The Sarbanes-Oxley Act of 2002 and the PCAOB
As a result of massive accounting scandals in the United States between 2001 and 2002 involving notorious companies, such as Enron, Worldcom, Tyco, and various other recognized entities, President George W. Bush signed into legislation during 2002 the Sarbanes-Oxley Act of 2002. This historic piece of legislation has had a profound effect on the accounting profession. As a result of the act, the PCAOB was created. Since its inception, the PCAOB has created some of the most importing accounting standards that are used every day by auditors of public companies. This paper takes a look at the Sarbanes-Oxley Act of ...view middle of the document...
According to Gelinas, Dull, and Wheeler (2012), these entities failed to enact and enforce proper governance processes throughout their organizations, and as a result, some employees boldly violated ethical codes, business rules, regulatory requirements, and statutory mandates, resulting in massive fraud. The employees of these companies were not serving God when they decided to violate the ethical codes and laws and commit fraud, they were in essence serving money. Luke 16:10-13 states, “One who is faithful in a very little is also faithful in much, and one who is dishonest in a very little is also dishonest in much. If then you have not been faithful in the unrighteous wealth, who will entrust to you the true riches? And if you have not been faithful in that which is another’s, who will give you that which is your own? No servant can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.” (ESV)
SOX was created to restore the public’s confidence in financial reporting of companies and includes some of the most significant laws the accounting profession has ever known. According to Gelinas et. al.:
The key provisions of SOX are that SOX created a new accounting oversight board (the PCAOB), strengthened auditor independence rules, increased accountability of company officers and directors, mandated upper management to take responsibility for the company’s internal control structure, enhanced the quality of financial reporting, and put teeth into white-collar crime penalties. (2012, pg. 225)
Internal Control and Section 404
Internal control, according to Gelinas et. al., (2012), is a process – effected by an entity’s board of directors, management, and other personnel – designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) the effectiveness and efficiency of operations; (2) the reliability of reporting; and (3) compliance with applicable laws and regulations. Section 404 of SOX require corporate managers to provide a report, and their auditors to express an opinion, on the effectiveness of their internal controls over financial reporting (Chen, Krishnan, Sami, & Zhou, 2013). Section 404 mandates this report be filed annually with the SEC. David Stephens states:
While the rules and regulations of the Securities and Exchange Commission do not define standards for the effectiveness of a company’s internal controls as provided by SOX, they do suggest that the internal control framework defined in 1992 by the Committee of Sponsoring Organizations (hereinafter “COSO”) of the Treadway Commission are acceptable. According to the COSO framework, internal controls consists of five interrelated components: (1) a control environment that sets the tone for an organization; (2) risk assessment to identify and evaluate risks from external and internal sources; (3) policies and...