Ancher Public Trading TO: Board of Directors FROM: Learning Team A consultants DATE: August 22, 2005 SUBJECT: Sarbanes-Oxley recommendations As consultants for Ancher Public Trading (APT), Learning Team A would like to discuss the implications of the Sarbanes-Oxley (SOX) legislation. This memorandum provides a brief history of SOX’s creation, explains the relationship amongst the FASB, SEC and PCAOB, describes the pros and cons of SOX, assesses the impacts of SOX, and lists ethical considerations of SOX. History of SOX – the Sarbanes-Oxley Act of 2002 is legislation in response to the high profile financial scandals, such as seen with Enron and WorldCom. The purpose of this act is to protect shareholders and the general public from accounting errors and fraudulent business practices. The Sarbanes-Oxley Act introduced stringent new rules to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. Sarbanes-Oxley is not a set of business practices and does not specify how a business should store records; rather, Sarbanes-Oxley defines which records are to be stored and for how long.
A. ) The relationship among the FASB, SEC and PCAOB SOX is administered by the Securities and Exchange Commission (SEC).
The SEC sets deadlines for compliance and publishes rules on requirements. The Securities and Exchange Commission (SEC) is the department to which all publicly-traded companies, effective since 2004, are required to submit annual reports of the effectiveness of their internal accounting controls.
The Essay on A Primer on Sarbanes-Oxley
... public companies that were sanctioned by the Sarbanes-Oxley legislation Act of 2002 (SOX). This act was passed with the intent to restore ... also include factors such as excellence in the conduct of business, profitability and others. Davis, Schoorman, & Donaldson (1997) ... implied objective behind the regulation brought in by SOX and the SEC was to improve the functioning of public corporations, ...
The SEC has broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies. Along with them, is the FASB.” The Financial Accounting Standards Board (FASB), is a professional standards board created by accountants to establish Generally Accepted Accounting Principles (GAAP), which are the accounting standards used by accountants in the U. S. The GAAP reporting method makes it possible for investors and regulatory authorities to accurately determine an organization’s financial results.” The Public Company Accounting Oversight Board (PCAOB) was created to oversee the activities of the auditing profession. Specifically to oversee the reforms mandated by the SOX legislation to enhance corporate responsibility, and financial disclosures, plus delete corporate and accounting fraud.
The PCAOB is responsible for auditing, quality control, ethics, independence and other standards concerning the preparation of financial records. The Board oversees the audit of public companies that are subject to securities laws. Various sections of SOX requirements include the SEC determining whether the PCO AB is properly organized and has the capacity to carry out its responsibilities under the Act. B. ) Cons of SOX — one negative aspect of incorporating SOX into a business is that the act requires executives and board members to spend time on formulaic compliance efforts instead of leading their company. In addition, ! SS small public companies incur a higher percentage cost than large companies which could be an unfair financial burden, and business groups complain that it is costing them a lot of money and effort to turn up deficiencies that in most cases are inconsequential.
! ” (Solomon, 2005).
SOX has also been considered costly due to the updating of information systems in order to comply with reporting requirements. But, non-compliance may result in significant cost, stiff penalties and / or prison sentences. Pros of SOX — On a positive note, many analysts say this Act has made executives focus more attentive on financial records. ! SS This has prompted board members to take their work more seriously. ! ” (Johnson, 2005).
The Term Paper on International Financial Reporting Standards 2
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the ...
Disclosures are often more accurate and are produced in a timely manner. ! SS SOX increased shareholder value because it underlines the ethical operation of their company. Those who have invested in SOX have largely achieved or improved compliance, with 79 percent of respondents saying their controls are stronger than before the advent of SOX! ” (Bar las, 2004).
C. ) Impact of SOX! V The act has immediate and profound implications for the behavior and responsibilities of external auditors, management and the audit committee. Plus, even though nothing is explicitly required of internal auditors by SOX, the legislation will change their role within the firm.
! SS The act can be seen as an attempt to change the environment in which contracts are written and private behavior occurs. ! ” (Linsley, 2003).
The following three points of SOX are examples of the changes: 1) Ensure that the audit committee and the auditors are more independent. 2) Increase the consequences to the audit committee and the auditors if they submit incorrect reports. 3) Make management formally recognize and accept responsibility not only for the financials, but also for the internal control system.’ People have said these things are starting to filter down to smaller, non-public companies, Banks are requiring different standards for corporate governance which has increased as a direct result of Sarbanes-Oxley. People have started talking about spending more for internal controls, software, having to hire more auditors and higher D&O [directors and officers] insurance.’ (L eport 2005) Many improvements in financial transparency of companies are a direct result of the implementation of SOX.
According to R. Kulzick of St. Thomas University, the SOX act improved the financial transparency of public companies through the following examples:” Accounting standards and oversight improvements enhance the accuracy, consistency, appropriateness, completeness, clarity, governance and enforcement of financial information.” Changes in the reporting of standards improve the financial information timeliness and availability of financial statements.” Changes in responsibility standards clarify the duties of the audit committee, the CEO, CFO, and others.” Clarification of conflict and independence standards improve the accuracy, consistency, appropriateness, and completeness of financial information.” Strengthening of document standards assist with enforcement of the act.” Provisions under inspection, discipline, and enforcement provide additional implementation methods and improve deterrence. D. ) Sox ethical implications! V The SOX legislation enforces ethical behavior and attempts to control potential, unethical behavior. ! SS Corporations are rushing to learn ethics virtually overnight, and as they do so, a vast new industry of consultants and suppliers has emerged.
The Essay on Internal Control Audit Standards
For what purposes should an auditors’ understanding of the internal control components be used in planning an audit? An auditors’ understanding of the internal control components should be used for 3 reasons: a) To identify the potential misstatement that might occurs b) To identify the factors that affect the risk of material misstatement c) To influence the design of substantive procedures b. ...
The ethics industry has been born. ! ” (Hyatt, 2005).
Compliance to SOX requires education of the entire workforce on ethical behavior. Every employer should adopt a comprehensive ethics and compliance program that includes high-quality, effective training. Training must go beyond the communication of policies to truly impact behavior, facilitate cultural change and reduce risk. Upon the adoption of the SEC’s implementation of ethical rules, CEOs and CFOs are required to provide annual and quarterly reports for extensive certification, referred to as the Section 302 Certification.
These matters include: the accuracy of the financial statements, design and sufficiency of the entity’s internal accounting controls, disclosure of any significant weaknesses with the internal controls, and discovery of fraud involving management, or other employees, who play a role in the preparation of financial statements. Because the purpose of the act is to avoid the unethical manipulation of a company’s financial statements, external auditors have new areas of concern that include detecting fraud and record retention. With the SOX Act, the proper authority can! SS criminalizes any business who is responsible for the knowing alteration, destruction, mutilation, concealment or falsification of any record with the intent to impede, obstruct or influence any governmental investigation or other governmental function or any bankruptcy proceeding! ” (Hein, 2002).
The Essay on Business & Organizational Ethics
Course Description: This course is designed to develop an understanding of the theory and practical application of ethical issues facing business and organizational leaders/ in the 21st century. Students will explore a variety of ethical paradigms and will become actively engaged in the evaluation and in-depth examination of critical topics in management today. This course is organized in a ...
Any business or individual (s) found liable in a misrepresentation of financial statements are subject to a fine and / or imprisonment for up to 20 years. ReferencesBarlas, D.
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