Sarbanes Oxley Act Questions Essay

2955 words - 12 pages

Team Project: Financial Reporting and Ethical Practices
Rakel Raigns, Jakeia Griffin, Victoria Jones, Samirah Merritt
University of Maryland University College
November 9, 2013

Author Note
This paper was prepared for AMBA630 Economics Management Decisions, Section 9045, taught by Professor Victor Bahhouth.

Executive Summary
In order to avoid fraudulent reporting, the Securities Exchange Commission (SEC) has mandated that auditing for organizations must be completed by independent accountants. Today scrutiny of the accounting industry is more intense as laws are created to punish those that choose to falsify information. This paper aims to explain the importance of the ...view middle of the document...

A company’s financial information is considered to be the heartbeat of the organization. Financial accounting is the information produced for those outside an organization such as the general public, lenders, creditors, and potential prospective owners through the use of accounting (Kao, Li, & Zhang, 2013). Therefore, with the financial accounting information being accessible to numerous eyes, companies want to seem profitable and financially strong in order to attract investors.
SOX Section 404 on Internal Control
 Internal control within an organization consists of a policy in place in order to insure proper financial controls are in effect. The management staff ensures these controls are being followed not only on the management level but also throughout the staff beneath them. These policies are utilized in order to avoid fraudulent behavior and guarantee accuracy. For instance, a company that allows their accounts payable's manager to process invoices and cut the check without anyone reviewing their work before sending out the payments is not a sufficient method of internal control. This method could possibly result in the accounts manager cutting checks to themselves as if they were an account for the business.
A proper method of internal control would be for two other people to review the invoices and payments before being mailed out. If an auditor came in and saw this practice going on, they would have an ethical obligation to report on it. Section 404 of the Sarbanes-Oxley Act (SOX), makes it a point for an auditor to report on the internal controls occurring within the organization being audited. Once the auditor forms their report, the organization must include it within their 10K annual report. Failure to comply with this is in violation of Section 404. Ensuring that the organization post the auditor’s report into their financial reports allows others to understand or incorporate the same internal controls within their organization.
CEOs and CFOs
As previously mentioned, the Sarbanes-Oxley Act of 2002 (SOX) was intended to improve the accuracy of the financial statements prepared by publicly held companies. The driving force for this legislation was the recent collapse of enterprises such as Enron and WorldCom. Much emphasis has been placed on the management tiers within the web of each company’s internal control system and the auditors associated with preparing/reviewing financial statements. However, SOX also affect the Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs).
CEOs are put in place as the figurehead of organizations. This person is a representative of, and responsible for, the company itself and its actions in the public eye. The CFO is pictured to be a trusted individual who cares more about the company’s pockets than its own. A CFO is in place to ensure the financial aspects of a given company are in order and compliant with all internal and external requirements, to include...

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