Group Assignment: The Sarbanes-Oxley Act (SOX) & Financial Statements Accuracy
University of Maryland University College
Nicole Mone Walker
August 18, 2015
The United States Securities and Exchange Commission (SEC) was created after the Great Depression of the 1930’s, and given a mandate to oversee US financial markets. Since then its basic policy has been to promote transparency in corporate finance, through the full disclosure of companies’ financial performances. This allowed the SEC to maintain a strong track record of corporate financial disclosure oversight through the ...view middle of the document...
In addition we will also discuss the main advantages and disadvantages of SOX, the extent to which SOX can ensure financial statement accuracy, and improvements that may enhance SOX and its ability to improve financial reporting transparency.
Audit Committees of Public Company Boards of Directors
The audit committee is a product of SOX, and is tasked with purpose of overseeing the audits of public company financials. Prior to the implementation of SOX, management was responsible for the direct hire and fire of independent auditors. If management was dishonest, this lack of accountability allowed them to control their audits and auditors, and avoid bringing suspicion to their acts. Now that SOX has mandated rules regarding hiring specific external auditors, the committee is tasked with hiring an independent auditor from an independent audit firm registered with the Public Company Accounting Oversight Board (PCAOB), which will be explained further in the next section of this paper. The committee is also required to oversee the firm’s work regarding financials, and operate as the reporting agency in any instances of suspected fraudulent or suspicious financial findings. The audit committee consists of independent members from the public company’s Board of Directors. “Independent” meaning, the members are limited to the task of a board member and are forbidden to perform any other task for the client company including but not limited to, “…any consulting, advisory, or other compensatory fee from the issuer, and as not being an affiliated person of the issuer, or any subsidiary thereof” (AMBA 630 ppt., 2015), Section 301 of SOX.
“Audit committees may reduce the risk of material misstatement in the financial statements due to fraud by addressing the risk of management override of internal controls as part of their oversight of the financial reporting process” (AMBA630, 2015). This suggests that if the audit committee added ways to overcome the roadblocks of top management to their investigation auditing procedure, they would be capable of furthering their quest of risk management in the client’s financials. If the audit committee implemented a procedure to identify and disrupt top management’s attempt to perform illegal financial activities (i.e. hiding information), the committee could serve the public better by providing more accurate information. A few more duties of the audit committee from Section 301of SOX are:
“Each audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters;
Each audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties” (Securities and Exchange Commission, 2003);