Week 2 Homework
1. In two to three paragraphs, describe the Sarbanes-Oxley Act and why it is important to the accounting profession. (15 points)
The Sarbanes-Oxley Act was passed in 2002 by Congress after a series of scandals involving companies such as Enron, WorldCom, and Tyco. This was passed because of shady transactions and misrepresented financial data which caused shareholders to lose millions of dollars and their trust in investing in public companies. It was passed to create new rules of accountability and accuracy for public companies.
It is important to the account profession because companies were required to have met certain conditions or face the consequences. The Act requires all public companies to create an audit committee, which will be part of the board of directors, and will need to include at least one accountant or someone who is “financially literate” and knows what he/she is doing at all times. It also requires public companies to hire outside firms to perform their financial audits on an annual basis, no company can use the same firm for more than five years at a time, allowing a different set of eyes to look at their financial statements and taking away the risk of fraud.
Each public company’s Chief Executive Officer (CEO) or Chief Financial Officer (CFO) is required to certify that the company’s financial date is accurate and correct. If they’re not correct either the CEO and/or the CFO can face criminal penalties if there is a hint of fraud within the reports. Finally, the Act makes it a crime if any document is either destroyed or concealed from government investigation.
2. Name and briefly describe the five components of COSO’s internal control framework.(10 points)
The Control Environment: This relates to the control consciousness of people within the work environment/organization. This is the basis for all the other components of internal control.
Risk Assessment: This refers to the organization’s