discussion urgent
discussion urgent
Accounting discussion
Sarbanes-Oxley Act (SOX) was introduced in 2002 by the United States Congress to fight corporate financial statement fraud. Since its implementation, there have been questions about its effectiveness. After reading the Coats and Srinivasan’s (2014) article, “SOX after Ten Years: A Multidisciplinary Review”, select one item from the article that you found interesting. Explain why you selected it.
Respond 1:
I found it incredibly interesting that it is incorrectly assumed the Sarbanes-Oxley Act (SOX) required companies to strengthen their internal controls, yet there is no such requirement even resembling that assumption under the Act. Instead, the provision for internal controls under SOX requires disclosure of internal control weaknesses as determined by auditors, not necessarily improvement (Coates and Srinivasan, 2014). This provision gives public companies the option to “adopt any internal control system” they feel meets the requirements of the Foreign Corrupt Practices Act even if it has “what its auditors believe are significant weaknesses” (Coates and Srinivasan, 2014, p. 632). While the Foreign Corrupt Practices Act requires companies to have an internal control system in place that provides “reasonable assurances” that “transactions are recorded as necessary to permit preparation of financial statements in conformity” with GAAP (Coates and Srinivasan, 2014, p 632), weaknesses did not have to be disclosed under this Act. By forcing their disclosure, SOX was relying on market pressures to trigger companies to improve their internal controls. I actually find it quite comical that this issue seems to reduce down to the use of assumed peer pressure in order for internal control improvement. However, the fear of market pressure and possible litigation risks due to internal control system weaknesses resulted in some companies hiding their weaknesses until a restatement occurred and forced the company to then reveal the internal control weaknesses (Coates and Srinivasan, 2014). A study done by Rice, Weber, and Wu as referenced by Coates and Srinivasan (2014), found that firms who failed to report an internal control weakness in a timely manner, but later had a restatement that forced disclosure were “less likely to have class action lawsuits, SEC sanctions, and management and auditor turnover compared to firms with restatement” (p. 635) who had reported the internal control weakness previously. Additionally, some companies continue to disclose the same internal control weaknesses year after year because the market pressure and perceived litigation risks have not been as present as expected. Because SOX does not require companies to actually increase the strength of their internal control systems, this allows for the weaker systems to be kept in place. I find it interesting that with all the provisions SOX did supply, specifically increasing the internal control’s strength was not one of them. Instead, it operated on the reliance that a company’s desire to not be perceived at a higher risk for fraud would be motivation enough to increase internal control strengths. Apparently for some, that still was not a good enough reason.
Respond 2:
What struck me as interesting in this article was not the reaction to the “Comply or Explain” approach to Internal Control (IC) systems, but the implied complacency companies have toward internal controls that are lacking in effectiveness. Ideally, companies should strive for accurate financial records and systems that eliminate risk of fraud and error. The company I work for has an internal audit department that is constantly evaluating our work to ensure accurate records and that we are adhering to company processes and policies. While our internal audit department is not able to affect policy, they do recommend evaluation of policies when they find weaknesses. In fact, my office just underwent an audit that took four weeks to complete – our audits are nothing, if not thorough. Even though we are a privately-owned company, we still have rigorous internal control policies and retain the services of an external auditor. Given that I work for a private organization that puts so much emphasis on IC, I find it incredible that Johnstone, Li, and Rupley (as cited in Coates & Srinivasan, 2014) found 30% of 733 U.S. companies that disclosed a material weakness in 2006 continued to disclose the same weakness three years later. I understand that the cost for IC is high but this is a necessary cost of doing business. The benefit from accounting quality is also high, and surely outweigh the negative connotations associated with IC weaknesses as companies who have such weaknesses also “have accruals that do not map well into cash flows, more auditor resignations, and more restatements and SEC enforcement actions; they also provide less precise management forecasts, and have CFOs with weaker qualifications” (Coates & Srinivasan, 2014, p. 649). For these reasons, as Coates and Srinivasan (2014) pointed out, disclosure of internal weaknesses does not fare well with investors. Because the implications of weak IC are so negative, I find it so interesting that there are companies out there that are okay with allowing IC weaknesses to be a part of their organizations.
Respond 3:
One item from the “SOX after Ten Years: A Multidisciplinary Review” article that I found interesting was that the Sarbanes-Oxley Act (SOX) required audit partner rotation every five years (Coates & Srinivasan, 2014) and that the SOX Act “banned many non-audit services that had formed the backbone of the consulting businesses that each of the large audit firms had developed alongside their traditional audit lines of business” (Coates & Srinivasan, 2014, p. 630). Additionally I found it interesting that in response to European proposals, the Public Company Accounting Oversight Board (PCAOB) proposed in 2011 to require a more stringent requirement, to not only require audit partner rotation every five years but to also require audit firm rotation every six years (Coates & Srinivasan, 2014). Interestingly enough, there was a House or Representatives bill, H.R. 1564, the Audit Integrity and Job Protection Act, which was passed by the House of Representatives in 2013, but as of the writing of this article, was not picked up by the Senate for a vote (Coates & Srinivasan, 2014). H.R. 1564 would have amended the SOX Act to “prohibit PCAOB from requiring auditor rotation” (Coates & Srinivasan, 2014, p. 631).
The reasons that I find the above related points from the article interesting is that I wonder how many auditing firms were initially impacted by the requirement that banned many non-auditing services? I also wonder whether it was just the large audit firms that were impacted or rather were smaller more family owned audit firms also impacted? It would be easier for large firms to split their operations into audit related services and non-audit services, but it seems that smaller firms may or may not have the resources, both monetary and human, to split their firm into smaller more focused entities. What was the cost to these audit firms to be in compliance with the SOX Act? Finally, I also wonder why there would be a strong aversion to the potential requirement of having to rotate audit firms every six years? Who exactly is against this idea, was it the audit firms themselves, not wanting to lose clients or was it the companies being audited? Another question that begs to be asked is why is rotating audit firms every six years in the United States important to European constituents? From the perspective of audit firms, it seems reasonable not to want to have to constantly change clients every six years; however, from the view of the companies being audited, I am not sure that I see what their opposition to the proposal would be. If an audit firm is supposed to provide an outside, independent audit of a company’s accounting records, why should it matter what audit firm provided this service?
I am very curious to see classmate insights to these questions.
Respond 4:
After reading the article “Sox After Ten Years: A Multidisciplinary Review” the information I found interesting was the assumption that the Sarbanes-Oxley Act would create increased costs associated with legal actions (Coates & Srinivasan, 2014, p.643). According to the article, lawsuits conducted under the U.S Securities laws likely became more accessible and manageable which in effect helped to produce settlements influenced by SOX sections 302 and 404 (Coates & Srinivasan, 2014, p.643). In reality, SOX enforced increased disclosures that are admissible in court by plaintiffs and lawyers to distinguish the defendants and display the disclosures as evidence of fraud (Coates & Srinivasan, 2014, p.643). Coates and Srinivasan (2014) claim that costs did rise but then decreased again in a couple of years and believed the spike in costs was a reaction from the corporate unlawfulness that originated the necessity for SOX (Coates & Srinivasan, 2014, p.643).
The reason I chose this information is that I find it interesting that people were apprehensive about increased litigation and costs. Isn’t it a good thing that fraud and any wrongdoing is more easily detected? I could see the number of court cases could potentially rise as an effect of disclosures being admissible in court and lawsuits being easier to pursue. Ultimately, there is a need for increased litigation as more wrongful activities can be detected and brought to light through SOX.
Response 5:
The section that I found most interesting in this article was the qualitative evidence of SOX’s impacts. More specifically, the lack of federalization of corporate law. SOX did little to alter corporate governance whilst staying malleable to the major changes in corporate governance. However, SOX had proven to have the ability to affect corporate governance in a more indirect manner. The main threats were that shareholders could sue under state law using SOX’s requirements as a basis for doing so. The other was that it would lead to more Congressional intervention which would cascade into federal legislative changes to the corporate law. So, it would not be SOX directly altering corporate governance, however, it’s presence and shareholder’s abilities to utilize SOX’s requirements as a basis for suing under state law would cause a need for changes in corporate governance. After the ten year span, however, none of those indirect possibilities had arisen. This shows that though SOX did present negligible opportunities, it’s “say to pay” methodology imposed a non-binding shareholder vote on executive compensation, and according to the article, “fewer than two percent of US public companies have experienced a negative vote since its implementation.”
Discussion ITS
What is your preferred method of remote access authentication? Why is this selection better than the others? Does your solution address security and risk concerns? Explain.