...RBOX Reflection Paper on The Sarbanes-Oxley Act I. Introduction The Sarbanes-Oxley Act of 2002 (Sarbox or SOX), also known as 'The Public Company Accounting Reform and Investor Protection Act' in the US Senate, was enacted on July 30, 2002. This law was co-authored/sponsored by US Senator Paul Sarbanes (D-Maryland) and US Congressman Michael Oxley (R-Ohio). The act contains 11 sections with various requirements ranging from additional corporate board responsibilities to criminal penalties, and empowers the Securities and Exchange Commission (SEC) to implement rulings that comply with the said act/law. The objective of this law was two-fold: 1) to restore the public confidence in public accounting, auditing and public securities trading 2) to assure ethical business practices by demanding executive awareness and accountability. But why and how did this law come to fruition? What events prompted these U.S. lawmakers to pass this bill in the first place? This bill was enacted as a reaction to a number of major corporate and accounting debacles (or accounting scandals). Some of those corporate accounting scandals involve companies such as Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of these affected companies collapsed and shook public confidence in the US securities markets. To better understand SOX, it is best to understand the first company that found itself in that accounting...
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...4. A. Entity level controls cover a wide variety of processes depending on how precise the controls need to be. Some examples of entity-level controls include: * Controls related to the control environment * Risk assessment, control activities, information and communication, monitoring * Controls over management override * The company's risk assessment process * Centralized processing and controls * Controls to monitor results of operations * Controls to monitor other controls * includes activities of the internal audit function, the audit committee, and self-assessment programs * Controls over the period-end financial reporting process * Policies that address significant business control and risk management practices B. The period-end financial reporting process is particularly important because of its end-user intent. The process involves: * Methods used to enter transaction totals into the general ledger * Methods related to the selection and application of accounting policies * Methods used to initiate, authorize, record, and process journal entries in the general ledger * Methods used to record recurring and nonrecurring adjustments to the annual and quarterly financial statements * Methods for preparing annual and quarterly financial statements and related disclosures. 3 Region Net Income US Northeast | $11,541 | US Southeast | $57,704 | US Central | $39,791 | US Southwest | $60,853...
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...Ethics can be defined as principles or right or wrong. Business decisions should be ethical, but the evidence suggests that is not always what happens. (Hollenbeck, Gerhert, Noe, & Wright 2004) A recent study has shown that 4 out of 10 executives stated that they had been asked to behave unethically. As a result of unfavorable perceptions of U.S. business practices and an increased concern for better serving customers, U.S. companies are becoming more aware of the need for all company representatives to act responsibly (Hollenbeck, Gerhert, Noe, & Wright 2004) A recent article published in Tribune-Star discussed corporate ethics to university students in Indiana area. Over 370 were in attendance to a business conference host by Networks Professional Development Program. Students from Indiana colleges and universities as well as students from DePauw, St Mary-of-the-Woods and Rose-Holman Institute of Technology were in attendance of the conference which was hosted by fellow students. The event, organized by juniors in the Networks Professional Development Program at ISU, included speeches, panel discussions and break-out sessions on business, public policy and corporate ethics. (Foulkes, 2007) The conference would also help prepare students for the work force when they graduate. "We wanted to prepare students for when they go out into the work force" and face actual ethical decisions, said conference executive director Amber Williams, a junior in the Networks program. (Foulkes...
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...Sarbanes-Oxley: Benefits vs. Costs Sarbanes-Oxley: Benefits vs. Costs The American Competitiveness and Corporate Accountability Act of 2002, commonly referred to as the Sarbanes-Oxley Act (SOX) was enacted in response to corporate financial scandals involving companies such as Enron, WorldCom, and Tyco International. While SOX was written specifically for public companies; a few provisions, including whistleblower protection and document retention apply to all companies and nonprofit organizations (Levy, 2009). The stated purpose of the SOX legislation is “to protect investors by improving the accuracy and reliability of corporate disclosures” (Martin & Combs, 2010). SOX requires additional internal monitoring and disclosure of internal accounting control practices. SOX also mandates that CEOs and CFOs personally certify accounting disclosures. Ultimately, SOX was designed to increase accountability and transparency in an effort to restore investor confidence. While SOX has been effective since its enactment, many question whether the benefits outweigh the costs. Major Provisions SOX includes over 60 separate sections, including several significant provisions (H.R. 3763). Section 101 created the Public Company Accounting Oversight Board (PCAOB) to oversee SOX and public accounting firms. Oversight is critical to the successful implementation of SOX requirements. Section 203 requires the lead audit or coordinating partner and the reviewing partner to rotate...
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...WHY THE SARBANES-OXLEY ACT CAME ABOUT OR HOW TO COOK THE BOOKS The Sarbanes-Oxley Act of 2002 (Sarbox, or SOX) was enacted on July 30, 2002, to protect the general public and shareholders from accounting errors, unethical behavior, and corporate scandal. There are 11 titles that include the requirements for reporting, retention period for records storage, management of electronic records, and standards for external auditors. The act is supervised by the Public Company Accounting Oversight Board, and administered by the Securities and Exchange Commission (SEC). Sarbox requires the CEO and CFO to certify and be liable for the annual and quarterly reports that are filed. If the financial reports are discovered to be untrue, such acts of noncompliance are fines, imprisonment, or both, depending on the severity. The Act was designed for publicly traded companies only, in reaction to scandals such as Enron, WorldCom, and Tyco. These scandals cost investors billions of dollars when the companies collapsed, or the stocks plummeted. These companies altered or destroyed records, defrauded shareholders, or “cooked the books”. When a company cooks the books, it means that incorrect information has been used to create their financial statements. They manipulate earnings and expenses to improve the bottom line, or earnings per share (EPS). This manipulation of information is used to bring in new investors, keep the shareholders happy, attain a bonus, and reach their...
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...CHAPTER 1 Introduction to Corporate Finance Compensation of corporate executives in the United States continues to be a hot-button issue. It is widely viewed that CEO pay has grown to exorbitant levels (at least in some cases). In response, in April 2007, the U.S. House of Representatives passed the “Say on Pay” bill. The bill requires corporations to allow a nonbinding shareholder vote on executive pay. (Note that because the bill applies to corporations, it does not give voters a “say on pay” for U.S. Representatives.) Specifically, the measure allows shareholders to approve or disapprove a company’s executive compensation plan. Because the vote is nonbinding, it does not permit shareholders to veto a compensation package and does not place limits on executive pay. Some companies had actually already begun initiatives to allow shareholders a say on pay before Congress got involved. On May 5, 2008, Aflac, the insurance company with the well-known “spokesduck,” held the first shareholder vote on executive pay in the United States. Understanding how a corporation sets executive pay, and the role of shareholders in that process, takes us into issues involving the corporate form of organization, corporate goals, and corporate control, all of which we cover in this chapter. 1.1 What Is Corporate Finance? Suppose you decide to start a firm to make tennis balls. To do this you hire managers to buy raw materials, and you assemble a workforce that will produce and...
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...Michael Williams 01/24/14 1) The Sarbanes-Oxley Act of 2002, commonly called “Sarbox or SOX” is a federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. This act was approved by the House of Representatives by a vote of 423 to 11. This act contains 11 titles or sections, the bill was the creation of two U.S. senators (Paul Sarbane and Michael Oxley) and it was enacted as a result to a number of major scandals accounting and corporate entities. These scandals which cost investors billions of dollars when the share prices of affected companies collapsed shook public confidence in the American securities markets. Now with all that in mind, this act was for everyone but more to protect small businesses because they always seem to get swallowed up when some big company gets caught with their hands in the cookie jar. So as I write this information down, there is no mention of the Mc Donald’s corporation in any of the information I have researched. So that lets me know that Mc Donald’s practices safe financial practices to ensure their stakeholders that they will never get caught up in scandals of corrupt financial dealings. Mc Donald’s has been doing business since 1933 and I’m 48 years of age and never once have I heard of the company practicing dirty or illegal dealings to scare off existing or future investors, clients, customers, or employees. So as I conclude...
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...CAPSTONE CASE STUDY ON ORGANIZATIONAL ARCHITECTURE: ARTHUR ANDERSEN LLP 1. Discuss the environmental, strategic and organizational changes that occurred over the life of Andersen in the context of Figure 11.1. Architectural design of firm may vary among companies. There are most common categories are business environment, strategy, and organizational architecture. Business environment of Andersen includes technology that was used effectively; structure of its markets, regulations which helped Andersen to grow along with its reputation. The second category is strategy which includes Andersen’s primary goals, choice of business, and services. Finally, the last category is organizational architecture which explains how authority is distributed among Andersen’s employees, and how rewards determined. BUSINESS ENVIRONMENT TECHNOLOGY | MARKETS | REGULATIONS | Company started using computers for bookkeeping.Company developed the largest technology practice. | Arthur Andersen was well respected, reputable auditing company for many customers.Early 1950s Andersen entered in computer consulting business. | The federal law in 1930’s which required companies to provide their financial statements to an independent auditor each year helped Andersen’s grow. | STRATEGY Quality audits were valued more than higher short-run firm profits.“Four cornerstones” of good service, quality audits, well managed staff and profits.Auditors were rewarded and promoted for making sound audit...
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...Effect of Unethical Behavior Article Analysis The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. It is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH). As a result of SOX, top management must now individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors.[1] The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange...
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...Comprehensive Case A.1 – Enron I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge The Sarbanes-Oxley Act of 2002 Section 103 Section 201 Section 203 Section 204 Section 206 Section 301 Section 302 Section 305 Section 401 Title IX PCAOB Auditing Standard No. 5 Paragraph #2 Paragraph #9 Paragraph #11 Paragraph #21-22 Paragraph #25 Paragraph #28-30 Paragraph #69 Paragraph #A5 (in Appendix A) Paragraph #A8 (in Appendix A) III. Case Questions – Answer Key 1. Refer to the second general standard of Generally Accepted Auditing Standards (GAAS). What is auditor independence and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? The second general standard of generally accepted auditing standards (GAAS) is, “In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.” If the auditor is not independent, the financial statements are considered unaudited...
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...internal control Qver Financial Reporting CASES INCLUDED iN THIS SECTiON 1. Simply Steam, Co. 155 Evaluation of Internal Control Environment 2. Easy Clean, Co. 155 Evaluation of Internal Control Environment 3. Red Bluff Inn & Café 165 Establishing Effective Internal Control in a Small Business 4. St. James Clothiers 169 Evaluation of Manual and IT-Based Sales Accounting System Risks 5. Collins Harp Enterprises 177 Recommending IT Systems Development Controls 6. Sarbox Scooter, Inc. 185 Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 7. Société Générale 195 How a Low-Risk Trading Area Caused a $7.2 Billion Loss case5.!-2 Easy Clean/Simply Steam, Co. Evaluation of Internal Control Environment Mark S. Beasley • Frank A. Buckless • Steven M. Glover • Douglas F. Prawitt INSTRUCTIONAL OBJECTIVES 1] To reinforce aspects relevant to the internal control environment. 2] To illustrate the degree of judgment involved in making internal control environment evaluations. 3] To provide students experience in making subjective evaluative judgments. 4] To provide a forum to discuss inquiry techniques as well as inquiry as a form of audit evidence. 5] To provide students direct experience with, and discovery of, issues surrounding the control environment, making inquiries, and the framing (e.g., positive or negative) of information provided by management. 6] To illustrate...
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...The Sabranes-Oxley Act In the wake of the Enron and WorldCom scandals in the late 1990’s and early 2000’s, the American public was concerned about the scandals in accounting practices of corporations and accounting firms. Corporations, such as Enron, WorldCom and Tyco International, and accounting firms, such as Authur Anderson, went out of business (Horngren, 2009). Congress enacted The Sabranes-Oxley Act of 2002 to resolve such concerns. This act was brought to the United States Senate as “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability and Responsibility Act” in the United States House of Representatives. It is commonly called Sarbanes–Oxley, Sarbox or SOX and named after the U.S. politicians that constructed this legislation - Senator Paul Sarbanes and Representative Michael Oxley. The purpose of SOX is to begin “major changes to the regulation of financial practice and corporate governance” (n.d, 2006). SOX created new standards for corporate accountability and penalties for acts of wrongdoing. It changes how corporate boards and executives must interact with each other and with corporate auditors. SOX Relation to Internal Control According to the textbook, internal control is comprised by five components: Monitoring of controls, Information systems, Control procedures and Risk assessment (Horngren, 2009). SOX included new internal controls and procedures designed to ensure the validity of their financial...
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...Case #2.4 – Enron: Quality Assurance I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge The Sarbanes-Oxley Act of 2002 Section 103 Section 203 III. Classroom Hints This case provides students with an opportunity to understand what is meant by quality control in the financial statement audit process and to understand why a quality control mechanism is an important internal control procedure for an audit firm. Further, the case provides a terrific example for students to see what can actually happen when quality control breaks down at an audit firm. In the case of Arthur Andersen, the breakdown in quality control ultimately led to the demise of the firm. To meet these objectives, this case illuminates the role of the professional standards group (PSG) at Arthur Andersen and the dialogue that occurred for several technical issues between Andersen’s PSG and the lead partner on the Enron engagement, David Duncan. We believe it is essential for students to carefully read over the recommended technical knowledge, along...
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...acceptable or cross the line into unethical or illegal behavior? Provide reasons for your answer. 5. What other actions could Computer Associates have taken to achieve its financial reporting objectives. For each alternative action, assess whether you believe it is acceptable or whether it crosses the line into unethical or illegal behavior. 6. What actions can other companies take to avoid the same outcome as Computer Associates? 7. Suppose you faced the same pressure as Stephen Richards to extend the fiscal quarter. How would you respond and what would be the expected consequences? 1 The Sarbanes-Oxley Act (2002) a. also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox; b. enacted on July 30, 2002 in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. c. The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. d. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. e. Key Provisions: Section 201 - Addresses Auditor Independence ...
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...Sarbanes-Oxley, also known as Sarbox or SOX, is also known as the “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability and Responsibility Act. The creation of Sarbanes-Oxley was due to the number of corporate accounting scandals and it often described as the most powerful piece of legislation aiming toward corporate financial accountability. Among the major scandals was Worldcom Company. Worldcom Company, at one point was the second largest telecommunication company, founded by Bernard Ebbers. The company merged with MCI in 1997 and eventually merged with Sprint. Bernard Ebbers remained as the company’s Chief Financial Officer after both mergers. Following the mergers, Bernard Ebbers received a large amount of capital and company stock making him a primary shareholder and CEO. As the MCI Worldcom stock declined, Bernard Ebbers approached the board of directors for a $400MM loan. The Executive Board of Directors were afraid Bernard was going to sell most or all of his shares, creating a panic in the market or provided an opportunity for a hostile takeover, agreed to the loan. The combination of the loan, decline in stock price and profits placed the company on the brink of bankruptcy. Instead of telling the truth and reporting earnings and spending as they should be, senior management knowingly misrepresented the company’s financial data resulting in an upwards of $11 billion that the company did not have. According...
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