The Sarbanes Oxley Act Of 2002 Essay

The Sarbanes Oxley Act Of 2002 Essay

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In addition to internal control reform, the Sarbanes-Oxley Act of 2002 (SOX) redefined governance requirements for U.S. reporting companies. SOX provided for stricter requirements of the audit committee by enhancing the board’s responsibilities. The audit committee is directly responsible for appointing and overseeing the work performed by a company’s external auditor. In addition, because the audit committee is required to communicate closely with the external auditors, the committee is required to have independent members of the board of directors as well as to appoint a financial expert. Through SOX, the audit committee’s role was enhanced as an integral segment of an effective internal control system and quality financial reporting (Soodanian, 69).
As a part of this system, external auditors are required to report any and all significant deficiencies or material weaknesses to the audit committee. This communication compels the audit committee into further oversight duties by calling their attention to the remediation of the internal control weaknesses identified. At this stage, the audit committee is now responsible for ensuring management actually remediates the internal control issue, to ensure that the internal control system is operating effectively. If the company later fails to remediate the deficiency, it can ensue costs to both the company’s reputation, as seen in the public’s perception, and through direct financial penalties (Boyle, 112).
Audit Committee Existence
The study performed by James Boyle suggests that material weaknesses reported by smaller companies are directly related to issues in corporate governance. The study conducted surveys of approximately 86 companies and found that the three main weaknesses ...


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...on variables,” even after controlling for other firm-specific variables (Cullinan, 266). Although these findings are not indicative of a causation relationship, it does imply that stock-based compensation increases the likelihood a company will report internal control deficiencies.
In fact, it was found that companies offering stock options to their audit committee are reportedly 3.156 times more likely to disclose internal control deficiencies (Cullinan, 268). The positive relationship in this sense implies that stock-based compensation causes audit committees to be less effective in overseeing the financial reporting process, including internal control processes. Moving forward, companies should use these findings and conduct research in order to determine a more effective compensation plan for board members that do not undermine the benefits of internal controls.

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