Reform Born of Scandal: The SOX

Bankruptcies did not stop in the United States!

In the US capital markets, large companies started to go bankrupt in 2001 and after, and Enron was the first to go bankrupt.

The Enron bankruptcy was not the only malpractice in America. In the years that followed, the world's leading companies, such as Worldcom and Xerox, also went bankrupt by resorting to accounting tricks.

Although the natural consequence of these scandals was to throw thousands of people out of work and to damage both the US and the global economy, one positive outcome was the introduction of legislation to ensure the independence of auditors, strengthen corporate audits, increase the responsibility of senior executives, and ensure transparency.

The Sarbanes-Oxley Act (SOX) was the result.

In 2002, the Sarbanes-Oxley Act was enacted to protect investors by increasing accountability, corporate governance, and transparency in financial statements and reporting. The Act introduced regulations for public companies and their auditors.?

THE SARBANES-OXLEY ACT (SOX) AND ITS KEY PROVISIONS

The Public Company Accounting Oversight Board (PCAOB)

A supreme body is established to oversee the accounting practices of publicly traded companies. This board will be responsible for audit quality standards, independence, and audit and investigative procedures of audit firms. The Board will act as the public sector's regulatory and oversight handover to the audit sector.

Corporate responsibility

Public companies are required to have an audit committee. Its members must be members of the company's board of directors and independent. The audit committee is responsible for assessing internal control issues and evaluating complaints about the internal control system and structure. Some changes have been made to the structure of the existing "audit committees" that review the financial reports prepared by the company and the companies

that prepare them. Audit committees will now consist only of independent auditors and at least one financial expert.? ? ? ? ? ? ??

All significant off-balance sheet transactions, liabilities, and pro forma financial information must be disclosed in the footnotes. In addition, companies will be required to disclose changes in their financial position at the same time. The Act introduces new requirements for public companies to make more extensive disclosures. This will confirm the accuracy of financial reports.

Analyst conflicts of interest

The law aims to prevent conflicts of interest that may arise from investment recommendations made by securities analysts and disclosed to the public in various written or oral forms, to ensure the objectivity of such analyses, and to provide more reliable and useful information to investors. A number of rules have been adopted to ensure that securities analysts provide more useful and reliable information to investors and to enhance the objectivity of research.

Commission resources and powers

This main heading includes the subheadings of allocation authority, pre-commission events and practices, federal court jurisdiction over exchanges where low-priced stocks are traded, and the personal qualifications of broker-dealers.

Reviews and reports

Subheadings include GAO reviews and reports on audit firm consolidation, Commission reviews and reports on credit rating agencies, reports on enforcement actions, and reviews of investment banks.

Liability for corporate and criminal fraud

The subheadings include penalties for falsification of documents, waivers and nondischargeability of debts for securities fraud offenses, statutes of limitations for securities fraud, amendments to laws and regulations on comprehensive criminal fraud offenses, protection of public company employees who expose fraud, and penalties to prevent fraud against company shareholders.

Increasing penalties for economic crimes

This section includes provisions relating to offenses committed by electronic mail, telephone, and telegram, attempts to commit criminal fraud, breaches of the law by employees, and fines and/or imprisonment that may result from corporate liability for certain financial reports. ? ? ? ?

Corporation tax refund

The income tax return must be signed by the director of your company.

Corporate fraud and liability

Anyone who falsifies, destroys, or deconstructs records, documents, or other tangible assets in order to disrupt the integrity and accessibility of an object that can be used in an official transaction, or who attempts to do so, may be sentenced to imprisonment and/or a fine. In the event of a violation, the employee or officer may be temporarily or permanently suspended by the Commission.

SOX compliance requirements consist of 11 titles, but there are two main provisions relating to compliance requirements:

302: Corporate Responsibility for Financial Reports

?SOX Section 302 states that Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) are directly responsible for the accuracy of financial reports. Signing officers must review and certify the accuracy of financial statements, establish and maintain internal controls, and disclose any significant deficiencies, fraud, or material changes in internal controls.

This authority allows CEOs and CFOs to be held liable for inaccuracies in their company's financial statements, up to and including criminal penalties.

404: Management's assessment of internal controls

Section 404 states that all annual reports should include an internal control report that clearly states management's responsibility for maintaining an appropriate internal control structure, an assessment of its effectiveness, and any deficiencies in those controls. Independent external auditors should also verify the accuracy of the company's assertion that internal controls are in place and effective.

To limit conflicts of interest, external 404 audits should be performed by independent auditors who exercise professional skepticism and judgement in reviewing the status of internal controls in public companies.

Benefits of SOX 404 Compliance

One of the critical consequences of Sarbanes-Oxley was the end of self-regulation and the provision of independent oversight of the audit process through the Public Company Accounting Oversight Board (PCAOB). The PCAOB can set industry standards, investigate allegations of fraud, and regulate audit firms. In fact, the PCAOB regularly inspects auditors to ensure that quality remains high and that industry best practices are being followed.

How is a SOX audit conducted ?

1.???? Risk Assessment

In line with the recommendations of the PCAOB accounting standard, you can use a risk assessment approach to determine the scope of the SOX audit. This part of the audit process is designed to help the auditor identify risks and potential business impacts; it is not a list of compliance procedures. This includes evaluating the organization's internal controls to ensure that they provide reasonable protection against errors and omissions.

2.???? Prioritisation analysis

This step involves determining which items are material to the balance sheet and income statement. Materiality means that items can influence the financial judgment of users. Auditors usually calculate a portion of the financial statement accounts to determine materiality.

This part of the audit process also includes identifying the location of significant account balances, identifying transactions related to significant accounts, and determining the financial reporting risks associated with those accounts. This involves analyzing the financial statements of all workplaces to identify account balances that exceed what is considered to be material. The transactions responsible for the increase in the balances should then be analyzed. Finally, you need to determine the cause of the risk event or why a transaction was not recorded correctly.

3.???? SOX controls

During the materiality analysis phase, the auditor identifies and documents SOX controls that can prevent and detect misstatements of transactions. This includes identifying the procedures in place to ensure the correct calculation of account balances. Material accounts may warrant multiple controls to prevent misstatements. Each control should be analyzed to determine its effectiveness and appropriateness. 4. Fraud Risk Assessment

This includes assessing potential fraudulent activity to ensure the early detection and prevention of fraud. Internal controls can help reduce opportunities to commit fraud and mitigate the material impact in the event of fraud.

4.???? Fraud risk assessment

This includes assessing potential fraudulent activity to ensure the early detection and prevention of fraud. Internal controls can help reduce the opportunities for fraud and mitigate the material impact of fraud if it does occur.

5.???? Process and SOX control documentation

The control description and documentation should include details of how key controls operate (including frequency, testing, and associated risks). Documenting risks and controls can be difficult to do manually.

6.???? Testing key controls

SOX control testing involves verifying the effectiveness of test procedures, ensuring that the control is performed by the appropriate process owner, and verifying that the control is successful in protecting against material misstatement.

SOX control testing procedures include continuous assessment and observation, communication with process owners, transaction testing, and document review.

7.???? SOX Deficiency Assessment

An effective SOX program should reduce the time spent on manual testing and administration with a predictable and acceptable level of deficiencies. The auditor will sometimes identify gaps in the SOX control testing process that need to be addressed. The assessment should determine whether the problem is due to a design or operational error and whether it is a material weakness (higher risk percentage of deviation).

8.???? SOX Control Report

The final stage of the SOX control testing is for management to prepare a control report and present it to the audit committee. The report should include a summary of the results and management's opinion; a review of the framework used and evidence gathered; the results of each test; the identification of gaps and failures and their causes; and the external auditor's assessment.

SO.

Enron and similar scandals dealt a severe blow to the US and global economy, but they also paved the way for important reforms in the areas of auditing and transparency. The Sarbanes-Oxley Act (SOX) was designed to make companies' financial reporting more transparent and to restore investor confidence by strengthening the independence of auditors. These events have shown that it is not only legal regulations that are essential for companies but also ethical and honest management principles. Strict adherence to these values will help prevent similar crises in the future.