Question

5. List 4 key differences between pre-SOX and post-SOX regarding SEC’s internal control requirement and audit regulation

Answer 1

Section i404 iof ithe iAct idirects ithe iCommission ito iadopt irules irequiring ieach iannual ireport iof ia icompany, iother ithan ia iregistered iinvestment icompany, ito icontain i(1) ia istatement iof imanagement's iresponsibility ifor iestablishing iand imaintaining ian iadequate iinternal icontrol istructure iand iprocedures ifor ifinancial ireporting ,iThe iCommission ireceived iover i60 icomments ion ithe iSection i404 iproposals ithat iexpressed igeneral ioverall isupport ifor ithe iCommission's iapproach ito iimplementing iSection i404 iof ithe iAct. iThe iadopting irelease iwill iincorporate ia inumber iof ichanges irecommended iby icommenters.

· Under ithe ifinal irules, imanagement's iannual iinternal icontrol ireport iwill ihave ito icontain:

· a istatement iof imanagement's iresponsibility ifor iestablishing iand imaintaining iadequate iinternal icontrol iover ifinancial ireporting ifor ithe icompany;

· a istatement iidentifying ithe iframework iused iby imanagement ito ievaluate ithe ieffectiveness iof ithis iinternal icontrol;

· management's iassessment iof ithe ieffectiveness iof ithis iinternal icontrol ias iof ithe iend iof ithe icompany's imost irecent ifiscal iyear; iand

· a istatement ithat iits iauditor ihas iissued ian iattestation ireport ion imanagement's iassessment.

iFurthermore, ithe iframework ion iwhich imanagement's ievaluation iis ibased iwill ihave ito ibe ia isuitable, irecognized icontrol iframework ithat iis iestablished iby ia ibody ior igroup ithat ihas ifollowed idue-process iprocedures, iincluding ithe ibroad idistribution iof ithe iframework ifor ipublic icomment.

The inew irules iimplementing iSection i404 iof ithe iAct iwill idefine ithe iterm i"internal icontrol iover ifinancial ireporting" ito imean

a iprocess idesigned iby, ior iunder ithe isupervision iof, ithe iregistrant's iprincipal iexecutive iand iprincipal ifinancial iofficers, ior ipersons iperforming isimilar ifunctions, iand ieffected iby ithe iregistrant's iboard iof idirectors, i

The iSarbanes-Oxley iAct iof i2002 i(SOX) iis ia ilaw ithat iimplements iregulations ion ipublicly itraded icompanies iand iaccounting ifirms.

While ithe iact iconsists iof ieleven ititles, ia isignificant iamount iof iSOX irequirements ilive iwithin iSection i302 iand iSection i404. iThese iSOX icompliance iactivities iinclude ithe iidentification iand itesting iof iinternal icontrols iover ithe ifinancial ireporting iprocess. iPlus, ithey irequire ithe isubmission iof ispecific ifinancial icertifications iin iquarterly iand iannual ireports ito ithe iUnited iStates iSecurities iand iExchange iCommission i(SEC). i

SOX iSection i302 irequirements i

Section i302 iof ithe iSarbanes-Oxley iAct ifocuses ion idisclosure icontrols iand iprocedures, iplus ithe ipersonal iaccountability iof isigning iofficers. iSOX i302 irequires ithat ithe iprincipal iexecutive iand ifinancial iofficers iof ia icompany, itypically ithe iCEO iand iCFO, ipersonally iattest ithat ifinancial iinformation iis iaccurate iand ireliable. iThey imust imake ithese iattestations iwithin ithe iquarterly i10-Q iand iannual i10-K ireports ifiled iwith ithe iSEC. i. i

· When isigning ioff ion i302 idisclosures, ithe iprincipal iofficers iare: i

· Confirming ithey ireviewed ithe ireport

Stating ithat, ibased ion itheir iknowledge, ithe ireport idoes inot icontain ifalse ior imisleading istatements ior iomit inecessary imaterial iinformation

Affirming, ibased ion itheir iknowledge, ithe ifinancial istatements iand iinformation iin ithe ireport iaccurately ipresent iin iall imaterial irespects ithe ifinancial icondition iand iresults iof ioperations ifor itheir icompany iduring ithe iperiods icovered iin ithe ireport.

So, iif ian iexecutive iofficer isigns ia iSOX i302 icertification idocument, ithey ipersonally itake iresponsibility ifor iit ibeing itrue. iThey’re ialso iresponsible ifor ifully idisclosing iall irelevant iprocedures, iand ifor iclearly idetailing iany ichanges ithat ioccurred iduring ithe iperiod iof ithe ireport.

To iprepare ifor ithis iquarterly icertification, icompanies itypically isend ia iquestionnaire ito ipeople iwho ihave isignificant iresponsibility ifor ifinancial iresults. iThese iinclude ioperating iofficers, icontrollers, iand iaccounting imanagers ias iwell ias ithe ihead iof iinternal iaudit. i

This imight ibe i15 ito i20 ipeople iin ia icompany ior ias imany ias i50 ifor ia ilarger icompany, ibut iit’s irelative ito ithe itotal inumber iof iemployees iand iis ia ifairly ismall ipercentage. iThe isurvey imay ivary iin ilength ifrom ione iorganization ito ianother, ibut iit ihas itwo imain ipurposes: i

· Determine iif ithere ihave ibeen iany isignificant ichanges ito itheir iinternal icontrols iof ifinancial ireporting ithat ihaven’t ialready ibeen ireported. i

· Inquire iif ithe irecipient iis iaware iof iany ifraudulent iactivities.

If iany iirregularities iare idetected iin ithe ireports isigned iby ithese iofficials, ithose ithat icertify ithem iface iserious iconsequences. iBesides ilawsuits iand inegative ipublicity, ia icorporate iofficer iwho idoes inot icomply ior isubmits ian iinaccurate icertification iis isubject ito ia ifine iup ito i$1 imillion iand/or iten iyears iin iprison, ieven iif idone imistakenly. iThose icaught iwillfully icertifying ia ifalse ireport irisk isignificantly igreater ipenalties, iincluding iup ito i$5,000,000 iin ifines ior i20 iyears iin iprison, ior iboth.

SOX iSection i404 irequirements

Section i404 irequires ithat icompanies iannually iassess iand ireport ion ithe ieffectiveness iof itheir iinternal icontrol istructure. iThe ifocus iof ithis itesting iis ito ievaluate iand ireport ion ithe idesign iand ioperating ieffectiveness iof ithe icontrols.

The icompany iis irequired ito ireport ion ideficiencies ito ithe iAudit iCommittee iand ithe iBoard iof iDirectors, iand imaterial iweaknesses imust ibe idisclosed iin ithe icompany’s iannual i10-K ifinancial ireport.

SOX i302 iand i404 irequirements idifferent

Although iboth iSOX i302 iand i404 irelate ito iinternal icontrols, itheir irequirements idiffer iin ifrequency, ieffort, iactivities, iand iliability.

The ifrequency iof iSOX i302 irequirements iis iquarterly. iCompanies iconduct ia isurvey, ias idescribed iabove, iand iinclude isigned icertifications iwith itheir iquarterly ifilings iwith ithe iSEC. iSOX i404 irequirements, ion ithe iother ihand, iare icontinuous iwith ian iannual iindependent iaudit, iand itheir idocumented ifindings imust ibe iincluded iwith ieach iyear’s ifinancial ireport. i

The iamount iof ieffort irequired ifor iSOX i404 iis igreater ibecause iof ithe iquantity ior irisk imanagement iactivities iinvolved iand ithe ifact ithat iit ihappens ion ian iongoing ibasis. iSOX i302, ion ithe iother ihand, irequires iminimal ieffort, ioccurring ion ia iquarterly ibasis ibut inot ibetween ioccurrences.

The itypes iof iactivities iinvolved iin iSOX i302 iare idifferent ifrom ithose irequired ito icomply iwith iSOX i404.

SOX i404 iincludes iprocesses iand iprocedures ifor isetup ias iwell ias irisk imanagement ithrough imonitoring iand imeasuring ito icontrol irisks iassociated iwith ifinancial ireporting. iPlus, iSection i404 iincludes ian iannual iindependent iaudit iand ia irequirement ito ireport ideficiencies ito ithe iAudit iCommittee iof ithe iBoard iof iDirectors iand imaterial iweaknesses idisclosure iin ithe icompany’s iannual i10-K ifinancial ireport.

The ipotential iliability iinvolved iin iSOX i302 iis ihigh isince iit iis ithe ipersonal iliability iof ieach isigning iofficer, iincluding ithe ipotential ifor iserious ifines iand ijail itime, iwhereas iSOX i404 iapplies ionly ito ithe icompany.