Sarbanes-Oxley Act Relates to Internal Control Essay Example

Sarbanes Sarbanes-Oxley Act Relates to Internal Control Essay Sarbanes-Oxley Act Relates to Internal Control Essay Running:Sarbanes-Oxley Act relates to Internal Control How the Sarbanes-Oxley Act relates to Internal Control? Paris Hudnall Accounting 1 Instructor Wiley December 1, 2010 How the Sarbanes-Oxley Act relates to Internal Control? Former President George W. Bush signed the Sarbanes-Oxley Act on July 30, 2002. The Sarbanes-Oxley Act also known as Public Company Accounting Reform, and called Sarbanes-Oxley, or SOX (Wikipedia n. d. ) The enactment of this United State federal law was written for publicly traded companies to provide guidelines to corporations to assist with improving their internal control. Internal control is organizational plan and various measures created by a corporation to safeguard assets, encourage employees to follow company policy, promote operational efficiency, ensure accurate, and reliable accounting records. (Horngren, Harrison, and Oliver 2010) . corporations, such as Tyco International, Enron, and WorldCom were part of a scandal, because they participated in over stating earning, profits, questionable accounting practice, lack of independent auditing, and weak corporate governance (Wikipedia n. . ). These scandals cost investors billions of dollars, the collapse of Enron, consumers’ jobs and weaken the consumer confidence. Corruption within the corporation occurred due to the lack of internal controls systems. The Sarbanes-Oxley Act contains 11 titles with several sections, which outlining the requirements in which corporations must implement to improve their internal corporate governance and accounting practice. (Wikipedia n. d. ). The Sarbanes-Oxley Act will improve the internal control of monitoring, information system, control procedures, environment control and risk assessment. This paper will look at four key provisions in the Sarbanes-Oxley Act that focuses on corporation internal controls, regulations on how corporations managed their company internal structure and accountability in the area of outlining management assessment of internal controls, corporation responsibility, finance reporting, disclosure of reports, time period of disclosures, and criminal penalties for altering documents. Title IV section 404; Management Assessment of Internal Controls ensures corporations have organizational plan and guidelines (FindLaw Sec: 404 n. d. ). Guidelines in the corporation help establish an expectation within the work place, and everyone is working toward the same gold. In order to achieve this goal management must submit an annual report, which states the responsibility of management for establishing and maintaining a sufficient internal control structure, and procedure for financial reporting (CPA Journal 2207). By establishing these corporate interior procedures, it safeguard corporate asset by holding the corporation liable for reviewing financing documents and separation of duties limit financing fraud. Saharan-Oxley Act require at the end of the fiscal year the corporation has to report the effectiveness of the internal control structure and the procedure used for the financial reports (FindLaw Sec: 404b, n. d. ). These internal guidelines increasing the accuracy of proper record keeping, corporate information more reliable and increase profitability. Title III of the Sarbanes- Oxley Act is Corporate Responsibility. Section 302; outline corporation responsibility for the corporation financial reports. Sarbanes-Oxley Act place more responsibility on senior executive in the accuracy of corporate financial reports (Findlaw. com, n. d. ). One component of internal control is the corporate environment, which beginning with the owner of the corporation (Horngren, Harrison, and Oliver 2010). The owner or senior executive show honest and respect for the rules of the corporation, which set the example for the employees (Horngren, Harrison, and Oliver 2010). Management assigns responsibilities to employees and separation of duties, as part of the internal procedure. By placing limitations on internal control procedures, employees are clear on their responsibilities, higher job accountability, and limit two or more employees from working together to defraud the corporation (Horngren, Harrison, and Oliver 2010). Senior executive has to sign off on all financing report validating they have read and confirmed the content contains no untrue statements of material. All financial statements have to be verified, and the financial condition of the corporation is presented clearly and actually. By Following Saharan –Oxley Act corporation responsibility section 302, it created guidelines, and a paper trail internally to discourage and control another Enron scandal. Title IV of Saharan Oxley Act enhanced financial disclosures. Section 401 outlines disclosures in periodic reports. To improve internal controls of accurate reliable accounting records corporations are required to ensure all financial statements are prepared according to accounting principles under title IV(FindLaw Sec:401, n. d. ). All financial obligations, arrangements, off balance sheet transactions, and any relationships that may have current or future effect on financial conditions have to be present (Soxlaw. com). All financial reports have to be clear of incorrect statements and transparent. With internal separation of financial procedure in place, it secures the accuracy of financial statement and limits fraud. To strength public confidence the Sarbanes –Oxley Act in section 409 requires public traded corporation to disclose to the public on a regular basis report and presentation on the financial condition, market trend and financial changes (FindLaw Sec:409, n. d. ). This will assist in protecting investors and public interest. These sections assist with internal control of information system, limit unethical acts by personnel, and transparency of company risk. In light of the accounting scandals in the United States TitleVIII, Corporate and Criminal Fraud Accountability, section 802 outlines consequences for not following the law and altering documents (FindLaw n. d. ). Accountants took part in Enron and Tyco financial scandal. Corporations were lack with independent auditing, accountants’ oversight, and accountants’ preformed consulting work for companies they audited, and accountants were self regulated (Journal of Accountancy 2003). After the passing of the Sarbanes-Oxley Act, internal procedures were put in place. These procedures regulated internal control for accounting firms. Guidelines focusing on accountants conflict of interest with corporations. The Act includes any person or persons knowingly destroy, conceal, alter, falsely record information, or obstruct can be imprisonment and/or fine up to 20 years (FindLaw Sec: 802, n. d). Accountants working for corporations are not allowed to audit the client files. New audit procedures were implemented, with auditors having to confirm they had review management internal controls financial procedures (Journal of Accountancy 2003). These internal control procedures help separate duties and create confidence among the employees and deter fraud. Accountants are required to keep audit file and work papers for five years. Any accountants knowingly, and willingly violate the law can be fine and/or imprison up to ten years (Soxlaw n. d). Since the passing of Sarbanes-Oxley Act, some business has relocated to places were the financial sector and laws are more relaxed. There is still concern and some debate over compliance cost, whether the transparency is with foreign firms, and numerous other issues. Companies are implementing all section of the act; however the most costly portion is the assessment of internal control. Documents, reports and financial manual and control require great effort (Wikipedia n. d. ). The stricter the internal control guidelines the more costly to the corporation. The internal control is the guidelines and organizational plan for a corporation. The Sarbanes-Oxley Act restructured how a corporation internal procedures are handled. With these internal control laws in place for a corporation to follow corporate assets are better safeguarded; employees are clear on procedures, company policies are spelled out, more environment control and financing reports are more reliable. The Sarbanes-Oxley act has been praised for improving internal control, which has been successful in deterring corporate fraud and scandal. With more accurate, reliable financial statement, investor confidence, independent audits, executive accountability. Reference Addison-Hewitt Associates. Initials. (2003). A Guide to the Sarbanes-Oxley Act. Retrieved from soxlaw. com Find law, Initials. (n. d. ). Sarbanes-oxley act of 2002. Retrieved from, fl1. findlaw. com/nerws. findlaw. com/cnn/docs/gwbush Horngren, Charles, Walter Harrison, and Suzanne Oliver. 7. Accounting 1. 2010 ed. New Jersey: Prentice Hall, 2008. 379. Print. Jean, Bedard Graham, L, amp; Hoitash, R. (October, 2007). Sarbanes-Oxley Section 404 and Internal Controls. retrieved 11/29/2010, from The CPA Journal Web Site: ysscpa. org McConnell, Donald amp; Banks, G. (2003,September). How Sarbanes-Oxley Will Change the Audit Process. retrieved 11/29/2010, from Journal of Accountancy Web Site: www. journalofaccountancy. com Sarbanes Oxley Act . Â  Wikipedia,The Free Encyclopedia. 2002. Wikipedia Foundation. 11/30/2010Â  lt;www. wikipedia. org/wiki/sarbanesgt;. SEC Immplements Internal Control Provisions of Sarbanes-Oxley Act. (2003). retrieved 11/29/2010, from U. S. Securiti es and Exchange Commission Web Site: www. sec. gov