Sarbanes-Oxley Act Came At The Term Paper

Length: 17 pages Sources: 20 Subject: Accounting Type: Term Paper Paper: #6148358 Related Topics: Aig, Internal Auditing, Meaningful Use, Accounting Theory
Excerpt from Term Paper :

In the company it has ushered in a better accounting and the management with upgrades in technology and competence, there will be a requirement for training and upgrading managers and staff to meet the contingencies of the proposed systems and controls. The Sarbanes-Oxley section will help the companies on the other hand gain a lot of investment and support from the investors by providing a quality and timely information, with a competitive advantage. (Shanley, 2004)

For the officer and the shareholder and those dealing with the company it ensures that the financially literate directors at the helm and will have internal controls which make the company relatively safe. It is however to be noted that the act is for public companies and many companies have cut issues to escape the provisions of the act. The Auditing firms and the auditing process all have undergone vast changes in the process of how they work on account of the act. The auditors now have a prime role and a have a specific duty cast on them when the audit reports are presented. To comply with the regulation it is now become a necessity that the auditors must first understand the internal framework of the company Thus they are now involved with the decision making of the company and are cast with greater responsibility. The act will bring about a lot of changes in the competency expectations of auditors and a need for them to upgrade their skills. The act has brought about a demand for restructuring the information systems including the it structure and personnel training. The it manipulation is the principal method of effecting deceptions and the simplest provision of security and integrity where a huge volume of data is processed has necessitated the creation of a system and a method of devising the proper policy, for the it operations. (Lin; Wu, 2006)

The it controls are very important in complying with the directives in the electronic age. This in turn will cause the employment of competent personnel and also training for the management in the it and MIS process. The truth is that since most companies do have an internal reporting system, the compliance is only a rework their existing framework stated in a new way. The controls over the it systems the computers and operations, and limiting and controlling access, and security and integrity of data and the controls that govern the use of the system have all to be taken into account in redesigning the system. (Fox, 2006)

Thus in the final form the guidelines has created a need in companies to create a structure within the existing financial system and incur expenses and also get the trained man power and provide for a better management of the company. Complying with the act by itself will help the company avoid risk and also the internal control of the company with regard to reporting of financial matters. Now the financial statement which is audited in the yearly report need to also contain the attested internal control report and this will show the company's affairs in a more clear a transparent light. Thus the act may have actually benefited the companies and could be a long-term solution to the corporate governance needs. (Shanley, 2004)

The section 404 is thus a mandatory provision for an annual review of internal procedures and the evaluation of the controls for


The annual report thus has to come with an assertion from the CEO or CFO which will affirm that they are being made responsible for maintaining and checking the internal financial controls, and the presentation of the evaluation of the controls and financial reporting process, and the assertion must also state that the company's internal auditor has attested the managements evaluation. All public companies have to comply with this law. (Shanley, 2004)

Public companies are in a need to take several steps to comply. This will mean that the existing internal control will make the transition easier. All companies normally have some type of internal control. These often are seen vested with the board of directors, the CEO or a special steering committee. The use of software and other electronic analysis tools is becoming a must and the model for most companies is likely to be centred on the model of the 'Committee of Sponsoring organizations of the Tread way commission - COSO'. (Shanley, 2004)the COSO has divided the internal control into a) the controls for the environment, that is ethics, and competence enhancement of employees, followed by the assessment of risk, the risks that are perceived to hamper the business achieving its objectives. The next part is the control model where the internal activates that are undertaken to mitigate the known risks is charted out. The information and communication facility between the staff and management regarding the information that needs be passed on is assessed. Lastly we have to have a monitoring session which will evaluate the whole internal control. Thus this is always an ongoing process and therefore all companies will have to create a special disclosure wing which will review the filings before the SEC and also undertake periodic review of the working of the internal controls. (Shanley, 2004)

The benefits of this method of accounting are numerous. The Sarbanes-Oxley section will help the companies gain the trust of investors, have high quality and timely information, save resources, and have a competitive advantage too. The failure to comply with this recommendation on the other hand can expose the company to law suits, loss of public confidence, negative perceptions, and prosecutions from the SEC and above all the company may become the victim of a fraud. (Shanley, 2004)

From the shareholder's point-of-view the provisions of the rule ensures that the corporate entities do not indulge in unethical behaviour, and ensure financially literate directors at the helm and will have internal controls which make the company relatively safe. Private companies are not legally obliged to comply with the Sarbanes-Oxley act provisions, but they can voluntarily adopt some of the provisions of internal fiscal control. The public companies come under the purview of the act and the act is clear about the qualifications of the members of the management. It is not possible for a private company to adapt all the requirements. (Shanley, 2004)

Auditing and the impacts on auditors

Section 404 of the act is under the chapter 'Enhanced Financial Disclosures' at title four of the act. The section briefly states that those companies that open issues must publish all information in the annual reports regarding the internal control mechanism its scope and adequacy and the structure and control regarding financial reporting the statements shall be assessed by an accounting firm. The Auditing firms have a large impact on account of this act. All companies are trying to cope with the provisions of this act. This will create a stress on the accounting companies in terms of labor and sourcing knowledgeable talent to cope up with the demand for the modern methods of audit and also the sheer volume of work. The auditing firm has to perform its activities in a more structures and careful manner Care must be taken to store and keep all records intact because it is a very stringent requirement under the act. (Mccarthy, 2004)

This law has changed the situation for both the auditor and the company now the auditor has to certify the company's internal controls which ill bar the use of some of the audit strategies. The cost of implementing the rules will be hiked for the company. (Mcconnell; Banks, 2003) Auditors generally follow the risk factor by concentrating on the generally accepted accounting principles -- GAAP, and automatically arrive at the results and strengths weakness and threats and the risks inherent in the inherent operations. The risks that they perceive will affect the reporting and major enterprise risks do not occur from inside. Major problems like the WorldCom and Enron problems had been the result of the risks that went unheeded in the processes of management and are clear examples of failures that were occasioned on account of lack of information systems and controls. (Lin; Wu, 2006)

In view of this fact and in view of the fact that auditors could also audit the compliance report, the SEC took the view that implementation of the sections 404 to item 308 of the Sarbanes-Oxley Act that the firm ought to provide a report of internal control in the annual report of the company that needs to contain an assessment of the fiscal year of the previous year and the evaluated report relating to the company's performance with regard to the reporting of 'internal control' of fiscal aspects. (Goodman; Olson, 2002) the auditors have a specific duty cast on them when…

Sources Used in Documents:


Anderson, David R. (2006) "Modern Business Statistics"

Thomson South-Western.

Bullock, Jane a; Haddow, George. (2006) "Introduction to Homeland Security"


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