Small to mid-sized enterprises (SMEs) can benefit from implementing control objectives for governance and compliance. The Securities and Exchange Commission’s (SEC) Sarbanes-Oxley Act of 2002 (SOX) increases transparency and minimizes speculation. Despite the fact that auditing standards have been adjusted for SMEs, many still need to implement control objectives for compliance nationally and internationally.
The move toward shareholder value and increased capital market influence has been apparent in the way corporations have restructured themselves. A broad trend toward decentralization is obvious. Large companies work to become more agile and determine new ways to offer employees higher-powered incentives. At the same time, external capital markets have taken on an expanding role in capital reallocation as evidenced by the large volume of mergers and divestitures. The corporate governance structures in place before accounting practices were regulated gave managers of large public corporations little reason to make shareholder interests their primary focus. The corporate governance system needed to be overhauled. The press, academics, and top Federal Reserve officials routinely criticize top executive compensation. These failures and concerns have served as catalysts for legislative change. In the wake of high-profile corporate accounting debacles, authorities have started to take action, and new international accounting standards (IAS) defined rules on boards’ responsibilities and imposed penalties such as the Sarbanes-Oxley Act (SOX) were implemented. IAS rules will cause a greater need for comparability across various accounting and reporting principles. The Sarbanes-Oxley Act of 2002 (SOX) was designed to enforce regulatory modifications to include new governance guidelines.
Change in Financial Reporting
Following recent decisions by various jurisdictions to adopt International Financial Reporting Standards (IFRSs), thousands of companies throughout the world made a transaction in financial reporting by breaking away from national practices and changing to accounting standards set by the International Accounting Standards Board (IASB). IASB issued IRS 1 First- time Adoption of International Financial Reporting Standards, which requires an entity to comply with every IASB standard in force in the first year when the entity first adopts IFRS, with some targeted and specific exceptions after consideration of the cost of full compliance. Under IFRS 1, entities must explain how the transition to ISAB standards affects their reported financial position, financial performance and cash flows.
Critical Assessment of Effect of Changes on Smaller Enterprise In most countries, many or even all entities have a legal obligation to prepare financial statements that conform to a required set of accounting principles that are generally accepted in that country. Those statutory financial statements are normally filed with a government agency and are available to creditors and suppliers. The objective of financial statements is to provide information about the financial position and performance of an entity that is useful to users of such information. Financial statements show the results of managements stewardship of and accountability for the resources entrusted to them. For small and medium-sized entities, the most significant users of financial statements are likely to be owners, government and creditors, who may have the power to obtain information additional to that contained in the financial statements. Management is also interested in the information contained in the financial statements, even though it has access to additional management and financial information. Financial statements are prepared on the accrual basis of accounting. They are normally prepared on the assumption that an entity is a continuing concern that will continue to operate for at least the foreseeable future....