Advanced Auditing Learning About the 2002 Sarbanes Oxley Act

Learning about the Sarbanes-Oxley Act

For this Discussion, you will first need to read details related to the Sarbanes Oxley Act of 2002. The details of the Act can be found at http://www.sec.gov/about/laws.shtml. Make sure to share something different from your classmates.

Having read the Sarbanes Oxley Act of 2002, discuss the following:

1. What is the significance of Section 404?
2. Discuss the role of the PCAOB
3. What other part of the Act did you find interesting? Explain.

Also response each posted #1 to 3 down below

Posted 1

A

states that annual reports, which are required by the Securities

Exchange Act should include an internal control report. The internal

control report should identify the responsibility of managers to

establish and maintain an acceptable internal control system. To

determine the effectiveness of the internal control structure, an

assessment of the most recent fiscal year is conducted.

Subsection B of the Sarbanes-Oxley Act is titled Internal Control Evaluation and Reporting. It requires the accounting firms to attest and report on the assessment made by managers of the issuer. It also provides an exemption for smaller issuers that are not considered “large, accelerated filers”.

The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB). The role of the PCAOB is to oversee the audits of public accountants and protect investors. Audits of brokers and dealers, and compliance reports filed pursuant to securities laws are monitored to protect investors and the public’s interest.

I found section 404-part B interesting. It is the exemption for smaller issuers. I believe smaller issuers should follow the same guidelines as larger accelerated filers. It seems like a potential loophole. I could see where some companies may attempt to use this to their advantage. The standard should be the same for everyone, it makes the rules easier to enforce.

Reference Sarbanes-Oxley Act of 2002 (2019) http://www.sec.gov/about/laws.shtml

Posted 2

The Sarbanes -Oxley Act of 2002 was enacted by Congress as a reaction to major accounting scandals, including Enron and WorldCom. The law provided criminal penalties for misconduct as it related to financial reporting and also expanded the responsibilities of accountants, auditors and corporate boards. The law contains eleven sections, including Section 404.

Section 404 of the law requires public companies’ audit reports to include the company’s assessment of its internal controls as well as an auditor’s opinion regarding the adequacy and effectiveness of those internal controls. Internal controls are procedures that ensure the integrity of financial data and safeguard assets against fraud and misappropriation. Section 404 is significant because it requires that internal controls be addressed by the company and by its independent auditors. It has led to more accountability and less fraud in financial reporting.

The PCAOB (Public Company Accounting Oversight Board) was created by the Sarbanes-Oxley Act to oversee the audits of public companies. It seeks to protect the interests of investors, creditors, lenders and the public as it relates to audit reports, allowing these stakeholders to better rely on audited financial statements. The PCAOB has four primary functions in its oversight – registration, inspection, standard-setting and enforcement. The PCAOB registers audit firms, inspects them annually, sets standards related to audit reports, conducts investigations, enforces compliance with rules, and imposes sanctions when necessary.

I remember working on “SOX” (Sarbanes-Oxley) implementation teams at Deloitte when this law was enacted. I was managing the audit of tax provisions at public companies like Fossil, Dean Foods, and GameStop, and it was my job to help their internal tax departments implement internal controls related to tax reporting. What I found most interesting about SOX at that time and even to this day is the requirement that CFOs certify their financial reports. I always felt like if that was done prior to Enron and Worldcom, it may have saved investors millions of dollars and jobs. There is something about signing your name and putting your reputation and livelihood on the line. It makes you take more responsibility for errors and irregularities; thus, you spend more time reviewing the accounting for transactions and other reporting. I remember the CFOs being nervous especially as it related to signing off on tax provisions because most didn’t have a tax background and were really relying on their tax departments.

Reference

Sarbanes-Oxley Act of 2002 (2019) http://www.sec.gov/about/laws.shtml

Posted 3

The Section 404 of the Sarbanes Oxley Act of 2002 requires an internal control report to be included in each annual report that is required by the Securities Exchange Act of 1934. The internal control report should include the responsibility of management regarding the internal control structure and the assessment about the effectiveness of the internal control as of the end os the most recent fiscal year of the issuer.

The main role of the PCAOB is to protect the interests of investor and the public interest by overseeing the audit of companies that are subject to the securities laws. The duties of the Board include establishing or adopting standards related to the preparation of audit reports, conducting inspections and investigations of the registered public accounting firms, and enforce compliance with the Sarbanes Oxley Act.

I think that Section 203 is a very important section, since it talks about the audit partner rotation after 5 years of service as the primary responsible for the audit. This type of rotation helps the external audit firm to stay independent of its clients and it also enforces the audit teams to frequently review and improve the quality of the audit procedures to be performed, as their leadership will be changing on every 5 years.