Auditing Case

1.1 Introduction:

The complexity of accounting policies and their impact often creates a wall between the management and the users of the data or stakeholders. As a result, the stakeholders may make financial decisions which may prove to be economically wrong if a full disclosure of the actual situations were made. To prevent or minimize this sort of situations, the United States Senate passed an act named Sarbanes-Oxley act in 2002, which provides a basic standard for the reporting and operating status of listed companies. This report analyzes the various aspects of this act and tries to:

 See the concerned areas in which the act operates.

 See how the corporate world was before this act was enforced.

 See how it affects the operations of listed and other companies.

 Analyze the impact on the share exchange market.

 Consider the overall impact on the corporate world.

1.2 Objective:

The main objective of this report is to:

 Define the purpose of the Sarbanes-Oxley act.

 Concentrate on the various sector of the Sarbanes-Oxley act.

 Observe what happens with the act in force.

 Analyze the implication of the act on various sectors of business.

 See how the act can be implemented on listed and non-listed companies' business policies.

 See the impact of the act on the securities and exchange commission of United States and on other countries.

 Make some recommendations as to how the act can be best applied in our country.

1.3 Methodology for data collection:

We have tried to gather as much date as possible within the timeframe and so our main sources were the following:

 The Internet

 Recent business magazines

 Journals published on daily newspapers.

1.4 Scope:

The scope of this report is very limited as this concentrates on the initiation of the SARBANES-OXLEY ACT and it's implications on the corporate sectors of the United States. It also considers its overall impact on the business world. It does not, in any way, make a suggestion as to whether this report can be used as a basis to employ the SARBANES-OXLEY ACT in other countries. This report also has very limited data as we have collected all the data from secondary sources and as such, the reliability may not be trusted to its fullest extent.

2.1 General Features:

2.1.1 What is The Sarbanes-Oxley Act?

The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called Sarbanes-Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002 and introduced major changes to the regulation of financial practice and corporate governance. The legislation set new or enhanced standards for all U.S. public company boards, management and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties.

2.1.2 Why was this act enacted?

A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000 and 2002. The spectacular, highly-publicized frauds at Enron WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of Sarbanes-Oxley Act in 2002. The main purpose was to stop future happening of such things and to implement a strong sense of responsibility and accountability in the managements' part on the minds of shareholders and other stakeholders.

2.1.3 What are the guidelines?

The Sarbanes-Oxley Act addresses the following issues:

1. Auditor conflicts of interest: Prior to SOX, auditing firms were self-regulated. They also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm's bottom line. This act proposes ways in which this risk can be minimized.

2. Boardroom failures: Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management. The engagement of their active duties being truly independent from the management can be ensured by this act.

3. Securities analysts' conflicts of interest: The roles of securities analysts, who make buy-and-sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest. This act provides different rules to prevent this sort of conflicting behavior

4. Inadequate funding of the SEC: The SEC budget has steadily increased to nearly double the pre-SOX level.

5. Banking practices: Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients