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Analysis of the sarbanes-oxley act
Analysis of the sarbanes-oxley act
What is the purpose of internal control
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Internal controls are measures put into place that allow for more accurate and deliberate representation of a company’s financial data. Internal controls also serve to protect a company’s assets from theft, fraud or misuse. With internal controls in place it becomes more visible to recognize if someone is stealing or misusing funds in any way. Internal controls also help to zoom in on errors or unintentional mistakes. When these errors are picked up on early it eliminates future problems for the company and its investors down the road.
The Sarbanes Oxley Act of 2002 is what enforces such internal controls of companies. This Act requires all United States companies to follow internal control guidelines and standards. Many argue that the egregious scandals such as Enron, Tyco and WorldCom gave Congress the impetus to pass such an act that has strict consequences if bypassed. Violators of the Sarbanes Oxley Act of 2002 (SOX) can be subject to large fines and even imprisonment (Weygandt, 2008). SOX holds executives responsible for the bottom line. In other words, these executives, under SOX can no longer claim they had no knowledge of any misreporting since SOX enforces these executives to have strict internal controls. Under the leadership of SOX the Public Company Accounting Oversight Board (PCAOB) was created. The PCAOB is responsible for auditing these companies to ensure they are following the SOX standards (Weygandt, 2008).
The SOX laws consist of six key principles. The first principle is to ensure there is a sole group or employee responsible for a specific task. For instance, Weygant (2008), illustrates a typical store with one person responsible for the cash register money at the end of each shift. I...
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...trols serve as the laws of the open business market today. They are in place to provide a reference point, but also to help companies maintain a balance of integrity and accurate record keeping. Having strong internal controls can make a company more valuable to its investors, stockholders, consumers as well as employees. However, there will always be exceptions or violators of the laws. Like any other area where laws have been placed to help individuals as well as the public, there will be violators. The important thing to remember is that the violators are not the majority. Just as the majority of people obey the speed limit on the highway, the majority of businesses try to do the right thing. There are times, however, when people do not follow the rules and the very fact that we have these laws means that there are consequences for those violators.
Internal controls is defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance
A company that announces deficiencies in its internal control will more than likely have a fall in their stock prices. Investors will not trust that company’s financial information. The investors know that the company will be hit with fines for not complying with the regulations. No honest investor wants to be involved with a company that defies the government.
...efits from adopting unfair business practices and discouraging competition are much higher than the expected penalty and punishment. With changing time, there is need to make these laws more effective and relevant.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency.
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to strengthen corporate governance and restore investor confidence. The act’s most important provision, §404, requires management and independent auditors to evaluate annually a firm’s internal financial-reporting controls. In addition, SOX tightens disclosure rules, requires management to certify the firm’s periodic reports, strengthens boards’ independence and financial-literacy requirements, and raises auditor-independence standards.
Individual Article Review Lily Cobian LAW/421 March 31, 2014 Ramon E. Ortiz-Velez Individual Article Review Introduction My article review is based on Sarbanes-Oxley and audit failure, a critical examination why the Sarbanes-Oxley Act of 2002 was established and why it is not a guarantee to prevent failure of audits. Sarbanes-Oxley Act talks about scandals of Enron which occurred in 2001 and even more appalling the company’s auditor, Arthur Anderson, found guilty of shredding company documents after finding out Enron Company was going to be audited. The exorbitant amounts of money auditors get paid to hide audit discrepancies was also beyond belief. The article went on to explain many companies hire relatives or friends to do their audits, resulting in fraud, money embezzlement, corruption and even the demise of companies. Resulting in the public losing faith in the accounting profession, the Sarbanes-Oxley Act passed in 2002 by congress was designed to restrict what company owners and auditors can and cannot do. From what I gathered in the article, ever since the implementation of the Sarbanes- Oxley Act there has been somewhat of an improvement but questions are still being asked as to why there are still issues that are not being targeted in hopes of preventing more audit failures. The article also talked about four common causes of audit failure: unintentional auditor mistakes, fraud, fatigue and auditor client relationships. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct clearly states an independent auditor because it produces a credible audit, however, when there is conflict of interest, the relation of a former employer, or a relative or even the fear of getting fire...
Internal locus of control is how you as a person dictates how their work or personal life is going to go. Meaning the results of something is based on ones behaviors and actions. For example, getting the new job promotion and you knowing that you got the job for your hard work and not because you think, it is out of pure luck.
CEO Jeffery Skilling and Kenneth Lay, the CEO prior to Skilling, were taken to trial. They were both found guilty of committing multiple types of financial crimes, and sentenced to 24 years in prison. CFO Andrew Fastow was also taken to trial and was found guilty and sentenced to 10 years in federal prison. The collapse of such a large corporation led to changes in financial controls. U.S. Congress passed the Sarbanes-Oxley Act in 2002. The SOX Act protects investors from deceitful accounting actions by companies (4). The Financial Accounting Standards Board increased its ethical behavior. FASB is responsible for generally accepted accounting principles, which provides standards for financial statements of publicly traded companies. These changes brought to life after the Enron scandal have decreased fraud and increased investor confidence. Although the acts that Enron committed were immoral and destroyed thousands of lives, it has lead an increase of controls and compliance, preventing something like this from happening in the
In late 2008, the world economy seemingly grinded to a halt. Wall Street, unable to reconcile the liquidity crisis and financial losses that stemmed from its bad bets on mortgage backed securities, turned to the United States government for help. What resulted was the $700 billion Troubled Asset Relief Program (“TARP”), the largest government bailout in the history of the United States. After the dust settled and Wall Street, with hundreds of billions of taxpayer dollars, managed to avert a global financial meltdown, Congress put pen to paper to ensure that the same crisis would never happen again. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), a nearly 900-page behemoth of financial reform, was signed into law. The Dodd-Frank Act was meant to reform that the unsavory and opaque practices that led to the 2008 crisis – it does so by introducing a stricter financial regulatory regime in which Wall Street must operate.
After major corporate and accounting scandals like those that affected Tyco, Worldcom and Enron the Federal government passed a law known as the Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act. This law was passed in hopes of thwarting illegal and misleading acts by financial reporters and putting a stop to the decline of public trust in accounting and reporting practices. Two important topics covered in Sarbanes-Oxley are auditor independence and the reporting and assessment of internal controls under section 404.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
...The Sarbanes-Oxley Act deals with the proper filing of financial paperwork along with rules and regulations to follow while working as a top business (The Sarbanes-Oxley Act, 2002). Some of the consequences that derived from the Act include fines and possible imprisonment up to 20 years for destroying documents. It also made it a crime to destroy corporate audit records. Since the Sarbanes-Oxley Act was in place at the time Bernie Madoff was charged with security fraud, he received 25 years in prison for his wrong-doings (Bernard Madoff, 2014). These crimes by Madoff and Enron have made for safer business practices and stricter laws. However, to ensure cases of this magnitude do not occur again, companies must not only abide by mandated law, they must develop a culture deeply rooted in strong ethics. Character matters in a business just like it does in people.
The rise of Enron took ten years, and the fall only took twenty days. Enron’s fall cost its investors $35,948,344,993.501, and forced the government to intervene by passing the Sarbanes-Oxley Act (SOX) 2 in 2002. SOX was put in place as a safeguard against fraud by making executives personally responsible for any fraudulent activity, as well as making audits and financial checks more frequent and rigorous. As a result, SOX allows investors to feel more at ease, knowing that it is highly unlikely something like the Enron scandal will occur again. SOX is a protective act that is greatly beneficial to corporate America and to its investors.
Kozlowski’s long line of bad decision making is used by businesses as well as academics as an examples of unethical behavior and why internal controls are important to corporate governance. As the primary indicator of performance, corporate governance reports often display the strength and weaknesses of the company but are only as reliable as the set of values and ethics of the person’s implementing the rules.