The Act Sarbanes-Oxley - Case Study Example

Compliance with Sarbanes-Oxley (SOX-2002) Grade Year Compliance with Sarbanes- Oxley Introduction Shocking news about accounting scandals occurred in many of the leading corporates and public companies in the US has shaken the public confidence in capital investment. Investors were taken aback by the reports of misdeeds at leading financial institutions and corporations. Companies such as World Com, Global Crossing, Tyco, and Adelphia were some of the victims of financial misconduct. As a result of such unfortunate incidents, The Public Company Accounting Reforms Act was passed in the US congress in 2002 to control over the auditing in public companies. The Act is also known as Sarbanes-Oxley (SOX). Since some form of fraud was prevalent in many of the major companies, regulation was essential to balance the volatile economy of the nation. The legislation was intended to enhance confidence in investors, and to enforce strict and authentic audit control that would prevent corporate misconduct (Ge Weili & McVay S., 2005). Compliance with the Act To illustrate legal compliance, noting about the functions of a midsize leather manufacturing and exporting company would be relevant. This company, in which I am deployed, has been well established for the last 15 years and has gained the appreciation of its shareholders. Especially for the past ten years there has been considerable increase in the demand for its share. The best thing about the company is that it shows special attention on declaring share dividend on right time. Irrespective of all other deficiency and internal weakness, the company has maintained its reputation in front of the public and media. The uniqueness and popularity enabled the company to gain investors’ confidence. Although the company has confronted with certain criminal and civil proceedings it overcame all such tribulations leaving little chance to controversy. Adhering to the Sarbanes-Oxley regulations, recently the company has taken steps for setting up committees and for making required structural changes. On the other hand, there are certain areas where the company has to initiate remedial measures to ensure proper compliance. Absence of proper documentation was detected many times which according to the Sarbanes-Oxley Act is a punishable crime. Changing or falsifying records with objective to impede legal investigation has been identified. According to SOX sec.404, management should conduct an evaluation that is sufficient to provide it with a reasonable basis for its annual assessment, and moreover if the evaluation process identifies material weakness that should be disclosed in the management’s annual report with a statement that Internal Control over Financial Reporting (ICFR) is insufficient (cited. Bainbridge, 2007). Attempt made by some individuals to maintain their own personal interests have obstructed from this legal obligation. Furthermore, the absence of a financial expert was another reason for many of the purchase, stock malfeasance and account discrepancy. To comply with the SOX, ‘a company is supposed to disclose whether the audit committee of its board of directors includes at least one financial expert, and if not, why’ (The Essentials of Corporate Communications, 2006 p.29). All public companies are required to submit report about the effectiveness of their internal accounting controls to the Securities and Exchange Commission (SEC). As far as I am concerned still my company has to move ahead to comply with this regulation. Furthermore, company has failed to implement the strategies and instructions proposed by the audit report. Few steps were taken to prevent the identified financial risks and fraud. A company is legally responsible for some acts of individual misconduct, although it is not necessarily liable for the full scope of employee misconduct (McNeil F. & Brian 2008p.8). Therefore the company has both legal and moral obligation to report the identified accounting scandals to the Public Company Accounting Oversight Board (PCAOB). Lack of Proper billing and documentation was a major deficiency found with the company. For example, notable discrepancy between the company’s stock register and the actual stock was identified in last two years auditing. Besides, the company failed to implement the instructions given by the auditors. Recommendations for better compliance In order to comply with the regulations the company has to reconsider its policies and procedures to certain extent. Company needs to disclose reliable financial statements and thereby ensure better communication with investors. Company should avoid any situation that would compel the investors to pull out their shares. Unnecessary disputes and financial misconduct must be stopped effectively in order to revamp the company and to comply with the Act. Three areas of company function such as sales, purchase, and stock are more vulnerable to malpractice. As per section 107, ‘to lease, purchase, accept gifts or donations of or otherwise acquire, improve, use, sell, exchange or convey all of or an interest in any property wherever situated’ (cited.Anand & Wilkinson 2008 p.8). Proper auditing and supervision on these three areas would help prevent malpractice in the company. To avoid any sorts of illegal rate adjustment in purchase of raw materials, machinery and other equipments, company should maintain all its purchase details and other contracts transparent. For instance, conditions regarding freight charges should be included in the purchase agreement whether it will be ‘to pay or paid’. Sections 302 & 306 of the Act require top officers of public companies to certify that the Corporations financial statements are fairly presented (McNeil & Brian, 2008 p.373). Strict supervision and documentation over sales can avoid illegal price adjustment between the company staff and clients. Keeping up to date stock register is essential to prevent fraud and further legal procedures. Presumably mismanagement takes place in this section by concealing or altering details to of raw materials and products. Company should keep proper bill and voucher in all its transactions to prevent any sort of account discrepancy. Company needs to keep proper debit notes and credit notes whenever it allows or receives discounts. To comply with the Act company has to practice proper documentation on all its important correspondence, contracts, and business activities. In addition to this, copies of tax returns (income & sales), bank statement and details of sales, purchase, and stock are mandatory. Moreover it is the responsibility of the monitoring faculty or supervisor to verify that instructions are effectively implemented. A supervisor is proposed for the following actions; 1). Monitoring human activities and functions in the company 2). Ensure the effectiveness of individuals.3) Collect time to time information from all sides of the company 4) Examine checklists and adhere to company policies as well as to regulations. 5) Ensure that employees involved are well informed about the regulations 6) Confirm that they are following the instructions and rules. Conclusion To sum up, company management has both legal and moral responsibility to comply with the Sarbanes-Oxley Act. There should be frequent quality check and evaluation on the function of system and strategies of the company. Individuals with high proficiency should be deployed to monitor organizational functions and internal control. Audit report and performance review can guide a manager in his monitoring activities. An audit report can show how effectively legal obligations are implemented in an organization. Monitor has to ensure the skill and efficiency of the workers assigned to undertake the particular roles. Besides, he has to examine previous records and related reports so that he can foresee the probable shenanigans. References Anand S. & Wilkinson J. (2008). The Sarbanes-Oxley Act: An Introduction. Van Haren Publishing Bainbridge M. (2007). The Complete Guide to Sarbanes-Oxley. Adams Media The Essentials of Corporate Communications and Public Relations, Society for Human Resource Management (US) illustrated edn, Harvard Business School Press, pp.93-94 Ge Weili & McVay S.(2005). The Disclosure of Material Weaknesses in Internal Control After the Sarbanes-Oxley Act, Accounting Horizons, vol.19, No.3, viewed 12 June, 2009 McNeil F. & Brian (eds.) (2008). Internal Corporate Investigations, Section of Litigation, edn.3, American Bar Association Ramirez A M., Sarbanes-Oxley, CMC and the Hospital CEO, HG Experts Directory, viewed 12 June 2009 Read More