no reference provided

Question to be answered is in bold and the notes provided is the Sarbanes Oxley Act to be utilized Auditors have come into a department as part of a company-wide audit prior to issuing an audit opinion for the companys financial reports. In a one- to two-page paper (not including the title and reference pages), explain what the staff should expect the auditors to do. Be sure to include the requirements of the Sarbanes Oxley Act in your explanation. Your paper must be formatted according to APA style as outlined in the Ashford Writing Center, and it must include citations and references for the text and at least two scholarly sources from the Ashford University Library.

NOTES

Sarbanes Oxley Act

5.1 Regulatory Oversight We introduced the concept of generally accepted accounting principals (GAAP) in Chapter 1, but let's take a closer look at the entities that create these principles, as well as those responsible for making sure that they are followed in the reports released by publicly traded companies. Three critical U.S. organizations develop rules, monitor the issuance of financial reports, and police the sales of securities to the public (see Table 5.1): The Financial Accounting Standards Board (FASB) develops the GAAP reporting principles that all public companies must follow. The Securities and Exchange Commission (SEC), a part of the Federal government, monitors company financial reports and makes sure they meet the standards set by the FASB and the SEC. The Financial Industry Regulatory Authority (FINRA) regulates the actual trading of securities and monitors securities brokers. We will take a closer look at the role of each of these entities. We will also review the role of the International Accounting Standards Board (IASB) and the ongoing efforts to develop worldwide financial reporting standards. Financial Accounting Standards Board (FASB) Since 1973, the Financial Accounting Standards Board (FASB) has developed the standards of financial accounting that all public companies in the United States must follow. These standards govern the preparation of financial reports by nongovernmental entities and are officially recognized as authoritative by the SEC (in Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (in Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979). The primary purpose of the FASB is to ensure that financial reports provide useful information for financial decision making. It does this by establishing and improving standards of financial accounting and reporting. Because so many entitiesincluding lenders, investors, governmental entities, managers, and employees, as well as the general publicdepend on credible, concise, and understandable financial information, the FASB standards enable the efficient functioning of the U.S. economy. The Enron scandal reminded everyone of the consequences of undermining this system of accurate, reliable, and credible information. Seven individuals serve on the FASB; most have worked for major accounting firms and major corporations, and some are drawn from academia. In order to serve, a member must sever all ties with his or her former organizations. This helps to ensure the independence of the FASB. Further, members must have demonstrated knowledge of accounting, finance, business, and research, and must show a desire to protect the public interest in matters of accounting and finance. The seven board members maintain the FASB Accounting Standards Codification, which enables accounting professionals to access the rules and source of authoritative standards of accounting and reporting that make up the GAAP. One might think of this as the library of accounting standards. The FASB is part of a financial overview structure (see Table 5.1) that is independent of all other business and professional organizations. That structure includes the Financial Accounting Foundation, the FASB, the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC). Collectively, these groups set rules for accountants to follow when preparing financial reports. Table 5.1: Financial overview structure Regulatory body Function Financial Accounting Foundation A 17-member board that oversees the work of the FASB. Financial Accounting Standards Board (FASB) Develops GAAP reporting principles that all public companies must follow. Financial Accounting Standards Advisory Council (FASAC) Advises the board members of the FASB regarding potential new projects and helps to set priorities for existing projects. Governmental Accounting Standards Board (GASB) Develops reporting principles that all governmental entities must follow. Governmental Accounting Standards Advisory Council (GASAC) Advises the board members of the GASB regarding potential new projects and helps to set priorities for existing projects. Although the FASB strives to accomplish its goals through broad participation, its work is subject to oversight by the Financial Accounting Foundation's Board of Trustees. The Financial Accounting Foundation is an independent, private sector organization run by a 17-member Board of Trustees from various backgrounds, including users of financial reports, financial report preparers, government financial report preparers, auditors, and academics. When technical issues arise involving accounting principles, the FASB looks to the FASAC to investigate and recommend any needed changes to the GAAP. (In Chapter 1, we discussed how the FASB develops new GAAP rules.) At the time of this writing, the FASAC had more than 30 members, who represent a broad cross section of the FASB's constituency. Note that standards for governmental agencies can be different. One significant difference, for example, is the reporting of revenue. For a government entity, revenue comes primarily from government sources, taxes, or user fees. The financial reporting rules for government entities are developed by the GASB and the GASAC. Task Box 5.1: Exploring FASB Project Plans The FASB lists all of its current and past projects to revise or improve accounting standards on its website. Visit the Project Plans Archive page and click on the most recent technical plan to find out what issues are currently being considered for revision or which new sections of the GAAP are being proposed. One project involves the rules for revenue recognition and is a good example of the work being done by the FASB to converge U.S. rules with international practices The world of business is changing, and countries are moving toward one set of accounting rules for international financial reporting. The United States is working toward adapting to this new standard; soon, managers in U.S. companies will be required to collect revenue data based on these worldwide rules. Review the Exposure Draft for the Revenue Recognition practice and note the number of issues being discussed that involve revenue recognition. Pick one issue and be prepared to discuss the changes being proposed and how you think that may impact financial reporting in the United States. Review the Proposed Amendments list and pick one for further reading. What aspect of revenue reporting did you choose? What key differences are being recommended, and why? Securities and Exchange Commission (SEC) Since 1934, the SEC has had the statutory authority to establish reporting standards for U.S. public companies. The SEC does not actually write the GAAP, but its enforcement of GAAP principles give it power to monitor and improve financial reporting. Managers must collect the financial transaction data that their companies report based on the GAAP rules. They need to work closely with the accounting liaisons in their offices to meet the requirements of these rules. Securities laws that give the SEC authority over financial reporting include: The Securities Act of 1933 (SEC, 2012b): This act is commonly referred to as the "truth in securities" law. The act mandates that investors receive financial and other significant information concerning securities that are offered for sale to the public. It also prohibits deceit, misrepresentations, and other fraud in the sale of securities. The Securities Exchange Act of 1934 (SEC, 2012c): This act created the SEC and gave it broad powers to register, regulate, and oversee firms that sold securities to the public. This is the act that empowers the SEC to require periodic reporting of information by companies that raise money through sales of publicly traded securities. Specifically, the act enables the SEC to require companies with more than $10 million in assets whose securities are held by 500 or more owners to file annual and other periodic financial reports. As discussed in previous chapters, these reports are available on the SEC's EDGAR database. The Investment Company Act of 1940 (SEC, 2012a): This act regulates the mutual fund industry. It requires companies to disclose their financial condition and investment policies to investors when stock is sold on the public markets. The Sarbanes-Oxley Act of 2002 (SEC, 2005): This act mandated reforms to enhance corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (SEC, 2014): This act reshaped the U.S. financial regulatory system to improve consumer protection, increase trading restrictions, regulate credit ratings, regulate financial products, and improve corporate governance and disclosures. The SEC is still working to implement the new rules under this act. The act contains over 90 provisions that require SEC rulemaking. Task Box 5.2: Staying Abreast of SEC Wall Street Reform The SEC still has much work to do to fully implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Research its progress on implementing this act at http://www.sec.gov/spotlight/dodd-frank.shtml. Click on pending actions and review the key issues that are listed there. Pick one of the pending actions and discuss why rules are being considered, how you think those rules will impact financial reporting, and how you will collect data for accounting as a manager. Financial Industry Regulatory Authority (FINRA) The Financial Industry Regulatory Authority (FINRA) does not play a large role in financial report regulation; however, it is the largest independent regulator of securities firms doing business with the public in the United States. FINRA's mission is to protect investors and ensure market integrity. The authority oversees the U.S. brokerage industry, including, according to its website, more than 4,100 brokerage firms and more than 630,000 brokers. International Accounting Standards Board (IASB) The International Accounting Standards Board (IASB) is essentially the FASB's international counterpart. It is the independent standard-setting body of the International Financial Reporting Standards (IFRS) Foundation. The board's 15 full-time members develop and publish International Financial Reporting Standards. The board members come from various countries and work closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters, and others in the accountancy profession. Currently, the FASB is working closely with the IASB to develop a single international standard. However, although most other major countries have adopted an international standard, or have set a date to do so, no date has been set for the United States. The most recent report by the SEC on this issue was released in July 2012 (Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers; SEC, 2012d). Companies whose stock is issued in other countries can already use the international standards when complying with reporting requirements of the SEC for their U.S. entities. Many details regarding how the U.S. and international systems will be converged must still be worked out between the international body and the U.S. entities responsible for setting financial reporting standards. The entities have developed the basic elements for financial reporting into a "Conceptual Framework for Financial Reporting" (IASB, 2008, 2010, 2013). The elements of quality financial reporting discussed in the next section were developed using the concepts in this framework (Tysiac, 2013). 5.2 Elements of Quality Financial Reporting As we have discussed, the primary purpose of financial reporting is to provide useful financial information about the company to employees, vendors, suppliers, creditors, present and future investors, and anyone else who depends on accurate financial information to make decisions about the company. Whether this information will be truly useful to readers depends on its quality (Van Beest, 2009). Developers of the Conceptual Framework for Financial Reporting have divided qualitative characteristics that make financial reporting useful into two categories (see Table 5.2): Fundamental qualitative characteristics: The two key characteristics defined as fundamental to all financial reports are relevance and faithful representation. Enhancing qualitative characteristics: The characteristics that make financial reports even more useful to readers include comparability, verifiability, timeliness, and understandability. Table 5.2: Conceptual framework for financial reporting qualitative characteristics Fundamental qualitative characteristics Relevance Faithful representation Enhancing qualitative characteristics Comparability Verifiability Timeliness Understandability In addition, the presentation of financial reporting is limited by two constraints: Materiality: Information is material if its omission or misstatement could influence the decisions a reader might make about the company. For example, a small business with profits of $200,000 that omits information about a $50,000 transaction is certainly leaving out crucial information that will be material to that company's profits. A major corporation with profits in the billions would not likely be materially affected by a $50,000 transaction that was omitted. (We will discuss materiality in more detail later in the chapter.) Costs: If the costs of collecting certain information for financial reports exceed the benefits, collection is not required. This cost-benefit analysis is done each time a new reporting requirement is developed as part of the U.S. GAAP or the International Financial Reporting Standards. For example, say a company runs a machine that uses a part that costs just $2 to replace. That replacement is needed about every 100 hours of use. The cost of carefully tracking each replacement in the accounting system would cost more than the part. In a cost-benefit analysis, the company would likely decide not to track each part change because there is little added benefit to the task. Instead, the company would track the expenses of buying the supplies. The costs of providing information include the costs of collecting and processing the information, costs of verifying its accuracy, and costs of disseminating it. Users of the information incur additional costs to analyze and interpret it. There are also costs to consider if decision-useful information is not reported. Readers may not have the information they need to analyze and interpret the report for the purpose of making a critical decision. A decision made without complete information can be costly if the user ends up incurring costs from reduced returns if a poor decision is made, based on incomplete information. Let's now take a closer look at the qualitative characteristics being developed by the joint efforts of the FASB and the IASB to ensure that financial reports meet the needs of their users. Fundamental Qualitative Characteristics Fundamental qualitative characteristics differentiate between information that is useful and information that is not useful or is even misleading. As noted above, for the information to be useful, it must provide two critical characteristics: relevance and faithful representation. Assorted financial reports, charts, and graphs. Baoshan Zhang/iStock/Thinkstock Relevance and faithful representation are the two fundamental qualitative characteristics of financial reporting. Relevance Financial report information is relevant if it could make a difference in someone's decision-making process. This is likely if the information has a predictive value (a value that can be used to form expectations of the future of the company) or a confirmatory value (a value that confirms or changes past or present expectations for the company) or both. Not all information that has a predictive value will be useful to all financial report readers. For example, straight-line depreciation of assets may be highly predictable every year, but it may not be useful for assessing a company's cash flow. The roles of predictive and confirmatory information are interrelated. Often information that has a predictive value also has a confirmatory value. For example, information presented about a company's past assets and claims against those assets can help predict a company's ability to take advantage of economic opportunities in the future, or to react to unfavorable circumstances that might arise. Faithful Representation Faithful representation means that the information presented is complete, neutral, and free from material error. Information is considered complete if it includes all details necessary to make an informed decision. A report is considered neutral as long as there is no bias that leads the reader to a predetermined result, or to take a predetermined action. This does not mean that the information will not influence decision making, because all financial reports do, but the company should not present the information in a way that leads to a conclusion that could have been reached based on information known prior to the preparation of the report. The developers of these basic qualitative characteristics realize that faithful representation will not necessarily mean that the report will be 100% accurate. Financial reports do include management estimates of various types of assets and liabilities. For example, the funds estimated for future retirement obligations must be based on various assumptions set by management and actuarial staff. Instead, for a financial report to meet the criteria of faithful representation, the estimates must be based on appropriate inputs, given the best information available at the time the report is issued. Sometimes it may be necessary to disclose the uncertainty of the information presented to meet the criteria of faithful representation. For example, in the section of the Notes to the Financial Statement where a company discloses potential financial impacts of pending legal action, the only information the company can provide is that the lawsuit is pending, without an estimate of the costs of that action if the company loses in court or settles the case. It is still critical to report the potential of a financial cost at some point in the future to meet the faithful representation characteristic. These two characteristicsrelevance and faithful representationtogether make financial reports more useful for decision making. However, having one without the other can be problematic. For example, information that is faithfully represented may not be relevant, and therefore not useful for making many decisions. Enhancing Qualitative Characteristics The enhancing qualitative characteristicscomparability, verifiability, timeliness, and understandabilitycomplement the fundamental qualitative characteristics to differentiate between useful and less useful information. Comparability Comparability refers to the use of the same accounting policies and procedures (or information about the different policies or procedures used) to compare the financial results of one or more companies. For example, if one company uses the inventory method FIFO (first in, first out) and the company being compared uses LIFO (last in, first out), it is important for readers to know about these differences so they can adjust their analysis. If a company changes its inventory valuation method, then it needs to adjust prior year financial reports so the information will be comparable from year to year for the same company. The time period for the information also must be known so that the reports are clearly comparing apples to apples. For example, if one company reports based on a calendar year and another reports based on a fiscal year that goes from February 1 to January 31, this may affect the numbers. Since economic conditions change from year to year, if the exact same months are not compared, the results will not be useful. For example, a company that uses a calendar year would include January 2012 in the 2012 report, but a company that uses a fiscal year from February 1, 2012, to January 31, 2013, would use January 2013 in the 2012 report. If economic conditions of January 2012 were very different from those of January 2013, the results will not be comparable for these two companies. Comparability does not mean that all financial reports must look alike. Instead, this concept means that if the reports are presenting information differently, financial report readers must have the information they need to understand these differences and adjust their analysis in order to compare more than one entity or to compare the results of one year to those of another year for the same company. In many cases, the rules of the U.S. GAAP or the IFRS will require companies to use the same accounting methods for the same type of transaction, so the information can be comparable. Verifiability Verifiability of the quality of the information presented on the financial reports helps demonstrate that the information presented faithfully represents the results of the company. Verification is done within a company using various methods to measure the accuracy of the information. For example, a company may verify its inventory count periodically by doing a physical count of inventory on hand and comparing that to the inventory information in the accounting records. Accountants verify cash flow into and out of the business daily by various checks and balances, to be sure the numbers entered into the system match the deposits made to their banks or other financial institutions. All companies have ways to verify the accuracy of their transactions, and auditors review these internal controls as part of their audit and report in the financial report whether they believe improvements are needed. We talk more about the role of the auditors later in this chapter. Timeliness Financial reports meet the characteristic of timeliness provided they are released within an appropriate period to enable employees or managers to make decisions based on the report. For example, managers need timely reports so they can decide how much additional inventory is needed for the next month. A report that is one month late could result in the company running out of inventory at a crucial time. The SEC requires U.S. companies to report their quarterly information 40 to 45 days after the close of the quarter. Companies must report their year-end information within 60 to 90 days after the end of the calendar or fiscal year. The faster reporting times are required of the largest corporations, whereas smaller companies have longer to release their reports. Understandability Understandability means the information in the financial reports is presented clearly and concisely. Even if detailed lease obligation information is included, it should be written in a way that managers and employeesas well as investors and creditorscan understand. If an employee does not understand the lease arrangements, he or she can request additional explanation from the accounting liaison for that department. Epstein, L. (2014). Financial decision making: An introduction to financial reports. San Diego, CA: Bridgepoint Education, Inc.