CEOs and CFOs must ensure that internal controls in outsourced activities are documented and tested each year

As CEOs and CFOs sign their first Section 404 reports under the Sarbanes-Oxley Act, many may wonder whether outsourcing will ultimately increase, rather than decrease, complexity and cost. If planned and executed correctly, outsourcing certainly can make compliance under Sarbanes-Oxley easier and less expensive. But there are many pitfalls that those responsible for managing service providers must avoid.

Companies that outsource business processes—such as accounting, finance, and HR—need to verify that their service providers are maintaining adequate and effective internal controls over the processes entrusted to them. CEOs and CFOs are responsible for ensuring that internal controls in outsourced activities—even those moved offshore—have been documented and tested each year. Failing to do so may land them in jail. If those internal controls aren't found to be effective, the CEO and CFO have to expose these problems in corporate Securities and Exchange Commission filings, which may cause investors to lose confidence and lead to plummeting stock prices.

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