Appendix I: The Sarbanes-Oxley Act, Internal Controls, and Management Accounting
Overall Intent of the Sarbanes-Oxley Act, 2002 can be described as below: • To prevent accounting scandals • To bring reforms in the financial reporting of the company to keep the public confidence in the Company • To implement legal actions for fraud or misstatement in Financial Reporting • Establish a body to audit the financials of the Company • Establishment of Corporate Responsibility for Financial Statement • Establishment of Internal Control in the companies to improve the reporting and recording of Financial Transactions
• Internal control is defined as a process established by the management to provide reasonable assurance to achieve effectiveness and efficiency of operations, reliability of financial statements and compliance with the laws and regulations. • Reliability of financial information relates to the policies, process, procedures that enables stakeholders to have confidence in the organizations financial reports. • These financial reports consist of organizations annual reports, 10k filings with SEC, tax returns filed with tax authorities and other public financial disclosures. • In the computerized accounting systems, internal control procedures are automated. • Large company's internal control over financial reporting comprises a vast array of policies and procedures involving hundreds of individuals. Example:- (a) Physical control over raw material (b) Authorization to sing the checks etcetera.
• PCAOB - It refers to Public Company Accounting Oversight Board and it is established by Title I, Section 101 of Sarbanes - Oxley Act (SOX) with five full time board members operating under the auspices of SEC. • The mission of PCAOB is to oversee and investigate the audits and auditors of public companies and sanction both firms and individuals for violation of laws, rules and regulations. • The auditors responsibilities in assessing and attesting a client's internal control systems are detailed in the PCAOB's auditing standard no 2. Entitled "An Audit of Internal Control over Financial Reporting Performed in Conjunction with Audit of Financial statements".