Please reply to the below discussion in 2 paragraphs. In the first, clearly state with which parts of the other student’s thread you agree or disagree. You must provide an explanation for why you agree or disagree with the other student’s thread. In the second, add some additional comments of your own that add to the discussion. the reply must be at least 200 words.
The Effects of Sarbanes-Oxley (SOX) and the Public Companies Accounting Oversight Board (PCAOB) on Auditing Practice.
A common name that arises from accounting textbooks is Enron. Enron serves as the poster child for everything a company should not do, and provides a linear picture of how the current professional accounting standards came to be. In his article The Rise and Fall of Enron C. William Thomas alludes to one of the red flags flying for Enron before the scandal hit, “As Enron’s reputation with the outside world grew, the internal culture apparently began to take a darker tone. Skilling instituted the performance review committee (PRC), which became known as the harshest employee-ranking system in the country.”
The Sarbanes-Oxley Act, seemingly ubiquitous with Enron, affected how corporate entities hold themselves accountable through the use of internal control systems. In his article Sarbanes-Oxley (SOX) Act of 2002 Will Kenton writes of the changes that arose from SOX, explaining, “the new law set out reforms and additions in four principal areas: corporate responsibility, increased criminal punishment, accounting regulation, and new protections.”
SOX presented several sections relating to internal control and management responsibilities, specifically Section 302 and Section 404. Section 302, as the textbook describes, “stipulates criminal penalties for CEOs and CFOs if they issue materially misleading financial statements” (Louwers et al., 2018, p. 177). Section 404 delineates management’s responsibilities to provide a report detailing the status and effectiveness of the company’s internal control system. These stipulations, as well as others, help to create a lower risk system in which fraud can be minimized.
In order to achieve assurance of this reduced risk, auditors must also comply with the new regulations. Beyond assessing and gaining an understanding of the documents set forth by entities adhering to SOX, auditors must consider the Public Companies Accounting Oversight Board (PCAOB) Auditing Standard No. 2201 (AS 2201). AS 2201, the textbook explains, “details the work that the external audit team of public entities must perform to comply with section 404 of Sarbanes-Oxley” (Louwers et al., 2018, p. 204). This guideline is set apart from the typical financial statement audit expectations in that it is specifically evaluating the internal control system with respect to financial reporting. An internal control audit will possibly include different analytical procedures, larger scope sampling, and a special focus on end of the fiscal year, compared with a financial statement audit. Additionally, the audit team must put forth an opinion on the state of the internal controls.
Reflecting upon management’s renewed duty to set the tone at the top, Peter 5:2-3 comes to mind, “Shepherd the flock of God that is among you, exercising oversight, not under compulsion, but willingly, as God would have you; not for shameful gain, but eagerly; not domineering over those in your charge, but being examples to the flock.”