Question

Answer the following questions in detail. Be sure to thoroughly describe each and provided examples. Use scholarly-peer reviewed journals or sources to support your response (Wikipedia, Investopedia, etc. is not acceptable sources).

How does Section 404 of the Sarbanes Oxley Act of 2002 impact small businesses? (Be sure to be concise and provide examples)

How does Section 404 of the Sarbanes Oxley Act of 2002 integrate with the audit function? (Be sure to be concise and provide examples)

Answer 1

SOX Section 404 (Sarbanes-Oxley Act Section 404) mandates that all publicly-traded companies must establish internal controls and procedures for financial reporting and must document, test and maintain those controls and procedures to ensure their effectiveness. The purpose of SOX is to reduce the possibilities of corporate fraud by increasing the stringency of procedures and requirements for financial reporting.

IMPACT ON SMALL BUSINESSES

The Sarbanes-Oxley Act was passed in 2002, after corporate scandals involving fraud and regulatory mismanagement in companies such as Enron and WorldCom. The Act dictates how all public companies are required to disclose financial information. The requirements of the Act can place a burden on small businesses, and penalties for noncompliance are very serious. It is vitally important that all businesses are familiar with what the act requires.

The Sarbanes-Oxley Act applies to any public company, no matter the size. Because the Act requires a high level of financial reporting and internal auditing, it can place a burden on smaller companies to make sure they are in compliance. The management of all companies has a legal duty under the law to maintain a system of auditing controls to ensure financial statements are reliable. There are no rules about what system to use. While large companies design their own system, most small companies do not have teams of auditors and accountants to do this. Instead, small companies can use the free framework designed by the Committee of Sponsoring Organizations of the Treadway Commission

One of the most difficult elements of the Act for small companies is the requirement that all annual reports include the company's own assessment of its system of financial reporting. This assessment must show that there are enough controls in place to safeguard the accuracy of the company's financial data. This assessment is called a Section 404 audit, and is done along with a financial audit. This has proved the most onerous part of the Act for small companies, because it means spending more money on auditors' reports and collecting more types of financial information

INTEGRATION WITH AUDIT FUNCTION

An integrated audit combines a financial statement audit with an audit of internal controls. Since the Sarbanes-Oxley Act came into effect, management is responsible for establishing, maintaining, and reporting on an internal control structure, and auditors are required to asses this internal control structure.

The Sarbanes Oxley Act of 2002, section 404, dictates the requirements that management must report on and assess internal controls and a registered public accounting firm must attest to management’s assessment. From this requirement, the requirement for an integrated audit was born.