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Sarbanes Oxley Act

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The Sarbanes-Oxley Act, passed in 2002 following widely publicized governance scandals at corporations such as Enron, was intended to deter fraud in publicly traded corporations. The Act extended boards' financial oversight responsibilities and imposed new financial disclosure requirements. Only two of these provisions applied to nonprofits. Its passage nonetheless quickly sparked discussions about nonprofit accountability and whether nonprofits should adhere to certain provisions of the Act, either on a voluntary or mandatory basis.

In 2004, for instance, the Senate Finance Committee issued a draft paper calling for stronger nonprofit governance, and various proposals continue to be debated. Several states have proposed or passed regulations that extend some provisions of the Sarbanes-Oxley Act to nonprofit organizations. For instance, the California Nonprofit Integrity Act of 2004 requires charities with gross revenues of $2 million or more to have an audit committee. Some nonprofits have voluntarily adopted practices provided for by the Act. At the same time, efforts to extend provisions of the Act to nonprofits have been met with objections and concerns about the impact on smaller nonprofits,

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The Sarbanes-Oxley Act, passed in 2002 following widely publicized governance scandals at corporations such as Enron, was intended to deter fraud in publicly traded corporations. The Act extended boards' financial oversight responsibilities and imposed new financial disclosure requirements. Only two of these provisions applied to nonprofits. Its passage nonetheless quickly sparked discussions about nonprofit accountability and whether nonprofits should adhere to certain provisions of the Act, either on a voluntary or mandatory basis.
In 2004, for instance, the Senate Finance Committee issued a draft paper calling for stronger nonprofit governance, and various proposals continue to be debated. Several states have proposed or passed regulations that extend some provisions of the Sarbanes-Oxley Act to nonprofit organizations. For instance, the California Nonprofit Integrity Act of 2004 requires charities with gross revenues of $2 ...

Solution Summary

The Sarbanes-Oxley Act, passed in 2002 following widely publicized governance scandals at corporations such as Enron, was intended to deter fraud in publicly traded corporations. The Act extended boards' financial oversight responsibilities and imposed new financial disclosure requirements. Only two of these provisions applied to nonprofits. Its passage nonetheless quickly sparked discussions about nonprofit accountability and whether nonprofits should adhere to certain provisions of the Act, either on a voluntary or mandatory basis.

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Sarbanes-Oxley Act and the PCAOB

The following comments summarize the beliefs of some practitioners about the Sarbanes-Oxley Act and the PCAOB.

The Sarbanes-Oxley Act is unnecessary regulation of the profession. The costs of requirements such as reporting on the effectiveness of internal control over financial reporting greatly exceed the benefits. These increased costs will discourage companies from issuing publicly traded stock in the United States. The regulation also gives a competitive advantage to national CPA firms because they are best prepared to meet the increased requirements of the Act. Three things already provide sufficient assurance that quality audits are performed without PCAOB oversight. They are competitive pressures to do quality work, legal liability for inadequate performance, and a code of professional conduct requiring that CPA firms follow generally accepted auditing standards.

a. State the pros and the cons of those comments.
b. Evaluate whether the Sarbanes-Oxley Act and PCAOB regulation are worth their cost.

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