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The Correct Financial Reporting

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On the backdrop of high profile accounting frauds and misstatements, Sarbanes – Oxley Act (SOX) was introduced in 2002 with an intended goal to make corporate accounting more transparent. Security Exchange Commission (SEC) was handed the enforcement responsibility and a new oversight body was formed the Public Company Accounting Oversight Board (PCAOB) for implementation of different provisions of the act.

Provisions impacting the Financial Reporting

Since these provisions fall under various provisions like Section 302 – Disclosure of controls, Section 401 – Disclosures in periodic reports (Off-balance sheet items), Section 402 – Assessment of internal control and the others. So, for simplicity we can break it into the following to understanding the impact on financial reporting:

  • Accounting standards and oversight
  • Reporting timing standards
  • Responsibility standards
  • Conflict and independence standards, document standards

Accounting standards and oversight:

Public Company Accounting Oversight Board (PCAOB): The law led to the formation of PCAOB, which constitute of independent five members board. Their duties are to:

  1. register the public accounting firms
  2. establishing work, ethics, independence and other standards for these firms
  3. conducting compliance audit of such firms
  4. taking initiatives for improving the quality of auditing services

Standards: SOX mandate that corporations use Generally Accepted Accounting Principles (GAAP) in reporting their balance sheets to shareholders and Financial Accounting Standards Board (FASB) will set the official standards.

Disclosures: All off-balance sheet transactions like operating lease and other relationships with unconsolidated entities must be disclosed in a separate section of the notes. Internal controls: It requires the companies to conduct an assessment of the effectiveness of the organization’s internal controls, and a provide a statement identifying the framework used by management to evaluate the effectiveness of internal controls.

Reporting timing standards

As per the act, all material changes in financial condition or operations must have a real-time disclosure e.g. all designated securities transactions done by directors, officers and 10% stockholders must disclose designated securities tractions within two business days.

Responsibility standards

The CEO and CFO of the company must certify the accuracy and fairness of the audited financial statements. An intentional violation here will attract a penalty of up to $5 million and 20 years of imprisonment. CEO and CFO must also certify that any significant deficiencies in internal controls, frauds etc. have been disclosed to the audit committee and the auditors.

Conflict and independence standards

Public accounting firms: A registered accounting firm is prohibited from providing any non-audit services (listed) to an audit client coexisting with the audit. This aimed at a minimalizing possible conflict of interest and compromises of integrity in the audit.

The audit committee: The act requires for setting up of an independent audit committee which helps in improving the governance by separating the functions of oversight from management.

Document standards

The work papers from the audit engagement must be maintained for a period of five years and if the audit firm is registered under PCAOB then for seven years. Any act of destroying, altering with any sort of document with an intent to influence any investigation will attract up to 20 years of imprisonment.

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The Correct Financial Reporting. (2019, January 28). GradesFixer. Retrieved October 26, 2021, from https://gradesfixer.com/free-essay-examples/provisions-impacting-the-financial-reporting/
“The Correct Financial Reporting.” GradesFixer, 28 Jan. 2019, gradesfixer.com/free-essay-examples/provisions-impacting-the-financial-reporting/
The Correct Financial Reporting. [online]. Available at: <https://gradesfixer.com/free-essay-examples/provisions-impacting-the-financial-reporting/> [Accessed 26 Oct. 2021].
The Correct Financial Reporting [Internet]. GradesFixer. 2019 Jan 28 [cited 2021 Oct 26]. Available from: https://gradesfixer.com/free-essay-examples/provisions-impacting-the-financial-reporting/
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