Sarbanes-Oxley Act section 404 requirements and implementation

Sarbanes-Oxley Act SEC 404

The Sarbanes-Oxley Act of 2002, which is also known under the name Public Company Accounting Reform and Investor Protection Act of 2002.was implemented as a requirement for companies to thoroughly report on internal control measures over financial reporting (Weirich, 2006). It also necessitates that auditors conduct investigations in order to render opinion on that report as well as opinion in response to the internal control (Weirich, 2006). The relaxed laws of the past allowed for accounting scandals of huge proportions, due to the lack of attention towards the internal controls of companies. Public trust in accounting practices and financial reporting diminished because of these scandals, and a detailed and structured measure in the form of the Sarbanes-Oxley Act Section 404 was necessary implemented for companies to regain this trust.

Since November 24, 2004, public companies have been required to thoroughly document and assess the effectiveness of internal controls over financial reporting, and 2006 saw the act extended to include smaller companies (Weirich, 2006). In particular, section 404 of the Sarbanes-Oxley Act requires that managers and auditors take on different roles than in the past. At the end of each fiscal year, managers must detail their responsibilities for ensuring and maintaining adequate internal control over financial reporting, and must also assess the effectiveness of these controls. Auditors are then required to independently report on and attest to this assessment provided by the manager. The details involved in these reports include the accurate maintenance of records, assurance that transactions are adequately recorded to enable financial statement preparation, and assurance that unauthorized acquisition, use or disposition of assets is prevented or detected (Weirich, 2006). The auditor is required to perform two independent audits for companies. One audit is conducted over the assessment of internal control put forth by management, while the other audit is performed on how effective management's internal control were for the purposes of financial reporting.

The implementation of the Sarbanes-Oxley Act section 404 as federal law was a necessary step in order to regain public trust in the financial controls and reporting of companies. Huge corporate scandals, such as the ones affecting Enron, and WorldCom, shook the public to their core, and resulted in the demand for consistent measures that would make companies accountable for all financial operations. This legislation was necessary and useful, but the focus of the law may be off the mark.