Question

5 paragraph answer : 8. ESSAY QUESTION: Do some reading in periodicals and/or on the Internet to find out more about the Sarbanes-Oxley Act's provisions for companies. Select one of those provisions, and indicate why you think financial statements will be more trust-worthy if company financial executives implement this provision of SOX.

Answer 1

Solution:

SOX is a U.S law which sets requirements for U.S. public company's boards, management and public accounting firms.

Key objective of this law is to ensure public confidence in corporate financial statements in the absence of this law (SOX) there were many incidences of financial malfeasance and investors suffered significant losses as a result of corporate failures.

Objectives of SOX can be identified as follows:

• Make management accountable
• Enhance disclosure
• Conduct regular reviews by the SEC
• Make external auditors accountable (establishment of the Public Company Accounting Oversight Board (“PCAOB”))

Provisions of SOX includes:

• Responsibilities of a public corporation’s board of directors,
• Criminal penalties for certain defined misconduct,
• Implementation by Securities and Exchange Commission (SEC) regulations defining how public corporations compliance with the law.
• Controlling accounting fraud by improving accuracy and reliability of corporate disclosures.

Provision of SOX are as follows:Section 303: Improper influence on conduct of audits

Section 302: Disclosure controls

Section 303: Improper influence on conduct of audits

Section 401: Disclosures in periodic reports (off-balance sheet items)

Section 404: Assessment of ICFR

Section 802: Criminal penalties for influencing U.S. agency investigation/proper administration

Section 906: Certification of financial statements and criminal penalties for non-compliance

Section 1107: Criminal penalties for retaliation against whistle blowers

Out of above provisions following provision will go a long way in establishing trustworthiness of financial statements:

Section 302

Section 302 mentions that the CEO and CFO of every U.S. publicly traded company to certify in its 10-Q and 10-K filings the “appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer.”

This includes  standard financial statements, the disclosures and qualitative analysis giving in depth insight to investors.

As these provision ensure the CEO and CFO of every U.S. publicly traded company to certify in its 10-Q and 10-K , it gives more trustworthiness to Financial Statements.

Section 404

Section 404 prescribes that management and auditors shall work in tandem to report and assess the company’s system of ICFR.

Annual reports (10-K) are directed to disclose:

• The responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting
• An assessment of the effectiveness of the Internal Controls Over Financial Reporting (ICFR )and company procedures for financial reporting
• Where applicable, the external auditor attestation on the effectiveness of the ICFR