With the passage of the Sarbanes-Oxley Act in 2002 (SOX), public REITs are being held to a far greater standard of accountability. The new law requires higher levels of disclosure from public REITs, certification of financials by officers of the company and reviews of controls that drive the accuracy and quality of financial data reported to the markets. Without documented monitoring and reporting procedures that ensure data integrity, corporate officers of REITs are subject to personal liability for mistakes in the valuation and condition of their real property assets. Consequences of noncompliance include corporate and individual penalties, forfeiture of compensation by officers and civil and criminal penalties.
The primary impact of SOX for the public REIT industry will be to drive greater transparency for shareholders in the disclosure of material financial risks associated with their real estate assets. Section 404 compliance begins with a meticulous evaluation of all internal business processes and procedures to determine the effectiveness and accuracy of the financial reporting. Public REITs are now required to review, document and monitor all of their internal procedures and processes to ensure that effective controls exist to prevent and detect errors and fraud. For the average REIT, SOX compliance introduces many new requirements that contradict the manual, distributed, or otherwise dissimilar processes that a REIT currently has in place. Decentralization of information is the most critical problem most REITs face in SOX compliance, as information regarding real estate assets are in the hands of different property managers all over the country.
That is where the intimidating task of meeting SOX compliance has a bright side. For those REITs willing to take the SOX challenge head-on and turn it into an opportunity, StructuredRisk provides the solution. An integral part of the StructuredRisk proprietary risk management software program is its ability to have real-time control and fingertip access to accurate and organized information involving the primary financial asset of any REIT its physical real estate assets. The StructuredRisk™ program enables corporate officers to monitor and manage information concerning each of their real estate assets in real time and provides a centralized platform of readily accessible information involving everything from property deficiencies to expiring statutes of limitation. This information is captured from disparate locations and is held in a secure, centralized database environment for easy recall when preparing quarterly and annual financial reporting.
Sarbanes-Oxley Act of 2002: Compliance for the Commercial Real Estate Industry