremely useful tool for managers since it provides a 360 degree performance measure view including four basic perspectives that are determinants of a firms performance (Kettunen, 2004). These perspectives, as shown in Fig 1, include Customers, Internal Process, Financial performance, and Learning and growth of firm. Analysis of these factors provides managers an overall view of firms operations and presents a clearer picture of gaps in profit margins and costs that have being incurred to achieve profits (Drury, 2004).

With its focus on major affecting elements, Balanced Scorecard provides ease of access to relevant information for managers rather than including irrelevant factors. This provides clarity of information for managers to analyze and formulate strategies accordingly (Kulatunga et al., 2007 Hubbard, 2007). Also Balanced Scorecard establishes clear link between each perspective of performance measure and analyze how significantly firms operations are linked with its strategy.

Strategic Planning
Managers use Balanced Scorecard to link the strategic performance factors with firms goals and objectives thereby, studying the efficiency of firm and future ways to initiate strategic planning that would align its operations with firms mission (Witcher and Chau, 2008).

Four Perspectives of the Balanced Scorecard
The analysis of Balanced Scorecard requires detailed study of its four perspectives and understanding the input of each factor in a firms performance. The four elements of Balanced Scorecard including Financial perspective, Customer related factors, Internal processes and Learning and Growth strategy each have their own importance and contribution towards financial performance of firm. It is therefore, important to study each element in detail and understand its importance and aim (Evans, 2002).

Aim of the Four Perspectives
In the initially designed model of Balanced Scorecard, there are four major research questions that were resolved using the scorecard. Firstly, the model looked at the stakeholders of the firm and particularly the shareholders that have invested in the firm. The model tries to understand what exactly the requirement of shareholders is and how a firm can fulfil it. Secondly, the most important element that generates income for the firm, customers, should be analyzed and their satisfaction level is measured. Thirdly, the firm looks at its operational efficiency to improve the internal processes to eliminate unnecessary costs and activities and thereby, increase profit margins. Lastly, The firm tries to establish a growth strategy that can lead the firm in future to create more value and continue to expand.

The four major perspectives in a firm are related to each other and therefore, through applying a Balanced Scorecard (Fig 1), managers establish relationship between the four elements and firms strategy and final outcome to understand and implement necessary changes.

Usefulness of Perspectives
The weightage or importance of different perspectives involved in Balanced Scorecard varies from firm to firm. For some firms and researchers Customer is the key to achievement in financial performance (while Callaghan et al., 2007) while others place high value on Internal process and learning and growth (Evans, 2002 Cobbold and Lawrie, 2002). The strong relationship between learning and growth and internal processes makes them superior perspective from others and a major input in firms performance.

The assessment and placement of these perspectives in order depends on each firms preference and structure. Ranking the perspectives holds high importance since placing high value on least important perspective can result in sunk cost for the firm. An example can be taken from leading firm Xerox where due to wrong assessment company spent huge amounts on surveys and interviews with customers. In later part of implementation of strategy it was found that customer satisfaction plays least role in generating profits for firm, thereby, costing company huge sum of money (Larcker, 2000).  Such misleading concentrations can affect the performance of Balanced Scorecard tool (Kaplan, 2001).

3.3 Leading and Lagging Measures

Key Performance Indicators are the measurement tools that are used to evaluate and control performances of each firm and align them according to firms goals (Eckerson, 2006). The performance indicators are divided into two main types of indicators Leading Indicator and Lagging Indicator. The leading indicators are measures that evaluate the activities of a firm that have the potential to increase performance of a firm i.e. they evaluate the futuristic options for the firm while the lagging indicators identify previous activities and their output to determine yielding activities versus unyielding activities.

Criticisms
Johnson and Kaplan (1987) identified several issues linked with leading and lagging measures. One of the major issues identified was focus on financial factors instead of non-financial aspects. The leading measure tries to establish link between the non-financial aspects and the financial aspects i.e. financial performance which are the lagging measures. This relationship is referred to as effect and cause relationship by Horngren (2004).

Analysis of factors that cause changes, whether positive or negative, in firms performance assist the management in formulating future strategies. Mostly, lagging measures work with Customer perspective and match it with the financial perspective since it is the non-financial measure. On the other hand, leading measures evaluate the Growth and Learning perspective which are more quantitative factors (Evans, 2002).

The main criticism towards leading and lagging measures has been pointed out by several researchers that claim the confusion between definition of leading and lagging measures (Hall, 2008). The criticism is drawn from the fact that where costs are supposed to be leading factor, it is taken as a lagging factor in the Internal Process. Also customer satisfaction though is a non-financial factor but is considered as a leading measure. The classification of leading and lagging factors often faces criticism

3.4 Strategy Maps for The Balanced Scorecard
Strategy maps are an important tool used by managers to analyze how the value chain works in an organization (Balancescorecard.org, 2010). As indicated by the name, strategy map is a diagram that shows how each perspective of organization give its input in value creation process through a step by step approach. The map also indicates how each activity affects the other activity in a strategic way to achieve goals. Strategy maps are a useful tool used by managers to implement different strategies. Given below is a strategic map which shows relationship between different perspectives of a firm.

Exhibit 3 Harich (2004)
Functions of Strategy Maps
The use of Strategy maps is mostly applied during implementation of Balanced Scorecard since it provides an efficient system to form strategies and present to employees visually the system that is to be implemented. As with any other strategic tool, Strategy maps also require careful consideration to be implemented and communicated successfully.

Uses of Strategy Maps
The main purpose of Strategy Maps is to create a visual map that would outline the main strategies and action plan that the management is planning to implement (Antola et al., 2006). Strategy maps are used to convince employees regarding the betterment of firm in adoption of new strategies and present their link with mission of firm that will motivate the employees adopt the new model (Kaplan and Norton, 2004).

Strategy map is another step towards establishment of Balanced Scorecard which is created by managers to review the link between new strategy and companys goals. This map is then utilized to communicate with the employees and thus, is used during implementation process (Lagace, 2004). However, use of Strategy maps is a time consuming job since after formulation of strategy which itself takes a lot of time, making of strategy maps can be considered as costly in terms of cost and time (Witzel, 2008).

Differentiation of Terms
Strategy maps have been identified as maps while in some literature they have been referred to as success maps (Neely and Bourne, 2000 Antola et al., 2006). The term success map is still synonymous with strategy maps since they both lead the firm on success road through establishment of necessary outline to follow. Both terms have similar mission to establish relationship between companys goals and its strategies and create steps that lead to companys main goal.

3.5 Limitations of The Balanced Scorecard
Balanced Scorecard measures the strategic factors that contribute towards companys performance and consider financial as well as non-financial perspectives.  Where Balanced Scorecard provides an efficient system for management, it has been criticised to have certain attributes that affect its objectivity and usefulness for managers.

Cause-and-Effect Relationship
The main logic behind formation of Balanced Scorecard matrix is to establish relationship between different perspectives of organization and deduce the cause and effect phenomenon from them. This cause and effect relationship makes managers formulate a strategy where the factors that can cause positive effect on performance of firm are utilized efficiently to obtain results. However, the effect of each perspective is interpreted based on historic results and is might be applicable under new circumstances (Drury and Shishini, 2005). This approach by managers is often criticized by researchers since adopting such strategy does not promise future performance according to strategy and is more based on hypothesis.  Suppose a marketing campaign initiated last year generated huge profits. However, the same strategy might fail in current year due to changed perceptions of audience. Therefore, this will affect the over all strategy and performance of firm.

Impact of External and Internal Environment
Another problem with Balanced Scorecard approach is that it does not incorporate elements of external environment which include competitive forces, suppliers and environmental forces (Kulatunga et al., 2007). As pointed out earlier, it is very important for managers to consider implications of such strategies on internal environment of firm which mainly includes human resource that is affected in long term (Drury and Shishini, 2005).  Several firms adopt Balanced Scorecard and make changes in the standard perspectives as they deem necessary. This leads to alterations that might change the results of matrix. Such alterations can affect the objectivity of results as well since Balanced Scorecard is mainly constructed for limited perspectives (Drury, 2004).

BSC Measures
The perspectives included in Balanced Scorecard matrix are then evaluated using certain measures for each perspective. These measures are required to be directly linked with firms performance and any change in these measures should be made only to enhance that performance. The effectiveness of new measures that firms include in the matrix is often questioned by researchers (Horngren, 2004). The researchers call for careful sort out of perspectives and measures associate with each perspective (Cobbold and Lawrie, 2002). Issues with inclusion and exclusion of certain elements are expected to affect the performance of firms.

Customer Perspective
One of the main issues with firms in todays scenario is that of its customers as revealed by a survey by US Financial Services Companies where 72 responses claimed customer service to be the main driver of financial performance whereas rest claimed short term financial performance to be the key driver for success of firm (Ittner and Larcker, 2000).

The importance of customer service makes its important for firms to carefully include customer satisfaction perspective in the Balanced Scorecard matrix otherwise the firm can incur high costs (SunMicrosystems.com, 2008). The Balanced Scorecard measures the satisfaction level of customers through surveys where attitude of customers were analyzed. However, researchers claim that the matrix should actually measure the buying behaviour of customer to obtain more relevant data (Drury, 2004).

Key Performance Indicators
The Key Performance Indicators as mentioned before are used to create a relationship between firms mission and goals and its strategies. These indicators are often labelled by researchers as irrelevant measures to analyze and plan firms strategies (Kaplan and Norton, 2000). This ambiguity in usefulness of Key Performance Indicators is often criticised to create delays in implementation of Balanced Scorecard strategy.

Along with Key Performance Indicators, the critics of Balanced Scorecard also lay emphasis on puzzling performance measures of leading and lagging. The lagging measures are often criticized to be focused on end results since they measure non-financial aspects of performance indicators (Kanji and Moura, 2002).

Relevance and Reliability of Surveys
The surveys included in the report are US and UK based which are synonymous with environment of Best Value PLC which is a US and UK based company. The main considerations of culture, environment and regulations are similar for both surveyed firms and Best Value and therefore, provide relevant and reliable information. However, the surveys are conducted in each type of firm giving a wide range of services which might not match with Best Values product line. Also the time frame is quite old as the surveys are included from 2000 and might not be relevant for current scenario.

Relevance and Reliability of Journal Articles
The journal articles taken in this research are from well known published journals and peer reviewed research papers which provided reliable sources of information. The industries included in the research are both related and non-related to Best Value PLC and therefore, provide an overall review of strategies followed worldwide. The articles used in the research have a long list of authentic references that provide an indirect sourcing for this study.

The articles used highlight issues related to Balanced Scorecard, Key Performance Indicators, Strategy Maps and other factors that affect the implementation of Balanced Scorecard. The article highlights issues related to BSC and provides solutions for firms that are planning to implement BSC.  

Relevance and Reliability of Books
The lists of books included in this study are from authentic authors like Drury and Shishini and Kaplan and Norton who have established their position as great researchers and article writers and therefore, provide extremely reliable and relevant information for this study. The year of publications of these books is also from a relevant time period i.e. 2004 and 2005 which supports the research topic in this study.  These publications include supports as well as certain criticisms on the implementation of BSC which provides a fair valuation of the model.

3.6 Balanced Scorecard Implementation Failures
The benefits of Balanced Scorecard does not guarantee successful implementation of the model in any organization and rather demand for careful consideration for certain factors that might lead to failure of the matrix. Among many reasons for such failures, some of the reasons are mentioned in this study.

Firstly, apart from the top level management that is responsible for creating the strategic plan, rest of the firm might not be properly communicated with to explain the new strategies that management is planning to implement.

Secondly, strategic planning is not done properly or in accordance with organizations goals and mission which is the primary objective of implementing Balanced Scorecard.

Thirdly, the financial department or the budgetary committee does not allocate required resources for the implementation of BSC which is an essential input in this process.

Lastly, lack of focus on achievement of strategic goals can result in failure of implementation of BSC since deviations can be made in process due to inclusion of various short term strategies.

Failure of Strategy Maps
Strategy maps which are used as an important tool in implementation of BSC are often regarded as a distraction from the long term goal of firms (Legace, 2004). Initially designed for support in process of implementation of BSC, strategy maps can consume longer time of management which can result in deviation from main goal (Witzel, 2008).

Opinion about Implementation Failures
Implementation of Balanced Scorecard is a subjective issue that lacks specific direction (Barr, 2007). The model is adopted by various firms in different ways that has increased the ambiguity regarding an objective approach for applying the model. Examples of failure in implementation of BSC can be found from a number of firms like Tesco which shows that 80 of the firms suggest that the model failures occurs in final stages of implementation while 50 claim it to be management issue during planning stages (Wheatcroft, 2004). Overall, the surveys depict that the failure rate for BSCs implementation is around 70.

Top-down or Bottom-up Strategy
The selection of direction for implementation of strategy also varies from firm to firm where some organizations has top to bottom structures while others have bottom top approach. Researchers like Calhoun (2004) suggest adopting a top down approach for implementation of BSC since it requires planning and strategy formulation on upper level while rest of the organization is advised regarding the plan through strategy maps and other modes of communication. However, this type of approach does not suit organizations that have a decentralized structure and a bottom up approach where employees have more authority and thus Balanced Scorecard should be applied from bottom top (Molleman (2007). Application of BSC planning is an important step that should be implemented keeping in mind the structure type of firm to avoid any failures.

Tesco Case-study and its Relevance and Reliability
There are several case studies regarding companies that have successfully implemented Balanced Scorecard and that too with certain amendments. As mentioned earlier, the Balanced Scorecard model has flexibility to include certain perspectives that may be essential to performance of an organization but have not been included in the BSC matrix.

Tesco introduced a modified version of BSC in form of Steering Wheel. The steering wheel consisted of five perspectives with addition of community perspective as a new perspective (Witcher and Chau, 2008). The successful implementation of BSC at Tesco is an example for managers of other companies that wish to include related factors into their BSC matrix.

Tescos Steering Wheel

Since Best Value PLC is a consumer goods and financial services organization, therefore the case study included in this report revolves around UK based Tesco which can be easily related to Best Value. The approach of case study used in this report is a useful input for understanding and developing feasibility of Balanced Scorecard at Best Value since it presents real life situations of firms that have adopted a similar strategy. Witcher and Chau (2008) presented a case study on Tesco where the implementation of Balanced Scorecard matrix took place. During early 1990s Tesco implemented traditional model of Balanced Scorecard as suggested by Kaplan and Norton. However, during 1996 the company updated it model through use of other measures along with Balanced Scorecard and finally the management came up with steering wheel concept where it included community as another perspective in Balanced Scorecard. Inclusion of Community was due to importance to reputation of Tesco and its contribution towards financial performance of company. This importance of Community rises from the fact that UK consumers are more inclined towards firms that contribute more to the societies and communities where they operate and thus, generate profits. The successful implementation of a fifth perspective in BSC at Tesco is an example that can be followed by Best Value PLC in its implementation of BSC.

Relevance and Reliability of Interviews
The study includes interview with Robert Kaplan who initiated the concept of Balanced Scorecard and therefore this interview provides an insight into details regarding Balance Scorecard, its implementation and elements associated with it. Kaplan has discussed various aspects of BSC and specifically the concept of Strategy Maps. However, this interview might give a biased opinion since the interview was also a promotional campaign for latest book of Kaplan regarding Strategy Maps and therefore, assumptions posted by Kaplan might be subjective in real life.

Relevance and Reliability of Newspaper Articles
The newspaper articles and other published articles used in this research study are from authentic printing press including The Times and Financial Times. Information regarding certain organizations like Tesco is also taken from the Times which prove the reliability of information. Also the time period from which articles have been selected varies from 2004 to 2008 which is a relevant time period to analyze the feasibility of Balanced Scorecard.

3.7 Future Developments of The Balanced Scorecard
After the initial launch of Balanced Scorecard, researchers started to investigate for feasibility and relevance of the matrix according to generation firms environment. This research has resulted in further developments in the matrix that has enhanced the usage of BSC and made it a more comprehensive tool (Bible et al., 2006).

Recent Developments
With other constant updates on the model, Callaghan et al (2007) developed Revised Scorecard, an instrument that was used to expand elements of financial perspective and include all necessary elements related to shareholders and other stakeholders. Another model of Extended enterprise Balanced Scorecard was designed by Folan and Browne (2005) where various aspects of manufacturing firms were incorporated in the model. Several firms that have modified and adopted the Balanced Scorecard approach are given in this study.

Further Developments
Given the criticisms on Balanced Scorecard matrix, there have been constant updates on improvement of the model through elimination of erroneous elements like weightage of perspectives, their measures and use of software to adjust any problems (Cobbold and Lawrie, 2002). Several approaches have been used to solve the issues. For instance Punniyamoorthy and Murali (2008) introduced balanced score approach while other researchers introduced other mathematical solutions to cater to the problems related to BSC.

Ethics Perspective
With other evolutions in the design of Balanced Scorecard, certain researchers have suggested that there are certain elements that can be incorporated in the model of Balanced Scorecard. One of those elements that have gained significance is the ethical perspective in an organization (Arveson, 2002). Inclusion of ethical perspective is included due to increasing importance of ethical issues in financial firms that are needed to be governed by management (Mclvor, 2005).

Relevance and Reliability of Websites
There is still lack of reliability of websites since only a few authentic websites like that of Balanced Scorecard Institute are available online. Aveson (2002) in his article on Ethical issues related to Balanced Scorecard assert that although there are a number of relevant sources for access of information related to Balanced Scorecard, the reliability of these sources are questionable. There is need for establishment of more reliable websites related to Balanced Scorecard to provide information regarding all technical, strategic and ethical issues related to BSC.

Conclusion

Balanced Scorecard is a useful tool that helps managers in analyzing the factors that contribute the most towards achievement of firms goals and objectives and align the strategies accordingly. Through Balanced Scorecard, managers develop a relationship between firms operational and financial performance and improve decision making process of the firm.

The Key Performance indicators for each factor further enhance the improvement process through following of a proper strategic decision and establishing a direct relationship with companys main objective. This makes Balanced Scorecard not just another management tool but a strategic tool that is used from top to middle management for formulation of strategies (Kaplan and Norton, 1996).

Strategies like Balanced Scorecard approach requires careful management consideration since the impact of such tools is from top to bottom affecting each level of organization and therefore, the management has to be cautious in its proper implementation. According to Molleman (2007), if Balanced Scorecard is not accurately implemented the affect of unsuccessful transition can be long lasting. However, application of Balanced Scorecard remains as a recommended tool and strategy for service organization since the advantages of its implementation surpass its limitations (Antola et al., 2006 and Cobbold  Lawrie, 2002).

There are various issues that are needed to be incorporated by management before implementation of balanced Scorecard. Firstly, any changes in original model should not be made until necessary. Balanced Scorecard is flexible enough to be altered according to firms needs, however, the management should make amendments that are less complex and that can add value to the use of Balanced Scorecard.

Several firms apply Balanced Scorecard with minor adjustments and still manage to successfully implement it and utilize from it in management decisions (Witcher and Chau, 2008). One of the most commonly and erroneously used perspective is that of customer satisfaction since it is one of the major factors that contribute towards performance and a low ranking in customer perspective means damaged market for the company. The solution to this problem is careful implementation of model and well trained strategic team to monitor the process of implementation (Witzel, 2008).

The implementation of Balanced Scorecard should be in accordance with firms goals and strategies and once the feasibility is drawn, each department of firm should be involved in the process through discussions or training sessions to ensure fewer constraints in the process. This approach is applicable during analysis of the tool and after its implementation.

Since its formulation, Balanced Scorecard has been constantly updated according to needs of business strategy and industry structure. With these developments, some elements of inaccuracy remain due to less objective aspects of weightage given to each element and its importance.  Therefore, firms needs to apply extensive research and management skills to develop the model and integrate elements like human resource and ethical factors with more prudence than objective factors like financial perspective (Arveson, 2002). Consideration of such elements leads to successful implementation of Balanced Scorecard model and thus, promises improved performance.

HSBC was selected because it is one of the leading financial institutions operating on a worldwide scale. The earnings and the dividend report will at least show the cumulative effects of the world economy on this companys performance. The company has cut back on their dividend pay-out since the banking sector is one of the most heavily hit by the recent economic crisis. The effect is a little different on such companies as Vodafone and GlaxoSmithKline, however.

Vodafone is a telecommunications company that was chosen because they are also one of the leading providers in the US. They are operating in the technological sector that is almost immune to the recession, but very sensitive to any changes in the telecommunications technology. This company is selected to showcase the difference in strategy that it will have as compared to the financial sector represented by HSBC.

GlaxoSmithKline which belongs to the pharmaceutical industry was chosen because it is also a leader in its industry and is representing the health industry. Although the companys drug products are dependent on technology, the factors and the interacting elements that influence this kind of companies is entirely different from Vodafone. GlaxoSmithKline represents the health needs of the world population today.

In relation to the efficient market policy, the dividend policy and stock returns are supposed to reflect the knowledge and expectations of the investors at any given time. This theory is very naive in assuming the reactions of investors will be reflecting all the information available for the market. First of all, there exists a certain inequality between the investors themselves. There are a lot of first time investors. They are financially unskilled that is why they are not able to tell whether or not they should be buying or selling their shares of stocks. This makes it a strong case to render the efficient market theory invalid.

The interpretation alone will never be the same with everyone. The reactions are not necessarily intelligent decisions. The basic premise of the theory is also flawed, since it assumes that one cannot beat the market. Since the market shows the reaction of everyone dealing with it, it does not mean that you have to follow the trend that everyone else is following. The most important evidence of this would be Warren Buffet who happens to be the best investor of all times. He has already been beating the market average consistently for the past few decades, (Gujarati 1995).

The dividend policy clearly does not reflect the ideas proposed by the efficient market theory. The increase in dividend does not necessarily mean a better performance of the company or a positive outlook of the investors for the company. Similarly, a lower dividend policy does not mean a bad or poor performance of the company. It does not mean the company is in dire straits just because of the lower dividend policy.

The statistical technique used in order to determine the relationship between the dividend and the share prices is the scatter graph analysis. This technique is chosen specifically because there is a difference in the units of measurement of the two variables. We are only after the relationship that we can derive from these two. The two variables we are comparing are the share price and the dividend of a company. They are very different in terms of category. The connection between the two however can be determined to some extent with the use of a scatter graph to determine their correlation.

The x and y axis of the graph will show whether the two different values correspond to any changes in the other one. The data gathered will be close to each other and form a recognizable line. The line may or may not be in proportion to the values of the x axis. There is correlation however between the two values as long as the distance between the data is not too far away from each other. The correlation factor used to determine the extent of the connection between the two variables is near 1. If the correlation factor is lower than 1, it would mean lesser correlation between the two variables. We can determine the connection of the two variables depending on the correlation factor that we determine. In this case, we have seen the scatter graphs showing little correlation between dividend and share prices. The conclusion we can derive from this data can only mean that there is no connection indeed between share prices and dividend yield (Field 2005).

On the other hand, the companies have different policies when it comes to their dividend since they are also encountering different situations. The three sample companies in this case are showing the differences between their business environments in terms of their dividend policies. They are specifically chosen to illustrate the relationship of the dividend yield with the share price. They cover different industries to point out the interaction of macroeconomic factors with the financial condition of any given company.

First, HSBC has been negatively impacted by the worldwide stigma associated with the financial industry but was fortunate to recover with the market after a few months. There are still many issues that HSBC needs to deal with. They are out of the danger zone for now. There have not been any drastic changes in the dividend policy of HSBC despite the ongoing financial crisis. The dividend has actually remained the same from previous years even though the earnings have already dropped considerably.

As for Vodafone, they need to invest much in their infrastructure. The fast development of the telecommunications technology requires this firm to stay abreast of the latest development in their field. The reduction in dividend clearly indicates that the company is planning some heavy spending. They are most likely planning to invest in new technology infrastructure to improve their current operations capability. The reinvestment of Vodafone into their own business would mean bigger returns in the future as well as increased competitiveness in their respective field. Vodafone has an erratic dividend policy within the last five years. It started low on 2005 and then swings upward and comes back low again on 2008. The financial crisis however has surprisingly increased the earnings per share of the company. Vodafone is able to increase their dividend payments to shareholders as well.

GlaxoSmithKline on the other hand greatly reduced their capacity for the dividend payments of their shareholder. Their sector is also greatly hit by the financial crisis but the demand for their products and services are not slowing down. The decision of the company to issue huge dividends shows they might be trying to use it to increase their competitive advantage. Thus, they can invest more into the research to create new drugs. This can ensure the future profitability of the company for a very long time. If they are not going to invest in the research, they will have no new products to offer in future. Pharmaceutical findings are always changing as well as the medical profession. GlaxoSmithKline has to invest in the development of new drugs otherwise they will face obsolescence and cease to exist as a business entity.

GlaxoSmithKline did not feel any significant decline despite the economic crisis. The nature of their products is considered essential. It would always be in demand despite people having lost their regular means of income. Their products are literally saving the lives of the patients. This is the reason why their products are enjoying inelastic demand. Their company actually posted higher earnings compared to the years that the financial crisis was just building up.

The selection of these three companies is based on the fact that they are all operating in different industries or economic sectors (Revsine 2004). The relationship between their share prices as well as the dividends paid to the shareholders is analyzed for the connection between the dividend policy and the resulting share prices.

Graphs show that there is no relationship between the share prices of the company and their dividend policy. The dividend policy simply indicates the relative strength or weakness of a company and not exactly the fundamental truth behind the scenes. Using the null hypothesis testing, the null hypothesis would be whether the increase in share prices would correspond to increase in dividend yield as well. The received data were all less than the 0.5 confidence factor (Field 2005). The hypothesis therefore is false. There is no connection between share prices and dividend yield. This can be easily explained by the fact that the companies with high earnings do not necessarily give out dividends to their shareholders.

All of these data are confirmed by the ideas taught by Banjamin Graham, who is considered an expert on the subject. Bejamin Graham points out that the share prices of a companys stock are mere fluctuations of the markets opinion at that moment. The perception of the market always changes in time. The investor does not have to share the sentiment of the market at any given time. The market is actually affected by the greed or fear of the investors. If the investors are feeling greedy, they drive the share prices of the stocks by engaging in a buying spree. If the investors are feeling fearful, they drive the stock prices even lower by selling them all at the same time (Dodd 2009).

Sensible people place more emphasis on the better standards when deciding the moment to buy a stock. The price quotation given by the market should not be perceived as an authority in the actual value of a stock. The term intrinsic value is used by Benjamin Graham to separate the business value of the company with what the rest of the market thinks of it. He proposes that the prudent investor should determine the intrinsic value of a stock to determine whether it is expensive or cheap compared to the market price offered. If the market price is cheap, he suggests that the investor buys the stock. On the reverse, he cautions the investor to shun the stock if it is too expensive relative to the intrinsic value. In determining the intrinsic value of a stock, he suggests that the investor study the financial statements of a company.

The investor should be able to determine to some extent the past performance of the companys management as well as the possible future profitability. The potential threats and opportunity surrounding the business should also be taken into consideration. The intrinsic value is then determined by calculating the potential future cash flow of the business using the net present value method. This is done in combination with a qualitative analysis that will cover potential threats to make the business model of the company obsolete. This is especially the case with technology based companies whose method of earning depends on a certain product. If the technology is made redundant, their product will also face obsolescence in the market. This is one of the major considerations done together with the calculation of the net present value to determine the safe return to an investors capital. The qualitative as well as quantitative information has to be combined to create a complete picture of the stock being considered for investment.

The management of the company might decide they need money for further expansion or to prepare for intensive investments. Otherwise, a company that faces financial problems might actually pay out a higher dividend rate than their wealthier counterparts, since they have no better option. They are not in the position to invest more in their business as they lack the competitive skill to be dominant in the field. It is not a matter of who has the most resources sometimes but rather who has the most efficient and capable organization. The companies that are in financial trouble can give out dividends because they might be trying to bolster their image with the public to prop up their share prices in the market. The investor has to be very discerning when reading a companys action.

Q. 1.
Critical Success Factors (CSF) are the elements that organizations require to accomplish their mission. They are the factors that create success to the business. The success factors should focus on all stakeholders of the organization. Success factors are elements such as the money, customer satisfaction, quality improvement, product development, employee attraction and retention, sustainable business development, good strategic management among others (Betz, 2001). The business should focus on the future customers by improving quality in product and service delivery. The strategies that an organization sets should be aimed at increasing the profitability of the business as well as increasing customer satisfaction. The strategies should focus on the future as well as improving the leadership of the organization so as to enable employees to be innovative. Cost should be properly managed to reduce the price of the product and increase the profits of the business. Success factors are aimed at improving strategy development and cost management skills of the managers (Drejer, 2002).

Q. 2.
Competitive advantage is gained through increasing innovation through the use of technology and increasing customer value. Innovation is the implementation of new ideas in the production and marketing of the products that are being marketed by the organization. The use of technology is important in developing new products which differentiate the companys products from those of the competitors. Customer value is the total satisfaction that the customer gains from the consumption of the products of the organization. Examples of organizations using innovation are Microsoft Inc., Apple Corp Virgin Group and others. Examples of organizations using customer value as a strategy are Daimler AG, Boeing and others (Drejer, 2002).

Q. 3.
SWOT analysis analyzes the strengths, weaknesses, opportunities and threats that an organizations products have compared to others in the market. The value chain analysis describes how Michael Porter explained about increasing the value of products in all the stages of production (Betz, 2001). Each level of production increases the value of the product so that the end product has highest value compared to competitors products. Execution analysis investigates how a company implements its strategies as compared to competitors. The balanced scorecard gives a range of figures that are used to rate the achievement of the goals of the organization. The four strategic resources are linked in that they establish the ability of the organization to outdo the competitors in the market. The aim of each method is to identify how better the organization is in a competitive market environment. They use tools and strategies that are almost similar in evaluating the business (Drejer, 2002).

Q. 4.
Management by exception is a policy where the organization concentrates on issues that show a big deviation from the planned policies. The organization has pre-determined results that it expects all the systems to achieve. Major deviations from the expected results are dealt with while minor deviations are rejected. More important matters are dealt with and this reduces the wastage of resources on insignificant matters. For example, the management may decide to concentrate on departments producing one thousand units. The rest are ignored since their contribution is not significant (Drejer, 2002).

Q. 5.
Balanced scorecard is a method of evaluating the success of a business using both financial as well as non financial measures. The non financial measures are customers, internal business processes and the learning and growth strategy of the organization. Different companies have different strategies. They have different problems and their resources are also different. The scorecard will differ in different companies because each company has different situations and cannot give the same evaluation figures (Drejer, 2002).

Officials who oversee non-profit financial management must learn basic techniques of managing finances. Such skills should focus in areas of bookkeeping and cash management where entries have to follow certain guidelines in order to ensure that honesty and integrity is maintained. Leaders should further learn ways of generating financial statements and the procedure of analyzing those statements for them to know the financial of the organization. Basically, bookkeeping involves the entry of different financial transactions carried out by the company in books of accounts. New organizations record their financial activities through a cash basis accounting format and as the company grows, they develop ledgers and journals thus proceeding to the accrual system of accounting (Free Management Library, n.d.).
           
Leaders should also learn the process of making a budget which basically shows how a company plans to spend its revenue and manage its expenses for a given period of time.  The company will also incur minor and frequent expenses and thus require the use of a petty cash. After making those entries, a person should proceed to trial balancing which involves totaling of entries in a journal and recording them in a general ledger. An organization further requires bookkeeping entries to generate different financial statements like the cash flow statement which analyses the movement of cash through out the year. The statement of financial position shows the total value of the company (Free Management Library, n.d.).  Financial analysis involves comparing figures in the statement in order to know how different sectors of the company are performing. In conclusion, financial reporting is essential in a company and the frequency of producing financial reports depends on whether the organization is doing well or is in a crisis.

Factory overhead includes direct materials, direct labour and factory overhead. Salaries paid to carpenters for making furniture is part of direct labor. Wood used to make chairs is part of direct materials. All other costs and expenses of the factory are lumped under factory overhead. Factory overhead should be included in product costs to determine if revenues are high enough to recover factory costs and expenses.

Question 1
Organisations normally charge indirect costs (overheads) to individual products in addition to the direct costs involved in making the products. By matching the direct and direct costs in producing a product to the corresponding revenues, management will know if the company was able to successfully generate profits. Standard accounting principle dictates that a strict matching of costs to generate the corresponding revenues should be adhered to without exception. Thus, the cost of indirect materials used to aid in the production of finished goods should be deducted from the revenues made from selling the finished products(Helfert, 1994 152).
 
Likewise, the indirect labour cost that includes the janitors and the supervisors salaries should be included in as part of product cost in order to determine the total manufacturing cost which will be recovered whenever the finished products are sold. Putting it another way, it would be unfair to deduct the indirect factory labor from the revenues generated by the marketing department for it would be violated generally accepting accounting principles of matching cost with the related revenues. The marketing department deducts commissions, advertising, other promotional expenses, and the sales personnels salaries and other benefits from its net revenues (Shim, 2007 17).
 
In a furniture manufacturing company, the direct materials cost is part of the direct cost. It includes the nails, wood, and furniture paints used to produce chairs or other furniture products. In addition, the direct labour is also part of the direct costs of producing the furniture. The direct labour is the amount paid to the workers who construct the chairs, tables, and other furniture (Lanen, 2008, 25). Another item under direct labour in a furniture-manufacturing environment is carpenter. The direct materials and the indirect materials form part of the total manufacturing cost. Further, the third segment of the total manufacturing cost is the factory overhead. The factory overhead includes other expenses that do not fall under direct materials and direct labour. Factory overhead includes the indirect materials and the indirect labour. Indirect costs are costs that cannot be directly corresponded to a cost object (Boer, F, 1999 45).
   
There are several stages involved in determining overhead absorption rates for each production department in a manufacturing company. First, the company collects the total amount spent in terms of indirect materials and indirect labour. The cost accounting department staff will divide the indirect amount by the predetermined rates. Generally, the indirect labour costs is divided by the estimated direct labour hours or machine hours used in one accounting period (Hilton, 200748). There are different bases that may be used for absorbing factory overheads. One very popular method is to use direct labour hours in the allocation of factory overhead.   Likewise, factory overhead can be machine hours used to allocate factory overhead.
   
For a company where most of the jobs are done by machines, the machine hour will offer the most as there are many advantages of using machine hours over direct labour hours in the allocation of factory overhead.  A very tenable reason for using machine hours here is that the depreciation expenses of the machines are included in the income statement as deduction from the gross profit.
   
Likewise, since electricity used by machines, repairs and maintenance of machines reduce revenues, it would be more advantageous to use machine hours in allocating factory overhead costs. On the other hand, direct human labour does most of the jobs in manufacturing plants. It would be better to use direct labour hours in allocating factory overhead together with the advantages and disadvantages of each method (Meigs, 1995305).
     
There are several reasons for charging overheads. One very good reason is for proper matching of costs and expenses to the related revenues. This is very important because deducting cost of goods sold from net revenues generates the net profit or loss figure. In the same light, the cost of goods sold is arrived at by adding the direct materials, costs, direct labor costs, and the factory overhead costs (Horngren, 200084).
     
Another reason for charging overheads is determining the cost of goods sold by the company. The cost of goods sold is the amount that is generated when the factory overhead, direct materials and direct labour, working in projects, are deducted from net revenues. Another reason for deducting revenue is determining the total manufacturing costs. The total manufacturing costs is the sum of the direct materials, direct labor and the factory overhead (Boer, F, 1999 45).  

Question 2
There are different stages in determining the overhead absorption rate. First, the management estimates the total factory overhead amount. Next, the total estimated factory overhead is divided by either estimated total direct labour cost, total estimated direct labour hours, or total estimated machine hours. The procedure for allocating factory overhead to cost centres objects and units covers cost allocation, cost apportionment, and overhead absorption. While the allotment of whole items of cost-to-cost centers or cost units is referred to as cost allocation, the allotment of common costs to two or more cost centres on the estimated basis of benefits received is known as cost apportionment.
     
In addition, overhead absorption represents the allotment of factory overheads to cost units objects by means of a predetermined factory overhead application rate. The factory overhead absorption rate can be either actual overheads rate or a predetermined overhead rate. Normally, a predetermined overhead rate is preferred the reason being is that it is useful in bidding cases to determine quotation prices. Another good reason is it allows easy costing of individual jobs manufactured.  A third reason is that the rate makes interpreting stock market charts. This may trigger by variation in actual factory overhead costs, and or actual level of activity.  One of the two key factors to determine the factory overhead application rate for a period is to select a volume level of production (also known as the factory capacity) that will serve as the bases for applying factory overheads to production (denominators). The second key is the budgeted factory overhead at the capacity being chosen for factory overhead allocation (Power, 1999, 45).
   
In terms of capacity theories, the choice of capacity to be used as a base in applying factory overhead often raises difficult questions. The reason is that there is more than one basis of determining capacity. For instance, capacity can be based on the physical facilities that have been put into place in the factory site. Capacity can also mean productive capacity that can be utilized by giving due allowance for unavoidable lost hours both in respect of machines and number of hours worked by the factory workers. Another capacity issue is the actual capacity used in relation to the expected number of units sold. While one capacity level relates to the level of production determined by engineers, with no thought to the expected sales volume, the other is the expected production revenues. The choice is to be made from one of the following maximum or theoretical idle capacity, practical capacity, normal long-term capacity, and expected short-term actual capacity (Power, 1999, 45).
     
The maximum or theoretical capacity represents the volume of production that a particular production department or unit is capable of producing if the plant were in continuous operation at peak levels at all production periods or hours.  This capacity base does not have any provision for either lack of sales volume or interruptions in factory product output due to machine breakdown, machine downtime, for repairs and maintenance, set up time, holidays, weekends, and other factors. At this capacity, the plant is presumed to work for 24 straight hours a day for 7 days a week, for 52 weeks a year without any stoppage or recess. In addition, the factory is presumed to work at 100 percent of factory site capacity. On the other hand, the practical capacity does not expect full utilization of the factory site. This type of capacity makes due allowance for unavoidable idleness of workers and machinery brought about by repairs and maintenance incidents during production of the companys products. Delays may also be caused by machine set -ups, fatigue, and time lost because of vacations and holidays. However, this measure does not take into consideration plant and personnel made idle due to the lack of sales order. In operational terms, it is the maximum capacity expected when the plant operates at a planned level of production efficiency (Power, 1999, 45).
   
In the same light, the normal or long run production capacity differs from practical capacity. This new capacity permits idleness both of the plant as well as the personnel caused due to a lack of sales orders. Normally, capacity is equal to, or less than, practical production capacity depending upon the volume of expected sales. More often, normal capacity is less than practical capacity. Further, revenue is generally not the basis for the accounting period revenues... It is the average annual finished goods produced over several accounting periods to meet the demands of ordinary and usual sales demand over a cycle of years long enough to be considered as a trend, usually five years (Khan  Jain, 200610).

The expected or short run actual capacity. It is defined as the volume of production needed to fill the estimated or projected demand for the next accounting period, usually one year. Therefore, expected actual capacity differs from normal capacity in the length of time to determine the capacity base used for factory overhead absorption. This measurement estimate will surely not smooth out cyclical variations the terms of quantity sold that are likely to happen over a long period of time as it is guided by an average of only one year projection. This type of measurement may appeal to some entities that are that interested more in short tern plans and control (Khan   Jain, 2006 10).

Question 3   
There are generally three major bases that may be used for absorbing factory overheads. They are direct labor costs, direct labor hours used, and machine hours used. The traditional standard cost system has been highly criticized by engineers and production managers as well as writers in the new manufacturing environment. The criticism in terms of direct labour focuses on the use of variances for control purposes -- primarily the material price variance, the labor efficiency variance, and the volume variance. To a lesser degree, standard cost systems have been disparaged for not promoting continuous improvement for allowing adherence to static standards. Labour variance is the change in direct labours when the numbers of hours worked are computed based on the budgeted and actual amounts gathered in the areas of actual and budgeted hours worked and labor fees actually paid.   Here, the factory overhead is allocated based on the actual direct labor amount for the same accounting period. For example, the actual labour cost is 1,000. If the budgeted factory overhead is twice the direct labor cost, the factory overhead applied is 2,000 (Cheatham, 1993 45).     On the other hand, direct labour hours are the basis for allocating factory overhead. A factory overhead rate hour is then arrived bat (Lewis, 1993 35).
     
In addition, the projected number of machine hours used during the entire accounting period to produce the finished goods of the total estimated factory overhead is important in allocating factory overhead.  This generates an overhead rate hour. This rate is multiplied by the actual number of machine hours spent by the workers to produce the finished goods. The result forms part of the factory overhead for one accounting period (Lewis, 1993 35).
     
Further, standard cost systems did not evolve until the 1900s.   Clearly, standard cost systems are distinguished from earlier cost systems in that they prescribed what factory overhead costs and expenses would be recording in the accounting books. This is different from the traditional way of just simply recording business attractions in the past. Estimates or standards for future costs established, and actual costs compares well with the officers pondering compared well to these predetermined benchmarks in determining the effectiveness of performance (Cheatham, 1993 45).
   
There are advantages and disadvantages in choosing machine hours or labour hours in the allocation of factory overhead. The advantages of using machine hours include determining if the machines were fully maximized or used to full capacity in producing the finished goods. Another advantage is that management will know if the machines were idle or used in contributing to the production of the finished goods.   The disadvantages include not knowing if labour was contributing to the failure of the machine to work at maximum capacity. Another disadvantage is that management may not know if the there are lazy workers contributing to the idleness of the machines.
     
There are advantages of using labour hours in the allocation of factory overhead. They include knowing if labour is skilled enough to produce more goods, and determining if one worker overshoots benchmarks. The disadvantages include not knowing if machines used were contributing to the failure to meet benchmarks. Another disadvantage is that management may not know if there are any machines damaged, causing decline in production output.

Computation in Excel
Briefly, total manufacturing cost is composed of direct materials, direct labour, and factory overhead. All factory costs not classified as direct materials and direct labor are lumped under the account title factory overhead. Direct labour cost, direct labour hours, or machine hours are used to allocate factory overhead. Indeed, factory overhead should form part of product costs to determine if revenues are high enough to recover factory costs and expenses.

The Sarbanes-Oxley Act (SOA) of 2002 introduced major changes in the regulation of financial and corporate compliances. There are several sections to the SOA, which applies to the public sector, foreign businesses, and accounting firms. One of the most important is Section 404, Management Assessment of Internal Controls (soxlaw.com.2003), which is what this paper will concentrate on.

The basic regulations of Section 404 concerning reporting to the Security Exchange Act (SEA), for a written guide to a companies internal control framework, and provide an assessment of the output of the companies internal controls and procedures for financial reporting.

According to the authors of, Internal Controls Sarbanes-Oxley Act, S404 and Beyond, internal controls went from being simple guidelines for internal auditors to a hot topic (Lorne et. Al., 2006). The destruction of formidable companies, such as Enron, and WorldCom caused a whirlwind of new, strictly enforced regulations on internal controls.  These companies caused significant financial losses for investors, and depleted investors confidence.

Section 404, in connection with the rules of the SEO, specifies that a corporation must routinely review management, and report the effectiveness of internal controls over financial reporting (Lorne et.al., 2006). Large companies are not the only businesses that must adhere to Section 404, smaller public companies are also accountable. The rules are the same, but the complexity of the reporting, auditing, and managements interaction is on a smaller scale.  Large companies must rely on a strict internal control system, while smaller ones are more reliant on company-level controls (Dolan, 2005).

Gaining investors confidence is paramount to building an equitable, national economy.  The Security and Exchange Commission became a prominent voice in amending the Sarbanes-Oxley Act, adding Section 404. Companies were now required to make reports public regarding the fairness of financial statements and the effectiveness of disclosure controls and procedures (corgovonline.com. 2005).

What internal controls are mandatory under Section 404
         
Management is required to submit an internal control report with their annual report.
         
Management must develop and maintain proper internal controls for financial reporting.
         
Management must include in their report an evaluation of their internal controls, at the end of the year (corpgovonline.com. 2005).

In Conclusion regulations have been added to the Sarbanes-Oxley Act of 2002 to protect major entities, small companies, and investors.  Stringent internal control revisions are divulged in Section 404, and the Security Exchange Commission contributed to their validity.  These controls are essential in the fair practice of all companies, and in regaining investors trust.