Accounting Capstone Conduct research to determine the impact of the Sarbanes-Oxley Act (SOX), Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), and the...

Running Head: SARBANES OXLEY ACT, GAAP and IFRS 1
Sarbanes Oxley Act, GAAP and IFRS
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SARBANES OXLEY ACT 2
Sarbanes Oxley Act, GAAP and IFRS
Introduction
Financial Reporting is one of the most important aspects for an organization. There
are several principles and concepts that have been put forward by the governing authority for
Accounting, the company needs to focus on recording their transactions as per the principles
and the guidelines of the GAAP.
The wave of financial scandals in 1990‟s and 2000 „s left a question on the reliability
of the financial statements of the corporates along with the regulating corporate governance
and the accounting profession of the country. The investors got highly concerned about the
scandals, with this the investors lost all the faith and confidence on investment which
smashed the stock market.
After different scandals that took place in United States, the government of America
enacted the Sarbanes-Oxley Act in the year 2002 which focused on protection against
accounting frauds and different financial malpractices. With the announcement of Sarbanes
Oxley act on July 25
th
‟ 2002, the stock market indices of the large capitalization stocks had
fallen down by 40 percent.
The Sarbanes Oxley is the act which focuses to fixing different auditing effects of the
US organization. The main focus of this act is brings accurate and reliable picture of the
company. The companies need to present its financials accurately. The act was inclined
towards the accuracy of the financial reporting.
Sarbanes Oxley Act
The Sarbanes-Oxley Act of 2002, is propounded by the sponsor Paul Sarbanes and its
Representative Michael G. Oxley. The law was designed with an objective to formulate the
strict standards against all US publicly traded companies. Securities and Exchange
Commission (SEC) and Public Company Accounting Oversight Board (PCAOB), which has
SARBANES OXLEY ACT 3
an obligation to oversee, regulate, inspect, and create disciplinary standards for accounting
firms with respect to the specific roles of them as auditors of public companies, is
incorporated under this act. (John, 2010)
The act focused on making new law and changing the existing laws in many ways, it
imposed different mandates which became compulsory for the publically traded organization
to follow. It also focused on enhancing the role of the auditors so as to enforce the law
against the fraud and theft the public companies. So as to have a strong focus on the
financials of the public traded companies, Sarbanes Oxley focused on creating a unique,
quasi-public institution which aimed to oversee and regulate the auditing of the company.
There are different sections and provisions that are compulsory for all the registered
companies to follow. There are nine set of mandates that needs to be followed by the
companies registered.
Sections Topics
101-109 PCAOB‟s creation, oversight, funding, and tasks
302, 401–406, 408–409, 906
New disclosure rules, including control systems and
officer
Certifications
201–209, 303
Regulation of public company auditors and auditor–
client
Relationship
301, 304, 306, 407
Corporate governance for listed firms (audit
committee rules,
ban on officer loans)
501 Regulation of securities analysts
305, 601–604, 1103, 1105 SEC funding and powers
SARBANES OXLEY ACT 4
802, 807, 902–905, 1102, 1104, 1106
Criminal penalties
806, 1107
Whistleblower protections
308, 803–804
Miscellaneous (time limits for securities fraud,
bankruptcy
law, fair funds)
Sections 302 and 404 have received the most attention of all the SOX provisions.
“Section 302 deals with corporate responsibility for financial reports”. In practice this means
that both the CEO and CFO of a public firm must take responsibility for the content of the
financial report and sign for this (U.S. House of Representatives, 2002).
Section 404 deals with the assessment of internal controls by management.
Management is obliged to take responsibility for the establishment and maintenance of
internal controls and it must assess the effectives of the internal control structure and the
procedures for financial reporting. Section 404 also obliges the auditor to assess whether the
assertions made by management are fair or not (U.S. House of Representatives, 2002).
A major goal of the Sarbanes-Oxley Act of 2002 was to improve corporate reporting
in the United States so as to restore investor confidence and stabilize the credit markets
following major business failures in the US.
Materiality Implications:
The Sarbanes Oxley is the act which focuses to fixing different auditing effects of the
US organization. The main focus of this act is brings accurate and reliable picture of the
SARBANES OXLEY ACT 5
company. The companies need to present its financials accurately. The act focused on the
accuracy of the financial reporting and made the management of the firm personally
responsible for the accuracy of the financial system. This act helped in safeguarding the
interests of the investors who invests in the stocks of the company. This act strongly focuses
on internal control of the organization in terms of accounting. Sarbanes-Oxley Act has
brought out several laws in respect of corporate responsibility, responsibility and regulations
of auditors, and enhanced disclosure policies for the organization.
Preventing Material weakness:
The Sarbanes Oxley Act of 2002 has put the demands on management to detect and
prevent material control weakness in a timely manner. Foe this the CPA‟s needs to focus on
creating key control processes which helps in assessing as well as reporting the risk. A strong
focus is there on the internal control for the material weakness.
Audit committees of public company board of directors – With the
implementation of the SOX, the audit committee had to work on the guidelines presented by
SOX which included:
Section 301: Public Company Audit Committees.
 Each member of the audit committee shall be a member of the board of directors of
the issuer, and shall otherwise be independent.
 "Independent" is defined as not receiving, other than for service on the board, any
consulting, advisory, or other compensatory fee from the issuer, and as not...