Appendix I - The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

APPENDIX I
THE SARBANES-OXLEY ACT, INTERNAL CONTROLS, AND
MANAGEMENT ACCOUNTING
Learning Objeci!e"
1. Understand and discuss the concept of internal controls over fnancial
reporting.
2. Understand and discuss the role of the PCAOB and the implications of
SarbanesO!le" Sections #$2 and %$%.
A##en$i% O!er!ie&
&. SarbanesO!le" 'SO() Act
&&. &nternal Controls
&&&. Public Compan" Accounting Oversight Board
A. SO( #$2
B. SO( %$%
'e( Lec)re C*nce#"
1. SA*BA+,SO(-,. 'SO() AC/
SO( 0as enacted in 2$$2 as a result of several ma1or corporate
accounting scandals. /he act2
Sought reform in companies3 fnancial reporting practices.
Sought reform in a frm3s internal and e!ternal audit
processes.
1
Appendix I - The Sarbanes-Oxley Act, Internal Controls, and Management Accounting
4orms the basis for possible criminal penalties for a
compan"3s Chief ,!ecutive O5cer and Chief 4inancial
O5cer if the frm3s fnancial statements are fraudulent or
materiall" misstate the entit"3s fnancial condition.
2. &+/,*+A- CO+/*O-S
Inerna+ c*nr*+ is 6broadl" defned as a process7 established
b" an entit"3s board of directors7 management7 and other
personnel7 designed to provide reasonable assurance regarding
the achievement of ob1ectives in the follo0ing categories2
,8ectiveness and e5cienc" of operations
*eliabilit" of fnancial reporting
Compliance 0ith applicable la0s and regulations.6
,!amples of internal controls include2
Separation of duties
Securit" over assets
S"stems of authori9ation and approval
&nternal controls help to ensure integrit" over both fnancial and
managerial accounting information.
#. PUB-&C CO:PA+. ACCOU+/&+; O<,*S&;=/ BOA*> 'PCAOB) A+> SO(
S,C/&O+S #$2 A+> %$%
2
Appendix I - The Sarbanes-Oxley Act, Internal Controls, and Management Accounting
/he P)b+ic C*,#an( Acc*)ning O!er"ig- B*ar$ .PCAOB/
oversees and investigates the audits and auditors of public
companies7 and has the authorit" to sanction both frms and
individuals for violations.
SO( #$22 Under this section7 signing o5cers of a compan"3s
fnancial reports must establish7 maintain7 and evaluate the
frm3s internal controls. /hese individuals must also disclose to
the compan"3s auditors an" signifcant change or 0ea?ness in
the internal control s"stem.
SO( %$%2 /his section re@uires companies to include an internal
control report in their annual report.
SO( #$2 and %$% have created troublesome and costl" reporting
and documentation procedures7 especiall" for small businesses7
0hich lac? the resources for compliance.
/he PCAOB has announced its intention to investigate 0hether
auditors appropriatel" use a ris?based assessment of internal
controls to help cope 0ith the preceding problems.
Teac-ing O!er!ie&
Coverage of this material 0ill probabl" be some0hat brief7 as it is a bit
6heav"6 for introductor" students. & tend to focus on the concept of
internal control and establish several fctitious cases 0here students can
tr" to beat the s"stem and either embe99le or misstate the fnancial
statements. /here are various studies that "ou can bring into the
classroom that sho0 compliance costs 0ith the provisions of SO(.
Students are t"picall" surprised at the dollar amounts involved.
Lin0" * -e Te%
Homework Grid

Appendix I - The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Item No.
Learnin
g
Objectiv
es
Completi
on
Time
(min.)
pecial
!eat"re
s#
,!ercises2
&A 1 1B
&C 1 1B to #$ ;
&D 2 #$ E7 C
&1$ 2 #$ to %B ;
&11 2 1B
&12 17 2 1B
&1# 17 2 2$
! C " #usiness communication $ " $thics % " %roup &or' I " International
( " (eb-based application
)