SARBANES-OXLEY ACT ACC 403- AUDITING PROFESSOR August 19, 2012 The Sarbanes-Oxley Act was placed into effect July 2002; the act introduced major changes to the regulation of corporate governance and financial practice. The Sarbanes-Oxley Act was named after Senator Paul Sarbanes and Representative Michael Oxley, who were the main architects that set a number of non-negotiable deadlines for compliance. The organization for Economic Cooperation and Development was one of the first non- government organizations to spell out the principles that should govern the corporate and issued the OECD Principles of Corporate Governance.
The Sarbanes Oxley Act also known as Public Company Accounting Reform and Information Protection Act and Corporate and Auditing Accountability and Responsibility Act. It is a federal law that set various principles for all the U. S. companies to detect and evade fraud. It detects the scandals in the securities markets when the share prices of securities are affected. The act requires the Securities and Exchange Commission to implement rulings on requirements to comply with the law. It created a new agency called Public Company Accounting Oversight Board which regulates, oversees and inspects the role of auditors of public companies.
The act covers auditor’s independence, corporate governance, internal control assessment and financial disclosures. The Sarbanes–Oxley contains 11 titles that describe specific mandates and requirements for financial reporting. Each title consists of several sections, which are the following below: I. Public Company Accounting Oversight Board (PCAOB): provides independent oversight of public accounting firms providing audit services and creates a central oversight board tasked with registering auditors. II.
Auditors Independence: establishes standards for external auditor independence to limit conflicts of interest and states new auditor approval requirements, audit partner rotation, and auditor reporting requirements. III. Corporate Responsibility: mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. IV.
Enhanced Financial Disclosure: describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. V. Analyst Conflict of Interest: includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest. VI.
Commission Resources and Authority: defines practices to restore investor confidence in securities analysts, and defines the SEC’s authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, advisor, or dealer. VII. Studies and Reports: requires the Comptroller General and the SEC to perform various studies and report their findings. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations and enforcement actions.
VIII. Corporate and Criminal Fraud Responsibility: It describes specific criminal penalties for manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers. IX. White Collar Crime Penalty Enhancement: It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense. X. Corporate Tax Returns: Section 1001 states that the Chief Executive Officer should sign the company tax return. XI.
Corporate Fraud Responsibility: It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their penalties. Prior to Sarbanes Oxley act, auditing firms were self regulatory. It may happen several times that challenging the counts of the companies damage the relationship with the clients. The frauds of the companies cannot be detected easily. There are many risks associated with the auditing report since it will not be able to report the actual position of the companies.
The Sarbanes Oxley act states that it shall be unlawful to contravenes the provisions of the commission because it is not in the public interest or it is unprotected for investors, for any other person to take any action to fraudulently influence, manipulate, coerce and mislead any independent person in the performance of preparing the audit report of the financial statements of any concern. The most important aspect in the financial statement is to follow and regulate the internal control system of the organization.
This is the most important point in this act as it detects that the internal control system of the corporations is sound or not. It wants to report about the internal control system of the organization so that the actual picture of the organization can be reflected easily in front of the members of the companies and the investors. Since the main motto of Sarbanes Oxley act is to protect the investors it has to report about the internal weakness and strengths of the companies to give a true picture of the company. It requires management to report the following points: * The operating effectiveness of internal control related to the significant accounts which affects the materiality of the account or from which the material misstatement risks can be occurred. * The flow of transactions so that it should be understood that whether there is any material misstatement could arise or not. * Evaluate the control of the company to record the components of COSO framework. * Perform the fraud risk assessment of the organizations. * Evaluate the control performance to detect and evade the errors. * Evaluate the control performance to detect and evade the fraud. Evaluate the work of the management to ensure that whether they consider the basic elements like objectivity, competency and risks. * Evaluate the internal control over financial reporting. * Evaluate the size and complexity of the company. The findings of Sarbanes Oxley act incorporate a code of Best Practices on Director’s Remuneration. The four main issues which were dealt with as follows: * The role of Remuneration Committee in setting the remuneration packages for the CEO and other directors. * The required level of isclosure needed to shareholders regarding details of director’s remuneration and whether there is the need to obtain shareholder approval. * Specific guidelines for determining a remuneration policy for directors and * Service contracts and provisions binding the Company to pay compensation to a director, particularly in the event of dismissal for unsatisfactory performance. The important recommendation was the establishment of Remuneration Committee of Non- Executive Directors which would be responsible for deciding the remuneration of executive directors.
The majority of the recommendations of the committee were incorporated in the Listing Rules of the London Stock Exchange. The principles of corporate governance are evolved as under: * Sustainable development of all the stakeholders- it ensures the growth of all the individuals associated with or effected by the enterprise on sustainable basis. * Effective management and distribution of wealth- it ensures that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all the stakeholders and enhancing its wealth creation capabilities to maintain sustainability. Discharge of social responsibility- it ensures that enterprise is acceptable to the society in which it is functioning. * Application of best management practices- it ensures excellence in functioning of enterprise and optimum creation of wealth on sustainable basis. * Compliance of law in letter and spirit- it ensures value enhancement for all stakeholders guaranteed by the law for maintaining socio-economic balance. * Adherence to ethical standards—it ensures integrity, transparency, independence and accountability in dealings with all stakeholders.
The Ministry of Heavy Industries and Public Enterprises, Department of Public Enterprises has issued Guidelines on Corporate Governance for Central Public Sector Enterprises. For the purpose of evolving Guidelines on corporate governance, Central Public Sector Enterprises have been categorized into two groups, namely – 1. Those listed in the stock exchange and 2. Those not listed in the stock exchange. Some claim that the financial activities of publicly traded companies are still severely nder-regulated while others hold that SOX was necessary, but that some of its requirements are not cost-effective which I believe will change over time. Reference * Arens, A. , Elder, R. J. , & Beasley, M. (2010). ACCT 403: Auditing and assurance services: 2010 custom edition (14th ed. ). Upper Saddle River, NJ: Pearson Education. * http://www. soxlaw. com/ * http://searchcio. techtarget. com/definition/Sarbanes-Oxley-Act * http://www. sec. gov/about/laws. shtml * http://www. sec. gov/news/testimony/090903tswhd. htm * http://www. sox-online. com/basics. html