These are comments made by my professor on a discussion board. I want to respond back to her points in a conversational manner.
1. Prior to SOX, the Committee of Sponsoring Organizations (COSO) of the Commission on Fraudulent Financial Reporting issued a four-volume document, Internal Control: Integrated Framework, commonly referred to as the COSO Report. The COSO Report provides a framework against which entities can assess their internal controls and establishes a common definition of internal control that serves the needs of a variety of groups, including directors, management, internal auditors, independent accountants, legislators, and regulators. The COSO Report defines internal control as ” a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
Effectiveness and efficiency of operations.
Reliability of financial reporting.
Compliance with applicable laws and regulations.”
It’s important to remember; however, that the design, implementation, and monitoring of internal control are the responsibilities of management, not the independent auditor. The auditor’s responsibility is to obtain an understanding of the internal controls sufficient to plan the audit and to determine the nature, timing, and extend of tests performed.
2. I would just like to add by explaining the Sarbanes-Oxley Act for those who may not be familiar. The Sarbanes-Oxley Act (commonly referred to as “SOX”) was signed into law in 2002. This Act, which was triggered in large part by several corporate accounting scandals, significantly changed the laws of corporate governance and the rules and regulations under which accounting firms must operate. The Sarbanes-Oxley Act was designed to restore investor confidence in capital markets and help eliminate financial statement fraud in publicly traded companies while at the same time significantly increasing the penalties for corporate accounting fraud. The most significant changes brought on by the Act include:
The creation of the Public Company Accounting Oversight Board
Requirements for senior financial officers to certify SEC filings
New standards for audit committee independence
New standards for auditor independence
Enhanced financial disclosure requirements
New protections for corporate whistleblowers
Enhanced penalties for white-collar crime
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