The Sarbanes-Oxley Act of 2002 (SOX) was enacted into legislation in 2002 within the wake of company monetary reporting scandals involving massive publicly held firms. SOX instituted new strict financial rules with the intent of enhancing accounting practices and protecting traders from company misconduct. SOX requires company executives to vouch for the accuracy of economic statements, and to institute and monitor effective internal controls over financial reporting. The value of implementing an efficient inner management structure are onerous, and SOX inflicts opportunity prices upon an enterprise as executives have become more threat opposed because of fears of incrimination.
Don’t waste time Get a verified expert to help you with Essay
The Public Company Accounting Oversight Board (PCAOB) was created by SOX to oversee the accounting process and dictate independence necessities for auditors and auditing committees. The PCAOB proposed rules should be accredited by the SEC earlier than they’re enacted. Since the passage of SOX, the IT division has become critical in designing and implementing the internal controls in firm accounting info techniques. The Information Technology Governance Institute (ITGI) created a framework called Control Objectives for Information and Related Technology (COBIT) to offer steering for companies to implement and monitor IT governance.
Accounting Information Systems Research Paper
The Sarbanes-Oxley Act of 2002 changed the panorama of corporate financial reporting and auditing. In the wake of company reporting scandals, Congress determined the accounting profession was unable to self-regulate, and The Sarbanes-Oxley Act of 2002 was signed into law. The law addresses company greed and dishonesty by requiring corporations to implement in depth inner control procedures to deter fraud and maintain company executives accountable.
The Public Company Accounting Oversight Board is the enforcement arm of the legislation, and is underneath the authority of the SEC to oversee accounting and auditing processes. Public firms are required combine internal controls of their accounting information techniques to ensure data validity and safety. The Sarbanes-Oxley Act of 2002
In the aftermath of several corporate financial reporting scandals involving large publicly held firms similar to Enron, WorldCom, and Tyco, the United States Congress handed the Sarbanes-Oxley Act of 2002 and enacted it into regulation on July 30, 2002. The Sarbanes-Oxley Act (SOX) takes its name from its two primary congressional sponsors, Representative Michael Oxley (R-OH) and Senator Paul Sarbanes (D-MD) (Hoffman, 2005, p. 3). SOX instituted new strict monetary rules with the intent of improving accounting practices and defending investors from corporate misconduct. The regulation is meant to guard stakeholders from corporate greed, fraud, and deceptive monetary reporting. SOX legislation tackles several essential considerations including company accountability, internal controls, auditor independence, financial disclosures, criminal and fraud liability, conflicts of curiosity, and corporate tax returns (Moffett and Grant, 2011, p. 3).
Under the legislation, independent auditors and corporate officers of publicly traded corporations must affirm each the accuracy of the financial statements and their supporting processes and data (Hoffman, 2005, p. 3). The legislation requires corporate officers to vouch for the effectiveness of the company’s inside controls and to be honest and transparent in monetary reporting. SOX is organized beneath eleven titles, with nearly all of the compliance principles written beneath sections 302, 401, 404, and 409 (A Guide to the Sarbanes-Oxley Act, 2006). Section 302 requires firm officers to certify the truthfulness and completeness of quarterly and annual reviews. Additionally, the signing officers are responsible for establishing and sustaining the interior controls, and should have evaluated the effectiveness of the controls within 90 days prior to certifying the monetary statements (Hoffman, 2005, p. 4). Section 401 of SOX requires companies to issue financial statements that are complete and correct and include all material off-balance sheet obligations or liabilities (A Guide to the Sarbanes-Oxley Act, 2006).
This regulation was instituted to prevent public firms from hiding liabilities from buyers, and thus artificially inflating inventory costs. Section 404 requires public firms to ascertain inner controls and report yearly on their effectiveness over financial reporting. The CFO and CEO are held personally responsible for the inner controls via the requirement to signal an announcement certifying the adequacy of the inner management system (Moffett and Grant, 2011, p. 3). Additionally, the company’s independent auditor should concern an attestation regarding management’s assessment of the internal construction as a part of the company’s annual report (Bloch, 2003, p. 68). Material changes to a company’s monetary condition or operations should be disclosed to the public in a timely manner underneath the provisions of Section 409. Rapid disclosure applies to all forms of firm information – i.e. product recollects, personnel modifications, or lack of a significant buyer (Hoffman, 2005, p. 4). Internal Controls
Effective inner controls protect a company’s assets, keep compliance, enhance operations, prevent fraud, and promote accuracy in financial reporting. In 1992 the Committee of Sponsoring Organizations of the Treadway Commission (COSO) designed an internal control framework of five parts: the management setting, danger evaluation, control activities, info and communication, and monitoring (Moffett et al, 2011, p. 3). Companies use this framework to implement inner control techniques tailored to their very own needs. No inner management system is infallible, nevertheless, effective controls provide affordable assurance firm property are protected and financial reporting is correct.
Section 404 compliance. Section 404 mandates that Securities and Exchange Commission (SEC) registered companies implement and keep sufficient internal management procedures for monetary reporting, and also appropriately assess and report on the internal controls’ effectiveness (Conway, 2003, p. 19). Company executives and audit committees are anticipated to take an active role in defining and evaluating the interior control structure and procedures. The COSO internal management framework is broadly accepted as the most effective criteria for evaluation of a company’s inside management construction. Documentation of inner control procedures is important to the evaluation course of. Documentation supplies evidence that controls have been identified and could be monitored. All related monetary statement assertions and every of the five COSO inside management elements should be documented. When
documentation is missing or nonexistent, impartial auditors will report both a major deficiency or materials weak spot in internal management (Conway, 2003, p. 19).
Furthermore, documentation provides proof that administration applies wisdom to defending firm property and instills integrity in monetary reporting in a way that is pleasing to the Lord, as affirmed in Proverbs 24:three, “By wisdom a home is constructed, and thru understanding it is established” (New International Version). Internal controls must be evaluated to determine whether or not they’re operating successfully and to substantiate management’s assertion on the adequacy of the controls. Internal control testing and results must be documented, with deficiencies noted and remediation plans recognized (Conway, 2003, p. 19). Upon completion of the analysis process, management prepares its assertion on the effectiveness of inner control over the financial reporting process. As a part of the independent audit, the external auditor will take a look at and evaluate the inner control system, and subsequently attest to management’s assertion relating to inside controls.
Section 404 impact on small business. One of the largest concerns to small firms is the onerous price of implementing Section 404 on inside controls. Companies have seen audit charges enhance by as a lot as 30% because of tougher accounting and auditing requirements required by SOX (Solomon & Bryan-Low, 2004). In addition to exterior auditing bills, the value of hiring employees to create, implement and monitor Section 404 compliant inside controls could be burdensome to small businesses.
In addition to the monetary burden created by SOX compliance, SOX imposes vital alternative price on corporations by making executives more risk-adverse by instilling in managers a concern of incrimination (Vakkur, McAfee, & Kipperman, 2010, p. 19). SOX inflicts extraordinarily punitive measures on company executives to include penalties, incrimination, private litigation, and potential labor market penalties (Ahmed, McAnally, Rasmussen & Weaver, 2010, p. 354). When managers’ time is consumed with regulatory compliance, they do not appear to be targeted on new-product improvement or growing the business, leading to decrease profits and reduced market competitiveness. The PCAOB
The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act to supervise the accounting process and dictate independence requirements for auditors and auditing committees (Kim, 2003, p. 236). In order to curb the system of accountants’ self-regulation, only two of the five members of the PCAOB may be present or former licensed public accountants. The PCAOB conducts annual quality inspections of accounting corporations that audit multiple hundred firms and triennial inspections of all other accounting corporations (Kim, 2003, p. 241). The PCAOB has the authority to conduct particular inspections of accounting companies at any time, and may impose sanctions on an accountant or accounting agency if the Board finds unreasonable failure to oversee any individual associated with auditing or high quality control standards (Kim, 2003, p. 241). The SEC maintains authority over the PCAOB, and must approve PCAOB proposed rules to ensure that them to turn out to be efficient. PCAOB Pronouncements
Pronouncements associated to accounting information methods. Auditing Standard No. 12, “Identifying and Assessing Risk of Material Management,” addresses the auditor’s requirement to grasp the company’s information system, including associated business processes, related to monetary reporting. This contains understanding transactions that are significant to the financial statements, and the procedures by which these transactions are initiated, licensed, processed, recorded, and reported. The auditor is to obtain understanding of related accounting data, supporting information, and particular accounts that are used to initiate, authorize, process and record transactions. The auditor should understand how the knowledge system captures occasions and conditions that are essential to the financial statements and the way info know-how impacts the company’s move of transactions. Additionally, the auditor should turn out to be educated concerning the company’s interval end monetary reporting course of, together with basic ledger procedures, utility of accounting ideas, procedures used to process and report journal entries and adjustments, and procedures for making ready financial statements and related disclosures (Auditing Standard No. 12, 2010).
Pronouncements related to inner controls. Auditing Standard No. 5, “An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements,” establishes requirements and provides direction for audit engagements of management’s evaluation of the effectiveness of inner control over monetary reporting that is a half of a financial statement audit. Effective inner control over financial reporting offers affordable assurance concerning the reliability of financial reporting and related financial statements. The auditor is required to plan and perform the audit to obtain applicable proof about whether or not material weaknesses exist within the inside management over financial reporting. General requirements apply within the audit, including technical proficiency as an auditor, independence, due skilled care, and professional skepticism.
The auditor prepares and indicators a report expressing whether the company maintained efficient inner control over financial reporting that’s dated and issued in conjunction with the report on the audited financial statements (Auditing Standard No. 5, 2007). Auditing pronouncements. SOX approved the PCAOB to ascertain auditing and skilled practice standard to be employed by registered public accounting companies. Auditor compliance is mandatory. On an interim foundation, the PCAOB has adopted the generally accepted auditing standards as described within the American Institute of Certified Public Accountants’ Auditing Standards Board’s Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards, in existence on April 16, 2003 (Auditing, 2003). Ethics and independence pronouncements. In accordance with Rule 3520, the registered accounting agency and auditors have to be independent of the firm’s audit shopper all through the audit and the engagement period.
In accordance with Rule 3500T, the registered accounting firm and auditors shall comply with ethics requirements as written in AICPA’s Code of Professional Conduct Rule 102, and interpretations and rulings as in existence on April sixteen, 2003 (Ethics & Independence, 2003). Quality control pronouncements. In April 2003 the PCAOB adopted as interim high quality management standards the AICPA’s Auditing Standards Board’s Statements on Quality Control Standards, as in existence on April sixteen, 2003. The part requires that licensed public accounting companies shall have a system of quality control for its accounting and auditing follow that ensures companies are fully delivered and adequately supervised. Firm personnel are to comply with applicable skilled requirements and the firm’s requirements of high quality (Quality Control, 2003). Attestation pronouncements. In April 2003 the PCAOB adopted as interim attestation standards the AICPA’s Auditing Standards Board’s Statements on Standards for Attestation Engagements, related interpretations, and statements of place as in existence on April 16, 2003.
The practitioner shall have adequate coaching and proficiency in the attest operate and the subject material. The practitioner shall keep independence in psychological attitude, and train due skilled care within the engagement. Work shall be adequately deliberate and supervised, and adequate evidence shall be obtained to support an inexpensive foundation for the conclusion expressed within the report (Attestation, 2003). Future PCAOB pronouncements. The PCAOB is contemplating including an Auditor’s Discussion and Analysis (AD&A) with an auditor’s report. The AD&A might embrace information related to the audit, together with audit risks, audit procedures and outcomes. It could additionally embody discussion associated to the auditor’s views of management’s judgments and estimates, accounting policies and practices, and difficult points. (Current Activities, 2013). SOX and PCAOB Impact on Accounting Information Systems
The SOX requires that firms evaluate the effectiveness of both the design and operation of internal controls (Holmes & Neubecker, 2006, p. 25). Because of the reliance on accounting information techniques for financial transactions and reporting, inner controls must be built into within the accounting system infrastructure so as to offer affordable assurance that financial reporting is valid, full, and free of fraud. Damianides (2005) stresses, “IT shall be crucial to achieving this objective and establishing the inspiration for a sound inner management setting.” Prior to SOX, there were no definitive necessities on the extent of accounting system info know-how controls an organization was anticipated to implement. Prior to SOX, sensible managers and corporations that placed high significance on integrity had already instituted internal management procedures. The bible speaks to this idea of being good stewards of the property entrusted to us. As famous in Proverbs 27:23, “Be sure you know the condition of your flocks; give special attention to your herds” (New International Version).
Once SOX grew to become regulation, extra consideration was given to inner controls that ought to be inherent in accounting information techniques. Accounting transactions from inception to disposition are automated, leading to a direct relationship between IT effectiveness and operational effectiveness in corporations (Holmes et al., 2006, p. 25). The chief info officer performs a crucial function in SOX inner control compliance. IT professionals are tasked to provide accurate, seen, and well timed info whereas making certain the safety and safety of data techniques (Damianides, 2005, p. 77).
IT governance is a course of whereby a company’s IT system sustains and helps firm targets and objectives (Gelinas, Dull, & Wheeler, 2012, p. 264). The Information Technology Governance Institute (ITGI) created a framework referred to as Control Objectives for Information and Related Technology (COBIT) to provide steerage for firms to implement and monitor IT governance. The 5 key parts of the COBIT framework are: strategic alignment, service delivery, useful resource administration, risk management, and performance measurement (Kepczyk, 2012, p. 5).
Strategic alignment is the integration of the IT infrastructure into an enterprise’s strategic plans. Service supply refers to the IT methods capacity to securely provide data system entry on any company-approved gadget from any location, on-site or distant. Resource management is the proactive monitoring and control of IT hardware and software prices, proactively applying cost-benefit analysis. Risk management encompasses the identification of threats and vulnerabilities to IT infrastructure, with proactive actions taken to mitigate potential impacts. Lastly, efficiency administration is means of determining the suitable levels of community efficiency and monitoring adherence through such instruments as balanced scorecards and benchmarks (Kepczyk, 2012, p. 5).
Businesses that apply biblical knowledge to studying and understanding legal requirements and the way to implement them will be profitable in overcoming the tactical challenges of complying with the regulation. We are reminding in Proverbs 1:5, “let the wise listen and add to their studying, and let the discerning get steerage.” Conclusion
The Sarbanes-Oxley Act of 2002 is probably the most important legislation regarding market regulation since the Exchange Acts of 1933 and 1934 (Holmes et al., 2006, p. 27). Public firms are most impacted by the stringent inside control requirements. The PCAOB oversees accounting processes and auditing requirements. Companies that are profitable in establishing and maintaining effective inside controls automate them inside their accounting data techniques. As the automation in business processes is frequently growing, managers are challenged to ensure transactions are valid, security is powerful, and reviews are accurate and legitimate.
A Guide to the Sarbanes-Oxley Act. (2006). Addison-Hewitt Associates. Retrieved April 30, 2014, from http://soxlaw.com Ahmed, A., McAnally, M., Rasmussen, S. & Weaver, C. (2010). How pricey is the sarbanes oxley act? Evidence on the consequences of the act on company profitability. Journal of Corporate Finance, sixteen, 352-369. Attestation. (2003). Retrieved April 30, 2014, from www.pcaobus.org Auditing. (2003). Retrieved April 30, 2014, from www.pcaobus.org Auditing Standard No. 5. (2007). Retrieved April 30, 2014, from www.pcaobus.org Auditing Standard No. 12. (2010). Retrieved April 30, 2014, from www.pcaobus.org Bloch, G. (2003). Sarbanes-oxley’s results on inside controls for revenue. The CPA Journal, 73(4), 68-70. Retrieved from http://search.proquest.com/docview/212294542?accountid=12085 Conway, R. (2003). Sarbanes-oxley, part 404: Achieving compliance. Orange County Business Journal, 26(15), 19. Retrieved from http://search.proquest.com/docview/211081168?accountid=12085 Current Activities. (2013). Retrieved April 30, 2014, from www.pcaobus.org Damianides, M. (2005). Sarbanes-oxley and IT governance: new steering on IT management and compliance. Information Systems Management, 22(1), 77-85. Retrieved from http://search.proquest.com/docview/214122540?accountid=12085 Ethics & Independence. (2003). Retrieved April 30, 2014, from www.pcaobus.org Gelinas, U., Dull, R., & Wheeler, P. (2012). Accounting data systems (9 ed.). Mason, OH: Cengage/South-Western. Hofman, S. (2005). Beyond sarbanes-oxley requirements. ISeries News, 1-6. Retrieved from http://search.proquest.com/docview/219592654?accountid=12085 Holmes, M. & Neubecker, D. (2006). The influence of the sarbanes-oxley act of 2002 on the
info systems of public companies. Issues in Information Systems, 7(2), 24-28. Retrieved from http://iacis.org/iis/2006/Holmes_Neubecker.pdf Holy Bible, New International Version®, NIV®. (1973, 1978, 1984, 2011). Retrieved from http://www.biblica.com Kepczyk, R. (2012). Raising your IT governance awareness. The Practicing CPA (Online), 40(8), 4-5. Retrieved from http://search.proquest.com/docview/1115475024?accountid=12085 Kim, B. (2003). Sarbanes-Oxley Act. Harvard Journal on Legislation, forty, 235-252. Retrieved from http://heinonline.org.ezproxy.liberty.edu:2048/HOL/Page?collection=journals&handle=hein.journals/hjl40&type=Image&id=241 Moffett, R. & Grant, G. (2011). Internal controls and fraud prevention. Internal Auditing, 26(2), 3-12. Retrieved from http://search.proquest.com/docview/863454394?accountid=12085 Quality Control. (2003). Retrieved April 30, 2014, from www.pcaobus.org Roman, H. K. (2012). Raising your IT governance awareness. The Practicing CPA (Online), 40(8), 4-5. Retrieved from http://search.proquest.com/docview/1115475024?accountid=12085 Solomon, D. & Bryan-Low, C. (2004). Companies complain about cost of corporate-governance guidelines. Wall Street Journal, February 10. Retrieved from http://search.proquest.com/docview/398856653?accountid=12085 Vakkur, N., McAfee, R. & Kipperman, F. (2010). The unintended effects of the sarbanes-oxley act of 2002. Research in Accounting Regulation, 22(1), 18-28. Retrieved from http://dx.doi.org/10.1016/j.racreg.2010.02.001