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Business Ethics: Sarbanes-Oxley & COSO

1. List the provisions under the Sarbanes-Oxley act that have proved to have the most significant impact on corporate governance and boards.

2. What is the Committee of Sponsoring Organizations (COSO)? List the control structure elements, and explain the control environment.

3. Enumerate upon the responsibilities of the Committee of Sponsoring Organizations (COSO). Explain Enterprise Risk Management?Integrated Framework.

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1. List the provisions under the Sarbanes-Oxley act that have proved to have the most significant impact on corporate governance and boards.

With big government come big names for things...especially laws. The Public Company Accounting Reform and Investor Protection Act of 2002 has been called the most significant change to securities laws since the 1934 Securities Exchanges Act. The Company Accounting Reform and Investor Protection Act (better known as the Sarbanes-Oxley Act to save probably millions in printing costs) contains groundbreaking reforms for issuers of public traded securities, auditors, corporate board members, and lawyers. It implemented new provisions to deter and punish fraud and corruption with severe penalties. The Act protects workers and shareholders alike (SEC, 2002). Bank of America felt the financial backlash of violating the Act to the tune of $10 million (Caffrey, 2004) while Endo Pharmaceuticals opted to protect itself through outsourcing and maintain focus on production (Rea, 2004).

There are many provisions of the Sarbanes-Oxley Act that outline how organizations will report, but my favorite is where it holds CEOs and CFOs responsible for their companies' financial reports. After all, they make all the money so they should bear the brunt of the blame when things go south. Other major provisions are prohibiting executive officers and directors from soliciting or accepting loans from their companies; timely reporting of insider trading and prohibiting them during pension fund blackout periods; full disclosure of CEO and CFO compensation; whistleblower protection; and tough penalties for violations including fines and jail. The Sarbanes-Oxley Act was enacted in response to large and public failure of corporate governance. Two sections of importance: Sections 302 and 404. They emphasize the importance of internal controls and mandate disclosures related to internal control effectiveness -- and changes in internal control.

According to Section 302, a company's officers are required to confirm that they are responsible for establishing and controlling internal controls. Meanwhile, Section 404 requires the company's auditor to attest to and report on the company's internal control over financial reporting. This section, of internal control should suggest management responsibilities to establish and sustain enough internal control over financial reporting and is used within certain criteria to evaluate the effectiveness of the company's internal control.

Finally, corporate governance has gained a great deal of momentum over the last 20 years as companies struggle to separate ownership and control in such areas as economic performance, finance and risk management. Chew and Gillan believe the problem with corporate governance systems starts with the Board of Directors (2005) and they are probably dead on. Since the board has the responsibility for the functionality of the company it is their job to hire, fire and compensate the CEO. If it only happened more often... Unfortunately, few boards have done this well in the absence of external crisis. The reasons for these failures are unclear, but in the absence of strong corporate governance systems the reason for failure is apparent.

The Sarbanes-Oxley Act's preventive controls include developing guidelines and responsibilities to conduct reviews of ethics policies, conflict-of-interest procedures, and updates in corporate compliance procedures that will protect and position the company to prevent a possible compliance violation. An associate of the company's preventative control measures include comparing the organization's current conflict-of-interest policy with industry regulations regularly, reviewing recent government filings, and evaluating the company's current compliance program. If these control steps are proactively taken regularly in the organization, the company will have taken preventative steps to avoid a potential future compliance violation (Maltz, 2003).

Detective controls enable the company to see if a possible compliance violation ...

Solution Summary

2000 words with references give the impact and reach of SOX and COSO in controlling the accounting environment.

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