Premium Essay

Section 404 of Sarbanes-Oxley Act

In: Business and Management

Submitted By emilyamelia
Words 8697
Pages 35
Section 404 of Sarbanes-Oxley Act
Introduction
Before 2002, many U.S. companies, such as Enron, WorldCom and Xerox went bankrupt and caused the serious global issues and financial responsibilities of managers in the world. The primary issue was about an ethical leadership and maintained the clean audit system. Well known examples perhaps were Enron and WorldCom scandals. Dyck and Neubert (2010) mentioned that “Ironically, the lucrative rewards for performance and innovation were keys to Enron’s early success and growth, before excesses in pursuit of these goals contributed to the ethical failures that ultimately destroyed the company. ” (p. 151). According to Dyck and Neubert (2010), both Ebbers as C.E.O of WolrdCom and Skilling as C.E.O of Enron went to a prison for their unethical behavior within their organizational structure caused (p. 449). According to Noreen and colleagues’ (2008), these scandals were involved at the highest level to the former C.E.O including the misuse company money and fraud financial reports (p. 25). In particular, Sadka (2006) indicated that in the case of WorldCom, its financial fraud includes mispricing of its products (p. 439) Moreover, due to WorldCom’s financial fraud, investors of WorldCom’s competitors lose $7.8 billion with additional losses of $49 billion social welfare (p. 463). That is to say, the bankruptcy of one of the biggest company caused a lot of problems in the U.S. As a result, not only investors lost billions of dollars but also thousands of people lost their jobs and retirement savings. Thus, the most significant action to recover the trust between investor and the company started to improve the public confidence in the market. In order to restore the public confidence, the U.S. Congress passed the Sarbanes-Oxley Act (SOX) as the response to the wave of corporate governance scandals in July of 2002 (Cosgrove...

Similar Documents

Premium Essay

Sarbanes Oxley Act of 2002: Section 404

...Within the last ten years corporate scandals such as Enron, WorldCom, Tyco, etc., triggered Congress to pass the Sarbanes-Oxley Act of 2002 (Ross, Westerfield, & Jaffe, 2010). False reporting of financial transactions was the number one commonality in all the scandals. In every case, shareholders of the companies suffered hefty losses due to the misrepresentation of the transactions. Almost $11 billion was lost by the shareholders of Enron (Blackburn, 2002). WorldCom shareholders lost about $194 million in total (WorldCom Loss, 2003). $9.2 billion was lost to Tyco shareholders (Giroux, 2008). The Sarbanes-Oxley Act is in place because it is meant “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” (Braddock, 2006). Substantial modifications to corporate governance and business practice regulations were introduced by the Sarbanes-Oxley Act. Within the Act there are many sections, the most important of which is section 404. Section 404 deals mainly with internal control actions and requires companies to provide details on their internal control structures and policies (“Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements”). As with any new regulation there are pros and cons to Section 404; however, it is the most significant because it has increased the reliability and accountability of financial statements, it......

Words: 1574 - Pages: 7

Premium Essay

Section 404 of the Sarbanes-Oxley Act - Curse or Blessing

...Section 404 of the Sarbanes-Oxley Act: Curse or Blessing for Financial Reporting? Yuliya M. Ford University of Maryland University College Introduction In response to public concerns regarding the accuracy and quality of reported financial information by publicly traded companies, in mid-summer of 2002 Congress passed Public Law 107-204, 116 Stat.745 which is commonly referred to as the Sarbanes Oxley Act (SOX or the Act). The law was passed in large part due to the public outcry of the numerous unethical accounting scandals and fraudulent reports from such notable companies as - Enron, WorldCom, and Global Crossing (Singer and You, 2011). The goal of SOX was to mandate corporate governance reforms in order to help to instill investor’s confidence in capital markets. In an effort to establish best practices and standards SOX created the Public Company Accounting Oversight Board (PCAOB). The PCAOB is chartered with the establishment of independent standards and overseeing the compliance of publicly traded companies with these standards (Agami, 2006). Another very important aspect that the PCAOB is charged with is reviewing the samples of audits conducted by accounting firms and ensuring that both the spirit and letter of the SOX act was established under (Parles, O’Sullivan, & Shannon, 2007). The Sarbanes-Oxley Act is divided into eleven sections referred to as titles. In terms of compliance, many have posited, including Addison-Hewitt Associates (2003), that the......

Words: 2712 - Pages: 11

Premium Essay

Section 404 of the Sarbanes-Oxley Act: Curse or Blessing for Financial Reporting?

...Section 404 of the Sarbanes-Oxley Act: Curse or Blessing for Financial Reporting? Yuliya M. Ford University of Maryland University College   Introduction In response to public concerns regarding the accuracy and quality of reported financial information by publicly traded companies, in mid-summer of 2002 Congress passed Public Law 107-204, 116 Stat.745 which is commonly referred to as the Sarbanes Oxley Act (SOX or the Act). The law was passed in large part due to the public outcry of the numerous unethical accounting scandals and fraudulent reports from such notable companies as - Enron, WorldCom, and Global Crossing (Singer and You, 2011). The goal of SOX was to mandate corporate governance reforms in order to help to instill investor’s confidence in capital markets. In an effort to establish best practices and standards SOX created the Public Company Accounting Oversight Board (PCAOB). The PCAOB is chartered with the establishment of independent standards and overseeing the compliance of publicly traded companies with these standards (Agami, 2006). Another very important aspect that the PCAOB is charged with is reviewing the samples of audits conducted by accounting firms and ensuring that both the spirit and letter of the SOX act was established under (Parles, O’Sullivan, & Shannon, 2007). The Sarbanes-Oxley Act is divided into eleven sections referred to as titles. In terms of compliance, many have posited, including Addison-Hewitt Associates (2003), that the......

Words: 2681 - Pages: 11

Premium Essay

Sarbanes-Oxley Act

...“President George W. Bush signed the Sarbanes-Oxley Act ( SOX) of 2002 (Public Law 107-204) on Tuesday, July 30, 2002. Congress presented the act to the president on July 26, 2002, after passage in the Senate by a 99-0 vote and in the House by a 423-3 margin” (The sarbanes-oxley act). A new federal law was passed in reaction to corporate scandals such as the Enron, WorldCom, Tyco cases. The Sarbanes-Oxley Act puts extreme pressure on companies accounting practices and annual reports. Simply put, the act was created to protect investors from corporate corruption, and accounting misconduct. This act also created a new agency called the Public Company Accounting Oversight Board, or PCAOB. The main purpose of Sarbanes Oxley Act is to ensure that the corporate sector works with transparency and provides full disclosure of information as and when required. The transparency purpose of Sarbanes Oxley Act is fulfilled by ensuring real time disclosure of information, the adherence to guidelines of the Generally Accepted Accounting practices, full financial details being made available of all the transactions not mentioned in balance sheet. This purpose of Sarbanes Oxley Act is also fulfilled by an expanded disclosure of financial and non financial control measures in force in every company. Similarly, public certification of these internal controls and financial measures also helps fulfilled the purpose of Sarbanes Oxley Act (Bing). The objective of Sarbanes Oxley Act is to make......

Words: 1587 - Pages: 7

Premium Essay

Marketing Plan

...The power of section 404 of the Sarbanes -Oxley Act on earning quality Law/431 July 23, 2012 The power of section 404 of the Sarbanes -Oxley Act on earning quality In this article, the authors study the effect of Section 404 of the Sarbanes-Oxley Act on two primary characteristics of earnings quality, reliability and relevance in combination. Using a difference-in-differences method, they find that firms that were required to comply with Section 404 during the first 2 years of its implementation improved the reliability of their reported earnings more than control firms that were not required to comply . More than seven years after the enactment of the Sarbanes-Oxley Act of 2002 (SOX hereafter), the effectiveness of the regulation remains controversial, with the recent financial crisis fueling this debate further (Altamura & Beatty, 2010). In this article, we study the effect of the internal control requirements of Section 404 of the Sarbanes-Oxley Act(Section 404 hereafter) on the earnings quality of all complying firms. We are motivated to study this issue because Section 404 is one of the most visible and tangible changes brought by SOX,1 the most far-reaching reform in the financial reporting and corporate governance requirements for public companies since the 1930s dimensions. For example, Section 404 mandates the disclosure of internal control-related problems, whereas FDICIA does not. Such differences may lead to different effectiveness of the two......

Words: 333 - Pages: 2

Premium Essay

Sox of 2002

...Sarbanes-Oxley Act (SOX) of 2002 Topics Covered: How SOX affects the following: CEO’s and CFO’s of Public Companies Outside Independent Audit Firms SOX section 404 on Internal Control The Main Advantages and Disadvantages of SOX Executive Summary The Sarbanes-Oxley Act of 2002 (SOX) was intended to create more transparency in financial reporting and to combat the perceived inflation of CEO compensation. To do this, the act required that a board of directors be financially independent from the CEO and have no familial ties. It also required the CEO and CFO to personally sign all quarterly and annual reports submitted to the SEC and provided for criminal penalties if this was not done. Our research indicates that Sarbanes-Oxley has created more transparency in the system, but it has actually had the opposite effect than was intended with regards to CEO compensation. The research indicates that CEO compensation has increased for many companies post-Sarbanes-Oxley. Due in large part to the Enron scandal, SOX needed to address outside independent audit firms to improve the accuracy of financial reports disclosed by publicly traded companies. These financial reports are used by investors, bankers and interested consumers to determine how well an organization is doing and provide investors with vital information about a company’s performance. This paper will discuss the Sarbanes-Oxley Act and how the SOX law affects outside independent audit firms. Next we......

Words: 4177 - Pages: 17

Premium Essay

Sarbanes

...Sarbanes-Oxley Act (SOX) Name: Institution: The Impact of Sarbanes-Oxley Act (SOX) on IT audit and controls Abstract Experiences from various organizations and companies shows that the effects of the Information Technology audits that have been conducted in line with the Sarbanes Oxley as well as its IT section, which is the Section 404, displays significant differences with the kind of focus traditional IT audit does (NetIQ Corporation, 2006). Typically, traditional IT audit tends to focus on the component, the subsystem, and on certain occasions, the audible issues on a system level; in that environment that is being audited. However, this method tends to have a very strong bias towards the security matters. The kind of IT audits that is done under the SOX act adds a whole new layer of governance, a layer of financial, as well as controls the matters that are associated to the audit process (TLK Enterprise, 2006). This method, as opposed to the traditional method and system, is mainly aimed at ensuring that the CFO, CEO, as well as the audit committee are assured of the accuracy, and the reliability of the financial information in the IT systems that the company or organization is reporting to the SEC. Description of the Sarbanes-Oxley Act (SAX) The Sarbanes-Oxley Act was passed in the year 2002 by the United States Congress in order to protect the company investors from the always imminent possibilities of fraudulence in the accounting activities of the......

Words: 1297 - Pages: 6

Premium Essay

None

...Kathleen M., Levick, Richard. “The Top Five Tips Every Executive Needs to Know About Sarbanes-Oxley and Corporate Ethics.” Exec Blueprints (2008): Print. The authors are law experts from various law firms who share their insights into corporate ethics, as it relates to Sarbanes-Oxley. The article begins by detailing how the Sarbanes-Oxley legislation now holds top executives criminally responsible for any public misstatements of a company’s finances. One key point that was referenced several times in this article is with the increased protection of whistleblowers that the act now provides many are now incentivized to report wrongdoing. As a result, it would behoove executives to institute a corporate compliance program and code of ethics. This was a very informative paper which provides insight into how senior management must set the tone for the organization in the standard of ethics and what is tolerated when any wrongdoing may occur. Frey, Kelly L., Taney, Francis X., Wucher, Robert. “The Top Five Tips Every Technology Executive Needs to Know About Sarbanes-Oxley.” Exec Blueprints (2008): Print. The authors, two of whom are lawyers and the other an IT executive, provide a high-level, summary overview of the Sarbanes-Oxley Act of 2002, and how it relates to decisions that every IT executive within a public company must make. Much of this document is centered on section 404 of the act, which details regulatory compliance language that these firms must now abide......

Words: 473 - Pages: 2

Premium Essay

Sarbanes Oxley Act

...Sarbanes Oxley Act Joslin Cuthbertson Hampton University Abstract The Sarbanes-Oxley Act came into effect in July 2002 and introduced major changes to the guidelines of corporate authority and financial practice. It is named after Senator Paul Sarbanes and Representative Michael Oxley, who were its main originators. The Sarbanes Oxley Act set a number of non-negotiable deadlines for publically traded companies to comply to. The Sarbanes-Oxley Act is arranged into eleven titles. As far as compliance is concerned, the most important section within these eleven titles is usually considered to be Section 404, which deals with internal controls. Since 2002, there has been a lot of debate about whether the act has positively or negatively affected corporate America. In this paper I have discussed the opinions of both sides of the argument. The Sarbanes-Oxley Act is a bill passed by Congress in 2002 after several corporations took actions that caused their companies to fail. These companies include Enron and WorldCom. As a result of these actions, stockholders lost confidence in the financial system. The intent of the bill is to protect investors of corporations by making the corporations accountable for any unacceptable accounting errors and practices. The Act is named after its main proponents, Senator Paul Sarbanes and Representative Michael Oxley. The Acts real name is the......

Words: 2668 - Pages: 11

Premium Essay

Sarbanes Oxley

...The Effects of the Sarbanes-Oxley Act There have been widespread reactions to corporate scandals which have become seemingly common in corporate America. Government reaction to these unethical corporate and accounting scandals has led to regulation and intervention. The Sarbanes-Oxley Act of 2002 is seen as a response to the lack of corporate governance present in many corporations. The Sarbanes-Oxley Act of 2002 is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called Sarbanes-Oxley, Sarbox, or SOX. This United States federal law was enacted on July 30, 2002 in response to a number of major corporate and accounting scandals, including those affecting Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom. The act is administered by the Securities and Exchange Commission. It sets deadlines for compliance and publishes rules on requirements. The Act contains 11 titles; these describe specific mandates and requirements for financial reporting. Moreover, the Sarbanes-Oxley Act introduced major changes to the regulation of financial practice and corporate governance. It is seen as the most important legislation affecting corporate financial reporting enacted in the United States since the 1930s” (Li, 1). It is extremely essential in to ensure protect to shareholders and the general public from accounting errors and fraudulent practices in an enterprise. However, with government regulation and intervention one......

Words: 2870 - Pages: 12

Premium Essay

Sarbanes Oxley Outline

...The Ineffectiveness of the Sarbanes Oxley Act In Corporate Management and Accounting In the early 1990s, a young company named Enron was quickly moving up Fortune magazine’s chart of “America’s Most Innovative Company.” As the corporate world began to herald Enron as the next global leader in business, a dark secret loomed on the horizon of this great energy company. Aggressive entrepreneurs eager to push the company’s stock price higher and a series of fraudulent accounting procedures involving special purpose entities were about to be exposed. In early 2002, the United States Justice Department announced its intent to pursue a criminal investigation into the once mighty company, Enron. After the gross negligence of accounting procedures were discovered at Enron, Congress passed the Sarbanes Oxley Act of 2002. While this legislation was seen by many as the rules to keep large corporations from destroying investors and employees, it also created unnecessary confusion and unbearable costs for American businesses. Perhaps one of the most confusing pieces of the Sarbanes Oxley Act is §404, regarding “the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.” (Sarbanes Oxley Act of 2002) While this sounds like good legislation, the cost of compliance with §404 varies greatly among public companies, depending on the size of their business. Joseph Piche, founder and CEO of Eikos, Inc.,......

Words: 690 - Pages: 3

Premium Essay

Sarbanes-Oxley Act

...Sarbanes-Oxley Act Accounting I – ACC100 Instructor – Date Analyze the new or enhanced standards for all U.S. public boards, management, and public accounting firms that the SOX required. The Sarbanes-Oxley Act has a new standard for all U.S. public company boards, management, and public accounting firms that the SOX required. The Act sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley has regulated all business records, memoranda, accountants’ audit or review documents, as well as correspondence, including electronic records and e-mails, must be maintained for a minimum of five years after the fiscal period in which they were generated. The Sox Act also ensures the CEO and CFO(chief financial officer) has to certify the correctness of the financial statements and disclosures controlled in the annual report. The CEO and CFO will be personally responsible for any violations. The Sox Act affected more than finances with in a corporation. It was established to define which records in the IT department should be stored and for how long. The Act contains 11 titles or sections which describe the rules that are required to comply with the new law. As far as conformity is concerned the most pertinent sections of the Act is 302, 401, 404, 409, 802 and 906. The Securities and Exchange Commission(SEC) is also responsible for protecting investors, maintain fair, orderly, and...

Words: 900 - Pages: 4

Premium Essay

Sarbanes Oxley Act

...Ian Pinkerton ACC 497 Mr. Patten 11/9/2014 Has Sarbanes-Oxley been Successful? The Sarbanes-Oxley Act (SOX) was enacted on July 30th, 2002. The bill is comprised of eleven different sections that cover quite a large amount of topics. Prior to the enactment of the Sarbanes-Oxley Act, there were several highly controversial and heavily scrutinized cases of corporate fraud that included the infamous Enron, Tyco, and WorldCom. These scandals cost investors billions of dollars when the share prices of these companies collapsed after the cases were filed. These cases of fraud indicated to both the public and the government that there was not enough regulation over financial statements of publically traded companies specifically. It focused specifically on publically traded companies to contain the fallout of lost investor’s money when these frauds come to light and the stock prices plummet. In order to fix these problems Congress rushed the Sarbanes-Oxley Act through both the House and Senate. This Act was one of the largest pieces of financial information legislation since the securities acts of 1933 and 1934 (Sweeney 2012). The Sarbanes-Oxley Act has faced quite a lot of criticism, but it has been quite successful. SOX legislation has for most come at rather high regulatory costs. The average annual compliance costs were $2.9 million prior to 2007 and $2.3 million since then (Singer & You 2011, pg 557). While it’s completely understandable why that large of a bill......

Words: 1560 - Pages: 7

Premium Essay

Sarbanes-Oxley Act Questions

...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 Sarbanes-Oxley Act (SOX) as it relates to the internal control, Chief Executive Officers and Chief Financial Officers. We will also identify the pros and cons of the Sarbanes-Oxley Act (SOX) and changes that could be made in order to pose arguments from both sides of the act. Introduction In the early 2000’s, one of the darkest times ever experienced in the history of accounting occurred due to numerous scandals. The results of these scandals from companies lead to terrifying actions, which included the downfall of one of the largest accounting corporations, Arthur Anderson, for their help with Enron. Companies such as Enron, Tyco, and WorldCom have led to the passing of the Sarbanes-Oxley Act (SOX) due to their financial reporting scandals (Forbes, 2013). With the passing of SOX in 2002, the falsification of financial statements by companies became a criminal offense. The passing of the SOX act posed as a challenge to many companies as it enforced businesses to make......

Words: 2955 - Pages: 12

Premium Essay

Sox Impact on Accounting

...theorld of financial accounting Sarbanes and Oxley or SOX is one of the most important pieces of legislation passed in this decade or even in the history of financial accounting. Sarbanes and Oxley brought about major changes in financial accounting which allows for more regulation of the accounting profession. It took Accounting form being looked at as a numbers game and placed more importance on the communication aspect of the profession. This essay will focus on Sarbanes and Oxley and its impact on the accounting profession as a whole. How can one piece of legislation weigh so heavily on a profession? To answer that question one has to look at the impact Sarbanes and Oxley has had on the practice of public accounting. Prior to Sarbanes and Oxley the regulation of public accounting was done internally, through organizations such as the SEC. However with the passage of Sarbanes and Oxley the profession was given an overhaul making companies more accountable. Sarbanes-Oxley was established to improve the quality and transparency of the financial statements issued by public companies. With that purpose in mind Sarbanes-Oxley developed a new board to oversee how financial statements are audited according to independent standards, the Public Company Accounting Oversight Board. This changed the game. It decreased the chance of companies falsifying financial statements, mainly because of the threat of penalties and imprisonment. In addition Sarbanes and Oxley have had a cascade......

Words: 603 - Pages: 3