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Sarbanes Oxley Companies

Abstract

Sarbanes oxley act 2002 was passed on July 30, 2002 and only the public companies are now feeling its impact. This act frequently called the “most significant accounting or auditing legislation since the securities exchange Act of 1934”. After the implementation it has established its demands to the companies for proper management and disclosure of risk. Nortel networks is a giant corporate in telecom industry and as it is expected they also have faced the challenges come from the SOX act.

Some of them are in favor and some are against the Nortel. ‘SOX’ has manipulated a larger impact on Nortel internal employee and external customers as well as their financial statement. The outcome of the Nortel is clearly different from before implementing the SOX. This paper is to find out the deeper understanding of SOX, how it governs the public corporate, financial disclosure and practice of public accounting in general sense. Besides this it will focus on the outcomes of Nortel network after implementation of SOX and its financial statement.

Introduction

There have been found a number of corporate financial scandals (e.g. Tyco International) that provides various type of weakness in the governance and auditing practice in the organization. It represents the failures in controlling the reliability and integrity to the stock markets. The scandals cost billions of dollars for the investors when the affected companies were collapsed. As a result, these scandals make upset the public confidence in the nation’s security markets.

The Sarbanes oxley act was passed in positive response by the American congress on July 30, 2002 in response to a number of major corporate and accounting scandals and these scandals in result of decreasing the investors or shareholders confident on investing on the share market. To restore their confident, a new regulation from SEC (Security and Exchange Commission) is implemented. The act was granted by a vote of 423-3 by the House and by the Senate 99-0. So, it can be said that the act had not to face approving challenges.

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The Sarbanes oxley act gives the government a strong control. This act is commonly known as Sox or Sarbox act and it consist of eleven titles. Each title contains different sections and setting from further corporate board tasks to criminal penalties. The Sarbanes oxley act was named after senator Paul Sarbanes and Representative Michael G. Oxley. President George W. Bush signed it into law, stating it included, “the most far reaching reforms of American business practice since the time of Franklin D. Roosevelt”. The established legislation is applicable for all U.S. public company boards, management and public accounting firms. This new legislation is an enhancement to standardize the process for all US public companies; the companies will become more transparent on company board, Management and public accounting firms.

For example, the Tyco International case reduced the confidence and shocked the investors in the listed companies in the share market and the liable reporting authorities. So, the purpose of the act was to recover the confidence and make tight the government rules and regulations on the companies to keep them under control. The consistent financial reporting process is ensured by this act. Consequently, the reliability to the public in accordance with disclosure is increased. The telecom professionals found themselves under the force to fulfill the regulation within a short time. By doing this they can keep away from any criminal accusations.

The most important provisions of Sarbanes oxley include:

  • Accelerated reporting of trades by insiders
  • Public reporting of CEO and CFO compensation and profits.
  • Auditor independence and a prohibition on audit firms offering value-added services.
  • Companies are now required to have an internal audit function, which must be certified by external auditors
  • Certification of financial reports by CEOs and CFOs.
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This paper presents a real understanding on the Sarbanes oxley act and its impact on the telecom industry. It also provides the controls adopted by the authority to maximize the financial reporting process. Besides these, it would give a clear idea that will act as a guideline on what possible interface control may need to implement to the telecom governance and accounting process.

Literature review

From a number of financial scandals the act Sarbanes Oxley has been evolved. This act provides some important and practical provisions for the public companies. There are eleven titles under the Sarbanes Oxley act of 2002 and these are: Public company accounting oversight board (PCAOB), Auditor independence, Corporate responsibility, Enhanced financial disclosures, Analyst conflicts of interest, Commissions resources and authority, Studies and reports, Corporate and criminal fraud accountability, White collar crime penalty enhancement, Corporate tax returns, Corporate fraud accountability.

All these titles provide fifty seven sections overall. The public accounting, public corporate or financial disclosure, all these are the boundary of Sarbanes Oxley act. The impact of Sarbanes Oxley 2002 on the Nortel networks in the telecom industry in regarding to its internal employee and external customer. Moreover, the outcomes of the Nortel telecom after the implementation of Sarbanes Oxley act. Some implied recommendations from this act and also some limitations of different sections.

An overview of SOX act

  • Public company accounting oversight board (PCAOB)

Title one has nine section and it establishes public company accounting oversight board. This public company accounting oversight board is to provide independent oversight of public accounting firms providing audit services. It also deals with the auditors registering, defining the specific process, subject to the securities laws, and related matters. It is to ensure the public confidence in the preparation of informative, accurate and independent audit reports. The board will be termed as a body corporate, operated as a nonprofit organization.

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  • Auditor independence

Title two also consists of nine sections and it establishes the independence of the auditors. This act provides a standard for the external auditors which limit the conflicts of interest. Furthermore, it also refers the approval requirements for the new auditors. Partner rotation policy, conflict interest issues, auditor reporting programs are in this boundary. According to the section 201, it is not approved to do other kind of business for the auditing companies, which are apart from with the same clients.

  • Corporate responsibility

Title three consists of eight sections and it emphasizes on the responsibility of the senior executives. The senior executives will be responsible for the accuracy and validity of corporate financial reports. It also establishes the responsibility by the corporate officers about the accuracy and completeness of the corporate financial reports. Besides this, the interaction between external auditors and corporate audit committees has been specified through this act.

There would be no improper manipulation on conduct of audits. Forfeiture of certain bonuses and profits, officer and director bars and penalties, insider trades during pension funds blackout periods, fair funds for investors, all these will be treated as the corporate responsibility. For example, according to the section 302, it is implied that the company should be responsible for approving the integrity of their company financial reports.

  • Enhanced financial disclosures

There are nine sections in the title four and it mandates the requirements for financial transactions, such as off balance transaction. In addition, pro-forma figures and stock transactions of corporate officers are described under this act. The accuracy and validity of financial reports and disclosures is dependent on the internal controls to be ensured. There is the possibility of material change in financial condition.

It enhanced conflict of interest provisions of personal loans to executives. This act provides the disclosures of transactions involving management and principal stockholders. Management assessment of internal controls, exemption, code of ethics for senior financial officers, disclosure of audit committee financial expert, enhanced review of periodic disclosures by issuers, real time issuer disclosures are the section included in this title.

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  • Analyst conflicts of interest

This title consist only one section and it emphasizes on to restore the confidence of the investors in the reporting of securities analyst. This title defines the code of conduct that is applicable for the securities analyst and it emphasis the disclosure of knowable conflict of interest.

  • Commissions resources and authority

This title six consists of four sections and provides practices to recover the confidence in securities analysts. It also defines the authority of Security Exchange Commission to censure or bar securities professionals from practice. It also provides the information about which person can and cannot be barred from practicing as a broker, advisor or dealer.

  • Studies and reports

Title seven consists of five sections and enhances the conducting research to prevent the violence that may occur by the SEC registrants and auditors. Effects of consolidation of public accounting firms or role of credit rating agencies in the operation of securities market or securities violations and enforcement actions, and whether investment banks assisted and others to influence earnings and obfuscate of true financial condition are the boundary of this title.

  • Corporate and criminal fraud accountability

Title eight ‘corporate and criminal fraud accountability’ consists of seven sections and it is referred to as the “corporate and criminal fraud act of 2002”. Specific criminal penalties for fraud manipulation and destruction or alteration of financial records or other interference with investigation all these are provided by this act.

  • White collar crime penalty enhancement

Title nine “white collar crime penalty enhancement” consist of two sections and this section is also known as “white collar crime penalty enhancement act of 2002”. This section of title nine defines the criminal penalties that associated with white collar crimes and conspiracies. It provides the more reliable guidelines and specially adds failure to certify corporate financial reports as a criminal offense.

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  • Corporate tax returns

Title ten “corporate tax returns” consists of only one section which states that the chief executive officer should sign the company tax return.

  • Corporate fraud accountability

Title eleven “corporate fraud accountability” consists of sevens sections. According to the section 1101 it has been recommended that this title can be named as “corporate fraud accountability act of 2002”. This act is to find out the corporate fraud and records which could temper the criminal offenses. It identifies these offenses and joins those offenses to specific penalties. This not only provides this description but also revises sentencing guidelines and strengthens their penalties.

Conceptual framework of this study

This paper conducts a study about the impact of SOX act on the telecom company. The Sarbanes Oxley 2002 act is to present a detailed report on a company’s internal controls over the SEC. in addition, the overall review of SOX in a short way to understand deeply is the framework of this study.

It would be difficult to get the right information from the respondents. The respondents may be unaware about the significance of the survey. Besides this, complexity in data collecting system may hamper the study paper. Multifaceted questions and difficult language is an obstacle to get the proper records. So, easy and understandable language will be used.

Sarbanes Oxley act 2002 and the practice of public accounting

According to the Sarbanes Oxley act 2002 all public accounting firms who wish to provide auditing function for the purpose of publicity traded companies need to register with the board. This act provides the scope of audit practice and reports, details investigation and defines conflict-of-interest prohibition.

The SOX itself has changed or affect the practice of public accounting system of Nortel. Nortel believes that all adjustment is necessary for presenting a fair financial statement. It expected to everyone that the practice of public accounting will be fair in a manner. Before the Sarbanes Oxley act passage, the firms did not have to usually disclose stock-opinion grants to the Security and Exchange Commission unless the close of the business year.

The firms had to disclose the stock-opinion within two business days after issuance. Sarbanes Oxley act has become now a law. Accounting, financial reporting and tracking of sales activities all these are affected by this act. Sarbanes Oxley is to be said as a mandatory which is applicable for all listed companies in the U.S. whether foreign or not and compliance is not an option. In case of Nortel the effects of SOX has begun. Like much of the business community, the public financial report is very crucial to present in a systematic way.

The growing number of restatement and so many other certain public accounting practices which shake the public confidence in the financial reporting system has been seen for a long time. Although it is difficult to measure the effect of accounting issues on the investor confidence, various efforts to find out investor confidence have been made. For example, a survey based index provides the public opinion in regarding to the accounting practice.

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Public cite public accounting practice as a difficult and complex issue, which has negative impact on the stock market. Some surveys indicate that after implementation of Sarbanes Oxley act in July 2002. “Other sources such as empirical research studies and academic experts generally suggest accounting issues have negatively affected overall investor confidence and raised questions about the integrity of U.S. markets”. (GAO October, 2002).

According to the Sarbanes Oxley act 2002 in the audit committee at least one member would be financially literate. The audit committee consists of minimum three members. However, SOX puts a strong emphasis on audit committee function with respect to the company’s relation with an external auditor. As a result the audit committee of each issuer becomes directly responsible appointment, compensation and oversight of the work of any registered public accounting company employed by that issuer. (Didenko Pavel)

At first Sarbanes Oxley act creates a nonprofit corporation that is “public company accounting oversight board” or PCAOB. Its “five SEC-appointed members (of whom two will be CPAs), financed by new public company fees, will register, inspect and discipline public accounting firms, including foreign firms in certain cases, as well as establish and enforce auditing, quality control, and independence standards.”(McTamaney, Aug 9 2002).

Because of the new Sarbanes Oxley act the audit firm itself now will turn around its guide audit partner every five years. Hence, the sec 103 of the Sarbanes Oxley enhances public accounting firms to prepare, maintain and continue a period of time which is not less than 7 years. Section 104 allows the advisory board to maintain and review all audit papers for a period of 5 years from the end of the fiscal period.

The section 105 of SOX provides the authorization to the oversight board to perform a wide investigation of auditing firms. Besides the auditing firms associated persons are to be conducted through broad investigation and the act authorizes the board to “require the production of audit work papers and any other document or information in the possession of a registered public accounting firm or any associated person thereof.” (Patzakis John, 2003).

Accounting did not cause the recent corporate scandals such as Enron and WorldCom. Unreliable financial statements were the results of management decisions, fraudulent or otherwise. To blame management’s misdeeds on fraudulent financial statements casts accountants as the scapegoats and misses the real issue. Reliable financial reports rely to a certain extent on effective internal controls, but effective internal controls rely to a large extent on a reliable management system coupled with strong corporate governance. (A management system is a process of planning, executing, and control for all business processes in an organization.)

Management systems dictate all business processes. When management deliberately or even unlawfully manipulates business processes in order to achieve desirable financial goals and present untruthful financial reports to the public, accounting systems are abused and victims rather than perpetrators. Internal control, no matter how effective, is rendered impotent when management decides to circumvent it. Therefore, internal control must be extended to cover all major risks outside of the accounting process. In other words, internal control rests on adequate and comprehensive analysis of enterprise-wide risks. (Hsieu Lin Heng & H. Wu Frederick, 2006)

Sarbanes Oxley act 2002 and public corporate

The recent increase in the number and size of financial statement have raised significant question about sufficiency of the current system of corporate governance and financial disclosure oversight. In a broad sense, corporate governance seeks to increase the value of corporation. The supporting of long-term strategies is to be developed.

In regarding public corporate governance four things need to consider in systematic way and all these are:-

  • Loans to public company directors and executive officers: the company will be prohibited from allowing any loans to any of its directors of executives officers.
  • Public company audit committee standards: the SOX act provides and enhances the independency of the audit committee. It has been recommended that each member of the audit committee should be also the member of company’s board of directors. The audit committee must be independent otherwise. Here independent means no member of audit committee may accept any consulting or advisory fees from the company and may not be an “affiliated person” of the company or its subsidiaries.
  • Corporate executive responsibilities (sec 302): the Security Exchange Commission now needs corporate CEOs and CFOs to sign and certify in the company’s annual and quarterly SEC fillings the followings:-
  • The officer has reviewed the report
  • From the knowledge of officer’s point of view the report should not provide any untrue statement or delete any statement of material fact whether partially or fully.
  • The financial condition of the company should be present fairly through the report.
  • The maintenance and establishment of internal controls to ensure material information relating to the company.
  • Any significant deficiencies that could affect the internal controls or any fraud disclosed by the officers.
  • Any significant change in the internal controls should be reported.
  • Corporate counsel responsibility: in case of any uncertainty occurs in regarding to material violation then the attorney has duty to the audit committee or directly to the board of directors.
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Sarbanes Oxley act 2002 and financial disclosure

“The Act authorizes the SEC to require public companies to disclose on a rapid and current basis, material changes in financial condition or operations”. (Tulsie Renata; May 2003). The act authorizes the Security and Exchange Commission to review disclosure every three years for once. Other disclosure will consider:-

  • Off balance sheet transaction
  • Audit committees financial expertise
  • Code of ethics for senior financial officers
  • Pro forma financial disclosure

(Tulsie Renata; May 2003).

In July 30, 2002 the Sarbanes oxley act was passed and the Nortel have had 5 years to get their internal control in orders. According to a reliable study it is estimated that large companies spent an average of $7.8M on section 404. The Nortel believes that Sarbanes Oxley act 2002 has improved governance, enhanced transparency, higher quality financial reporting. Consequently, it has certainly promoted the confidence among the investors for the reliability of financial report.

This act in company’s opinion has regained the public confidence in the U.S. capital market when it was contributing to trillion dollar losses in capitalization. So without any doubt such type of transparency gives investors with higher quality and more timely information. It helps the investor to make the decision about where they should allocate their capital. The opinions from other executives or professional advisors and stockholders represent an improved relationship particularly with a long term institutional investors. (Jonathan G. Katz, September 2005)

The section 402 provides the prohibition of personal loans to executives that enhance conflict of interest provisions. The act says that it shall be unlawful for a company to extend directly or indirectly or maintain credit or to renew an extension of credit, in the form of a personal loan or for any director or executive officer of the company. The loan which was made before Sarbanes Oxley is not subject to these new restriction. If the exception examined then it is seen that a few number of exception to this loan prohibition is found. These exceptions include certain home improvement, or manufactured home loan, certain consumer credit extension and certain loans by registered brokers and dealers.

According to section 408, the Security Exchange Commission is responsible for reviewing the periodical reports. This report is to be reported under exchange act by companies having securities listed on a regular and systematic basis. In addition, certain companies will more likely to report to the security exchange commission. (Client advisory, Aug 2002)

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The impact of Sarbanes Oxley act on Nortel Telecom Company

Nortel Networks is a giant corporate in telecom industry based in Canada and Head-Quartered in US. In this review, it will go through the effectiveness and comprehensiveness on SOX. The Sarbanes oxley is arranged by 11 titles which Nortel Networks needs to work in compliance with. In addition, a new set of tools is expected for the outside auditors to read and to understand the company’s standard procedure as a whole.

Investors have been benefited through Sarbanes oxley act for example stronger internal control, greater transparency, and elevated accountability that have resulted from this new law. It has been examined that the implementation of SOX is not a statutory change. Certainly, the investors are enjoying greater benefits from stronger and more reliable internal controls, greater transparency and elevated accountability that have resulted from this new law. (Interim Report Of The Commitee On Capital Markets Regulation, November, 2006)

Impact on IT division

According to the survey taken by the Bamboo consulting the following results need to consider regarding the impact of SOX act on IT division (July 21, 2008).

  • The result show that only 33 percent of respondent believe that the company will be able to take action of Sarbanes Oxley compliance to enhance their capital market, brand equity and liquidity, and that over time SOX may viewed in the same light as ISO certification.
  • More than 57 percent think that their IT department’s risk assessment process has been integrated adequately with the company’s overall risk assessment process for financial reporting.
  • Almost 68 percent respondents are in favor to encourage the publicity-traded companies to look beyond ‘merely complying’ with Sarbanes oxley. Many IT vendors recommend that the company had the possibility to

Code of ethics

Every employee, directors and executive officers now are bound by the company’s code of business ethics and conduct. The company adopted code of ethics and maintain it to comply with the Sarbanes oxley act 2002. The instruction of code of ethics is available at company’s website.

There is no evidence that the company has amendment to their code of ethics after implementation of the Sarbanes oxley act. The company is now more committed than ever before not to grant a waiver for non-compliance with the regulation. The company is now more alert about any procedure set forth in their code of ethics for any employee.

On March 12, 2007, the Securities and Exchange Commission or SEC has filed charges in the U.S. district court against four former senior executives of Nortel Networks Corporation. This action was taken for repeatedly engaging in accounting fraud to bridge gaps between the true performance, internal targets and Wall Street expectation of Nortel. These executives are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill.

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According to the SEC, their misguidance was done during the period of between September 2000 and January 2004. During that time Dunn served as CFO and CEO; Beatty as controller and CFO; Gollogly as controller and Pahapill as assistant controller and Vice President of Corporate reporting. From the court declaration it become known that each of the defendants betrayed the investors of Nortel and consequently their misconduct gave lead to billions of dollars losses. "The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets." said Linda Thomsen, director of the Commission’s Division of Enforcement. (Conte & England, 2007)

Specifically, their altered recognition policy violates the U.S. accounting principles. They improperly established reserves to meet earning targets and those actions boosted Nortel’s fourth quarter and fiscal 2000 revenue more than $1 billion, according to the SEC. (Stephen Taub)

So, the all things are captured and framed because of the Sarbanes oxley act 2002 and it is one of the impacts Nortel faced. The SOX act provides the evaluation of overall risk management and control the internal audit and financial policies efficiently. Furthermore, it is now possible with the help of Sarbanes oxley act. Sarbanes oxley act of 2002 provides greater opportunity to get an accurate financial report of company.

It helps the finance department to understand the clear picture of company’s inventory and assets. It is not far when the Sarbanes oxley will drive inventory and financial integration projects. The telecom executives are now seeking to more tightly integrated inventory management and report on financial standing. Now they are trying to understand how many inventory management systems they have. In addition, the realization of current inventory tracking system may way off. The reconciliation between the inventory and financial system will be possible in near future because of the SOX act.

Audit committee financial expert

The company makes sure the impartial supervision of the accounting finance and their business function by establishing an audit committee. This audit committee maintains the set of disclosure which is designed to ensure and control the required information in reports that they submit under the U.S. It is known that internal auditing is one of the most vital cornerstones of corporate governance.

The internal auditors keep a major role in regarding to financial disclosure. They are able to do many things such as monitoring the charters and checklists of board committee, educate the employees across the company on internal controls, provides advice to the audit committee and executive management, recommend to properly implementation of Sarbanes oxley act, evaluate the overall risk-management methodology and review the ethics office and the fraud hotline. (Barrier, Michael, 2003)

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The finance and inventory relationship

Network is the largest asset of a telecommunication provider and report on financial standing is not accurately possible without having knowledge about the network. It is known that the inventory management system is different from the financial system. Besides this, the employees who use them exist in totally different languages within a provider. Though they are different from each other and serve different function, they also however maintain a relationship and have common characteristics in some instances.

When the companies purchase the equipment for their planning or operation perspective, automatically the purchase orders are submitted into their enterprise resource planning system. The cost of the goods gets reported into the financial books as purchase value. Once the equipment is purchased, it does not get put into utilize and for this reason the gap occurred between the inventory system and the financial system. In most of the cases, it has been seen that financial system does not keep the record where the assets go in a network throughout the lifecycle. It may be the financial system is based on the equipment purchase. The reason behind it is that the inventory was not used actually anymore.

According to Daniel Kenyon, PeopleSoft’s vice president of communication industry strategy, “Financial systems should track every detail about inventory associated with any and every asset.” The financial system should be readied to track the entire network asset lifecycle from the time the need for the equipment arises to the time it is retired from the network.

From three points of view finance is concerned with inventory system-when the equipment is purchased, where it resides in a network and when it has no longer use in network. The purchase information according to Kenyon should be tracked by the financial system. In addition, the equipment cost, the inventory location in the network or any change in location, the serial number of equipment or the inventory lifespan are also needed to track.

The equipment location tracking is to be said relevant with the financial system. It should be understood about where the equipment is taxed. However, the service provisions and network planning are also need to track by the operations department. The network system has the equipment and it is resided within the same network. There is a minimum expectation how long the equipment will be lasted. This responsibility is within the boundary of inventory management system. Sarbanes oxley act deals with these in very efficient way and provides the best solution without any doubt.

It is a recommendation that the inventory management should recognize the need to request a port. The supply chain management is liable to include the request that can activate the port. Furthermore, there is the possibility of card arrival and systematically the inventory management system is responsible to know when it is available. The next step is to install the card by the engineer to make sure or to inform the inventory system that card is in the network. After that, the asset management will be informed about the card deployment.

Now, the point is that in past it was out of focus to integrate the inventory management and the financial system. Now Sarbanes oxley act is a driver that emphasizes the companies to integrate the financial function. But the question is whether it has direct impact on operation or not. The Sarbanes oxley act is an annual thing that must have to maintain as because it is the easiest way. “The more flow-through automation that can be achieved in the inventory management to finance and back to inventory management, the better off a service provider will be”. Most importantly, the Sarbanes oxley act is yet to be monitored. There is the uncertainty is working here. Because in future it may happen that the commission will go back to their traditional accounting methods.

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In regarding the application of Sarbanes oxley act to the public companies and the application to the non-government are not same. The benefit goes more to the public companies than the non-government companies.

Nortel is busy now to restart its financial function mainly because of Sarbanes oxley act. Each member of the audit committee now needs to be the member of the board of directors. It is very important to mention that the main impact of Sarbanes oxley act is in financial accounting and reporting. This act manipulates the Nortel telecom to set new laws that dramatically modify the rules and regulation. The companies were used to audit and report their financial information to the investment company and the Security Exchange Company.

Some implied recommendation from Sarbanes oxley act

  • The companies will establish an audit committee which is made of independent board members. The act recommends that there will be one member who must be financial expert within the board. He must have to have the capability to understand accounting principles and financial statements. Hence, this audit committee will be responsible in regarding to appointing, compensating and overseeing the activities of public accounting firms.
  • the accounting firms cannot provide the following services in regarding to those companies whose books they audit

Investment banking or service unrelated to the audit such as legal counsel (What the Sarbanes oxley Act Means for Board Members)

  • The employees who draw the attention to the board about accounting improprieties cannot be discriminated by the board members.
  • In regarding to any stock in the company it would not be legal to sell, acquire or transfer by the directors that they got during pension fund blackout periods. In case of violating this rule the directors have to refund and it is applicable to executive officer and the issuer of the stock as well.
  • Whoever breaks the law in regarding to a record or document must have to face fines and/or up to 20 years in jail.
  • The security and exchange commission has the authority to issue the order to prevent the officers or directors from violating the government regulation.
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  • Since august 30, 2002, the SEC (Security and Exchange Commission) has mandate the chief executive officer and the chief finance officer to sign their annual and quarterly reports.
  • The company will be expected to adopt the “code of ethics” that handles the conflict of interest. If they do not adopt it then they will have to explain why.
  • The annual and quarterly reports must comprises the “off balance sheet transactions, arrangements, obligations and other relationships” that may affect a company’s operation or financial condition.
  • The executive officers or directors will not get personal loans from the corporation.

Limitation of Sarbanes oxley act 2002

Limitation of section 404: according to this section the management and the independent auditors need to submit the report on the effectiveness of internal control over financial reporting. It is to be stated that the concept of this internal control is not new which the section 404 introduces. This section provides the instruction of mandatory reports on internal control by management and independent auditors. The belief behind this requirement is that it could prevent corporate scandals such as WorldCom and Enron. (Hsieu Lin Heng & H. Wu Frederick, 2006)

There are a number of reasons which misguided the aim of this section. First, the internal control was not conceptually designed to meet the requirements. The traditional concept of internal control is narrow in scope and procedural in application. Consequently, the accounting systems are supportive with this narrow concept. For this reason the auditors were not concern themselves with control beyond the accounting process.

However, the auditors of the Nortel Networks have identified some material weakness in internal control over financial reporting. Over the first course Restatement and second Restatement the independent auditors of the Nortel identified six weakness in the internal control over financial reporting. From the perspective of section 404 of the Sarbanes oxley act of 2002, or SOX 404, and the related rules the management of Nortel judged the impact of their internal control over financial reporting as at December 31, 2004. They used the method issued by committee of sponsoring organization of the Treadway commission, or COSO. The material weaknesses found by the internal auditor are as follows:-

  • Lack of compliance with written Nortel procedures for monitoring and adjusting balances related to certain accruals and provisions, including restructuring charges and contract and customer accruals;
  • Lack of compliance with Nortel procedures for appropriately applying applicable GAAP to the initial recording of certain liabilities including those described in SFAS No. 5, "Accounting for Contingencies'', or SFAS No. 5, and to foreign currency translation as described in SFAS No. 52, ""Foreign Currency Translation'', or SFAS No. 52;
  • Lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis and documentation of the application of U.S. GAAP to transactions, including but not limited to revenue transactions;
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  • Lack of a clear organization and accountability structure within the accounting function, including insufficient review and supervision, combined with financial reporting systems that are not integrated and which require extensive manual interventions; and
  • Lack of sufficient awareness of, and timely and appropriate remediation of, internal control issues by Nortel personnel. (Nortel Networks Corporation, UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Washington, D.C. 20549)

Interview section

The interview was taken on the control officer Michael E. Herzberg of “Grant Thornton”. The interview was to focus on the current perspective of the Sarbanes Oxley act in regarding to the SOX team. The interview results show that it is found difficult to implement the every angle of the Sarbanes Oxley act in every situation. The consequent result defines the problems of SOX and its policy & procedure.

Questionnaire section

There has not been used the traditional questionnaire method or something like that in this section. One hundred and twenty four employees of Nortel including executive officers, chief financial officer, and control officer are the source of this questionnaire part. The questionnaire section was very easy and clear for better understanding.

Objectives

  • To enable the reader to understand the integrated process of Sarbanes Oxley act and its implementation on Nortel telecom network.
  • To give a clear idea of gapping with problems of the Sarbanes Oxley act 2002.
  • To make aware about the advantages and disadvantages of the Sarbanes Oxley act 2002.

Analysis of the statistics and data collect from the questionnaire

10 questions were asked to the each participant and the full answer given by 95 employees out of 124. As usual it was expected that not all questions will get answered. The response was very positive and cooperation was excellent. The presence of hesitation can be said unmentionable. From the survey it has found that most of the employees who are in the mid level management are in favor of the Sarbanes Oxley act.

The reason behind it might be the clear certification of the financial statement. The liability may be the original fact behind this reason. It is because; the responsibility of maintaining Sarbanes Oxley act is mainly within the boundary of chief executive officer and chief financial officer. When the untrue financial certification found then these individuals become the victims.

Since the implementation of Sarbanes Oxley act of 2002, Nortel has followed all of its rules and regulation. The following are the outcomes of this questionnaire section:-

  • Better result from the SOX than the before
  • More reliable and functional process for the accountants as well as for the investors
  • Validity has been increased of the financial statements
  • SOX is able to face the upcoming challenges in the perspective of corporate level
  • Public disclosure meet all the requirements in regarding financial statements
  • The external conflict of interest has been increased
  • Provides criminal penalties for fraud manipulation and destruction.

Conclusion

It has to be mentioned that Sarbanes Oxley act of 2002 treats differently in accordance with the size of the organization. The implementation is one type to the big organization like Nortel and different to the small organization. This act was signed into law on July 30, 2002 in order to restore the confidence of the investors and to hold the CEO and CFO of public companies responsible for statements of the financial reports provided by their companies.

If those certifications founded untrue, they the individuals have to face criminal penalties. The Sarbanes Oxley act also has established the Public Company Accounting Oversight Board (PCAOB) which is overseen by the Securities and Exchange Commission (SEC). So, from this perspective SOX creates a potential need for additional information and reliability for the investors and overall publics. For example, the section 404 provides the rules for which the company needs to provide an internal control report in its annual report.


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