Sarbanes-Oxley Act

The Sarbanes-Oxley Act

Barbara J. Gilchrist

Accounting 206

Professor William Hatchett

Spring Semester 2010

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Sarbanes-Oxley Act Effects on Internal Controls

The Sarbanes-Oxley Act of 2002 is responsible for the internal control systems we find in companies today. Senator Paul Sarbanes and Representative Michael Oxley following the corporate scandals of companies like Enron and WorldCom introduced it into legislation. The scandalous accounting practices of these and other companies prompted politicians to put laws into effect that would prevent this from happening again. Once the details of the actions of these companies were revealed there was a public outcry of; how could something like this happen? Investors lost billions of dollars following the collapse of companies like Enron, WorldCom, Tyco and many others. It was discovered that no internal controls were in place to prevent the improprieties committed by those in the management and accounting. Their actions caused many investors to be reluctant to place their money with any company. Actions like these can bring the financial dealings of this country almost to a stop. The Sarbanes-Oxley Act required that all publicly traded companies to incorporate and maintain a specific set of internal controls. Titles II, III and IV are the most relevant to internal control. This act also places responsibility on the management of companies to ensure that these new laws are carried out. Management of companies can now be criminally prosecuted for wrongdoings of their company. the CEO and the CFO must acquire full knowledge of all SEC standards of compliance and reporting requirements; it is no longer acceptable to "plead

Page | 3 Sarbanes-Oxley Act ignorance by saying these tasks have been delegated to others either within or outside the Corporation." (Thomas A. Faulhaber, Editor )It raised the standards of transparency and accountability for companies.

Section 201 - Services Outside The Scope of Practice Of Auditors states that public auditing firms that are performing a companies audit are prohibited from certain other services for the same company. This would include services such as consulting. Section 204 - Audit Partner Rotation this states that the same senior auditor is prohibited from performing an audit for the same company year after year. This internal control will deter individuals to form an alliance in order to commit wrongdoings. Section 206 Conflicts of Interest this makes it unlawful for a registered public accounting firm to perform an audit of a company if any of their chief officers have worked for that company for a one year period prior to the audit. Section 302 Corporate Responsibility states that the principal officers of a company must sign corporate reports to attest to their accuracy and completeness. Section 303 Improper Influence on Conduct of Audits ensures that none of the officers or anyone acting on their behalf tries to exert influence over the external auditors to misrepresent the companies financial condition. Section 304 Forfeiture of Certain Bonuses and Profits states that if a company has to file an accounting restatement due to misconduct of the officers; those officers would have to reimburse any bonuses or profits they received as a result of the misstatement. Section 404 Management Assessment of Internal Controls states that management is responsible for establishing and maintaining a system of internal controls within the company.

Page | 4 Sarbanes-Oxley Act Management must also provide a report to be file with financial statements that show a system is in place and is being used and evaluated on a regular basis.

The sections listed above are a highlight of the many laws enacted to prevent corporate fraud. While it is impossible to prevent all misconducts, by having an internal control system in place a company can not only prevent much of it, they will also discover improprieties much sooner. Executive officers of a company are now personally responsible for those the actions of those who work beneath them. This should encourage their active participation in the financial matters of the company. Many privately held companies have also adopted a system of internal control to help prevent fraud. Even though they are not required by law, it can prevent loss of profits due to fraud and inaccurate accounting.

Page | 5 Sarbanes-Oxley Act References:

Pearson Custom Business Resources, Accounting, (Custom Edition), (2010) Strayer University.

Sarbanes-Oxley Act of 2002. Retrieved May 31, 2010 from http://www.businessforum.com/SEC01.html

Securities Exchange Commission rulings. Retrieved June 1, 2010 from http://www.sec.gov/rules/interp/2007/33-8810.pdf