Summary of purposes of SOX ACT 2002:
Corporate governance is a set of policies, processes, and customs affecting the way a corporation is administered and controlled or directed. It refers to the way the rights and responsibilities are distributed among the board, company management, shareholders and other stakeholders.
Issues involving corporate governance include
Internal controls and internal auditors
Independence of external auditors and quality of their audit
Oversight and management of risk
Oversight of the preparation of financial statements
Review of compensation agreements with senior executives
Resources available to directors to carry out their duties
Nomination of individuals for positions on the board.
What went wrong?
Executive compensation grossly disproportionate to corporate result
CEOs and senior executives involved in a serious conflict of interest
Misuse of corporate funds
Trading on insider information
Misrepresentation of earnings and financial conditions of companies
Obstruction of justice by concealing activities or destroying evidence Sarbanes Oxley Act
The Sarbanes Oxley act emerged as a reaction to a number of corporate and accounting scandals that cost investors billions of dollars and shook the public confidence in the securities market.
The act mandates a set of procedures designed to ensure good corporate governance. They include
Elimination of conflict of interest when dealing with management performance and compensation
Use of reliable and accurate standards in financial reporting
Elimination of conflict of interest in securities market transactions
Independence between board of directors, management and auditors
Disclosure of transactions involving management and principal stakeholders
Establishment and maintenance of adequate internal control structure and procedure for financial reporting
Adoption of code of ethics for senior financial officers or persons performing similar functions
Disclosure of additional information concerning material changes in the financial conditions on a rapid and current basis.
A. Auditors’ Responsibility as per Sarbanes Oxley Act 2002
1. It is the responsibility of the auditor to evaluate whether the internal control structure and procedures include records that accurately and fairly reflect the transactions of the issuer, provide reasonable assurance that the transactions are recorded in a manner that will permit the preparation of financial statements in accordance with GAAP, and a description of any material weaknesses in the internal controls. (Section 103)
2. While performing audit the auditor should enforce compliance with the rules of the Board, professional standards, and the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto including second partner review. (S103)
3. The auditor’s responsibility includes timely report to the audit committee of the client—
a. all critical accounting policies and practices to be used;
b. all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the client, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and
c. other material written communications between the registered public accounting firm and the management of the client, such as any management letter or schedule of unadjusted differences.’’. (S204)
4. The registered public accounting firms should prepare, and maintain for a period of not less than 7 years, audit work papers, and other information related to any audit report, in sufficient detail to support the conclusions reached in such report."(S103)
Attestation engagement generally refers to an examination, a review or an