The Sarbanes Oxley Act, Enron, energy company, SOX, new obligations, board of directors, audit committee, external auditors, conservation of information, civil liabilities, reinforced sanctions, impact on investors, impact on stock market, internal audit
Enron and WorldCom are just few examples of the accounting scandals of the last years, but they are emblematic.
Firstly, everyone heard about those two firms and theirs scandals. All Medias specialized or not, talked about it, even books were written.
Secondly, we have to note the blindness, or we could say the complicity of the auditor Arthur Andersen, who is supposed to be independent and impartial.
Thirdly and more important, a large majority of the shares were owned by individuals who invested pensions and economies in those firms. They have lost every single dollar they invested because of the fraud. Many families were ruined.
Those points conducts to an important question: how can investors still trust the financial statement of firms if they know that they can be false? How can they still invest their money on firms that can not be as healthy as it said and fill bankruptcy? How can individuals still put their money in firms? In fact, market generally and stock markets in particular strongly need investment. The consequences of an investor's loss of confidence can be disastrous. Firstly, investors will massively sell their shares. It will conduct to a fall in share's price and even to a fall of the stock market. Secondly, firms need money to create and promote new products, pay the employees to do some research and development... benefits only can not provide enough money to do this. If the money is not given, firms can fill bankruptcy and then, it will not be the firm's problem only, but also government. That is why the American government had to react.
To counter this major crisis of confidence and fraudulent practices, the American State reacts by a major reinforcement of the regulation by the "Public Accounting Reform and Investor Protection Act of 2002" or commonly called "Sarbanes-Oxley Act", SOX or SOA. The law Sarbanes-Oxley brought the most important reform the American financial markets saw since the "Securities Act" in 1933 and of "Securities Exchange Act" in 1934.
[...] The whole of the companies and their partners underlines the need for Sarbanes Oxley. To implement Sarbanes Oxley in order to go beyond the strict setting in conformity, it is necessary: - To know the initial objective of Sarbanes-Oxley - To understand the fraud and the mechanisms of detection by the audit - To give a strong stimulus of ethical attitude toward the fraud -To consciously decide to go beyond strict conformity towards an improvement of the governorship and controls - To model and implement Enterprise Risk Management (ERM) 1. [...]
[...] The act Sarbanes Oxley Titrates by Title SOX, new obligations A. New obligations for the managers B. New responsibilities for the board of directors and the audit committee C. New obligations for the external auditors D. New obligations in term of communication and conservation of information E. New civil liabilities and reinforced sanctions Actors of SOX A. SEC B.PCAOB C.COSO The Step Sarbanes Oxley II: Review of the SOX first year General effect Interpretation problems Section 404: results of the first year of tests A. [...]
[...] The companies can benefit from this framework at the same time to improve their system of internal audit and to go towards a total process of risk management. The companies then have a common structure for the implementation of ERM. D. A common language for the risk management in the company This reference frame allows the managers and the board of directors to capitalize on the current processes of risk management, to make reliable the external reporting and interns, to evaluate the effectiveness of the risk management, to identify the improvement appropriateness and to integrate the risk management. The ERM is declined under three fundamental dimensions. [...]
[...] There still, an independent station must manage the definition of the tests to be carried out To go beyond SOX Beyond the simple setting in conformity, the companies must adapt the tool Sarbanes Oxley with the level corporate and the level subsidiary company to fill the lacks of Sarbanes Oxley. The tests carried out within the framework of the setting in conformity with Sarbanes Oxley are inevitably limited in the scope as in detail. All the processes are not tested, and the selected processes are not tested in detail. [...]
[...] New obligations for the external auditors The Sarbanes Oxley law imposes the PCAOB (independent Official Authority) as a controller of the audit cabinets. All the audit cabinets auditing the accounts of the companies listed in the US stock exchange, including the non-American cabinets must be recorded at the PCAOB. This recording implies that the cabinets are committed respecting, within the framework of their 20 mission of audit for the issuer, the audit standards, independence and ethics, quality control of the PCAOB. [...]
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