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The Sarbanes-Oxley Act Of 2002: Internal Control Report

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The internal control practice of separation of duties failed to prevent the fraudulent reporting by not separating the duties necessary to complete a task and assigning the separated duties to two or more employees (Edmonds, Tsay, & Olds, 2011). Separating duties to two or more employees would reduce the opportunity for an employee to defraud the organization (Edmonds, Tsay, & Olds, 2011). Although the CEO and CFO of Automation Company were aware the controller was reporting fraudulent revenues, by using separating duties, the fraudulent act would have required collusion between the controller and other employees to make up the numbers (Edmonds, Tsay, & Olds, 2011). The Sarbanes-Oxley (SOX) Act of 2002, holds the chief executive officer (CEO) and the chief …show more content…

The SOX act requires that larger organization’s control of financial reporting be subject to external audits by independent auditors, as well as quarterly reviews (Kitching, Pevzner, & Stephens, 2013). The SOX act charges the CEO and the CFO with the ultimate responsibility for accuracy of the organization's financial statements (Edmonds, Tsay, & Olds, 2011). Although the organization’s lower level managers will likely prepare the annual report, the CEO and the CFO are required to review the report and certify to their knowledge that the report does not contain false statements or any omissions (Edmonds, Tsay, & Olds, 2011). SOX requires management of an organization to create a code of ethics and to file all reports using this code (Edmonds, Tsay, & Olds, 2011). Finally, SOX demands that management of an organization establish a hotline for anonymous reporting of fraudulent activities (Edmonds, Tsay, & Olds, 2011). Further, SOX prohibits organizations from punishing whistleblowers, employees who legally report an organization’s misconduct (Edmonds, Tsay, & Olds,

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A financial audit is an independent, objective evaluation of an organization 's financial reports and financial reporting processes. The primary purpose for financial audits is to give stakeholders reasonable assurance that financial statements are accurate and complete. Most internal audits are not adding value. One reason is that “ongoing compliance burdens and pressure to do more with less” is contributing to the decline in perceived internal audit value.

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This memorandum highlights significant portions of Statement on Auditing Standards (SAS) No. 115 Communication of Internal Control Related Matters Identified in an Audit and answers some questions frequently asked by accountants about SAS 115 ("The American Institute Of Certified Public Accountants", 2015). SAS 115 Highlights Here are some highlights of SAS 115. Applicability (SAS 115, 2015, para. 01). Definitions. A material weakness (SAS 115, 2015, para. 06).

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In 2002, Paul Sarbanes and Michael Oxley came together to present the Sarbanes-Oxley Act of 2002 (SOX), changing the business world forever. Although SOX was passed over a decade ago, continuous debates remain on numerous faucets surrounding this piece of legislation. The legislation has created extreme feelings and controversy regarding the advantages and disadvantages for public organizations. Along with the passing of SOX, the Public Company Accounting Oversight Board, (PCAOB) was established to oversee and regulate the new changes for public organizations. Discussed below are some of the advantages and disadvantages SOX has prompted since it was passed.

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According to the "Financial Web", "If they do not do their jobs properly, they will have to face the consequences. The legislation put specific steps in place that have to be followed in order to avoid any type of

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Enron was a stark example of why financial accounting, accounting standards, reliable financial reporting, and oversight is so important to investors and creditors. Congress responded to public outcry by passing a bill, which President George W. Bush signed, into law in 2002. The Public Company Accounting Reform and Investor Protection Act of 2002, also known as the Sarbanes-Oxley Act or SOX, applies to all publicly traded companies. Sarbanes-Oxley, among other things, seeks to regulate auditors and the functions they perform. To help accomplish this task, the SOX Act required the establishment of an oversight board.

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For example, in 1989 Ernst & Whinney merged with Arthur Young to form Ernst & Young and Deloitte, Haskins & Sells merged with Touche Ross to form Deloitte & Touche, which created the Big Six. In 1998 Price Waterhouse merged with Coopers & Lybrand to form the Big Five. In 2002, following the Enron and WorldCom accounting debacles, Arthur Andersen closed, which resulted in the current Big Four. As a direct result of the Enron and WorldCom events, US Congress passed the Sarbanes-Oxley Act of 2002 (SOX) to protect investors from the possibility of fraudulent accounting activities by corporations.

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Due to fraud in financial reporting, the Sarbanes-Oxley Act of 2002 was passed to restore the confidence in the accounting profession, by lowering corporate scandals and unethical behavior. The act requires upper management to certify the responsibilities of the financial statements, including ensuring proper internal controls, supervising the audits of such reports, and ensuring the accuracy in those reports. SOX also increased penalties for fraudulent financial activity and increased independence for auditors. The Financial Accounting Standards Board (FASB) was established in 1973 to form standards for accounting and reporting standards for public and private companies and for non-profit organizations that follow Generally Accepted Accounting Principles (GAAP) in the United States.

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SOX achieved this by creating the Public Company Accounting Oversight Board (PCAOB). The PCAOB is empowered by the Securities Exchange Commission (SEC) and is to enforce the regulations of the accounting industry. SOX requires for all accounting firms to be registered to issue audit reports for publicly-traded companies. The PCAOB is to perform investigations of accounting practices, and hold disciplinary hearings. The SOX Act gives integrity to financial

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The accounting scandals that occurred at Enron and WorldCom were due in part to a lack of internal controls (Edmonds, Olds, McNair, & Tsay, 2012). Edmonds et al. (2012) stated that internal control within an organization is a process that ascertains reliable financial reporting, efficient operations, and compliance with the financial laws and regulations. In order to ensure that the internal control concerns experienced at Enron and WorldCom did not occur again, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 (SOX) (Edmonds et al., 2012). The SOX Act requires firms to provide proof on their Securities and Exchange Commission filings of internal control mechanisms that are in place within the firms (Edmonds et al., 2012).

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Sarbanes Oxley of 2002 (SOX) was created as a response to several scandals in various companies; relating to accounting principles and practices. The purpose of SOX was to restore the confidence of investors and shareholders of publicly traded companies. SOX

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The regulation forces companies to make market-sensitive information available to all parties at the same time. Dramatic and sweeping amendments were made to the SEC's disclosure rules in the summer of 2002 with the passage of the Sarbanes-Oxley Act. This act was passed by Congress in 2002 in response to multiple financial scandals involving large conglomerates such as Enron and WorldCom. The act held senior management of companies accountable for the accuracy of their financial statements, while also requiring that internal controls be established at these companies to prevent future fraud and abuse.

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This law help organizations with encouraging and identifying best practices in boardrooms and has increased accountability. The Sarbanes-Oxley Act has helped with check and balance on corporate misconduct and has help decrease tolerance for ethical lapses, greater focus on corporate reputation and more intense awareness of enterprise risk (Peregrine, 2012). This act has made many tremendous changes involving changing the responsibility of management, offers harsher punishment for violators increasing maximum sentence to 25 years, for obstruction 20 years max and for mail and wire fraud to 20 years as well. The act also established the Public Company Accounting Oversight Board, which limits the conflict of interest and requires lead auditors to be rotated every five years (Peregrine,

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This instance clearly highlights the importance of internal control functions that identify, assess, monitor and report the risks and controls effectiveness on an ongoing basis   Governing Bodies or Organizations These governing bodies have enacted and developed various professional standards and acts that form the basis of audit principles. Table 2 List of governing bodies for Audit Organization Name Principles or Acts or Standards relevant for Audit function Remarks IIA (The Institute of Internal Auditors) International Professional Practices Framework • Basis for audit techniques and procedures • Standard for evaluating internal audit function AICPA (American Institute of Certified Public Account) Statement on Auditing Standards • Statements on Auditing Standards (SASs) • Statements on Standards for Attestation Engagements (SSAEs) • Statements on Quality Control Standards

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Introduction After the fall of Enron and WorldCom, investors’ confidence and trust in the market was at an all time low. In response, Congress passed the Sarbanes-Oxley Act to help regulate and provide guidance over internal controls and financial reporting. With the implementation of SOX was section 404, which requires external auditors to assess company’s internal controls and management to sign all financial statements. Internal controls are specific procedures and “measures adopted within an organization to safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations” (Weygandt, Kimmel, & Kieso, 2013 p.377). The system of internal controls consists of five components; A control environment, risk assessment, control activities, information and communication, and

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Starting in 1990s, a wave of corporate frauds in the United States occurred with Enron’s failure perhaps being the emblematic example. Jeffords (1992) examined 910 cases of frauds submitted to the “Internal Auditor” during the nine-year period from 1981 to 1989 to assess the specific risk factors cited in the Treadway Commission Report. He concluded that “approximately 63 percent of the 910 fraud cases are classified under the internal control risks.” Calderon and Green (1994) did an analysis of 114 actual cases of business fraud published in the “Internal Auditor” during 1986 to 1990. They concluded that limited separation of duties, false documentation, and inadequate (or non-existent) control were the main reasons for 60% of the fraud

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