Using Wikipedia (www.wikipedia.org.), look up the entry for the Sarbanes-Oxley Act.
Code of Ethics Disclosure: The SEC requires companies to disclose whether they have adopted a code of ethics for senior financial officers. If a company has not adopted such a code, it must explain why it has not done so.
Auditor's Role: The auditor is required to attest to and report on the assessment made by management regarding the effectiveness of the company's internal control over financial reporting. This means that the auditor must evaluate and report on the accuracy of management’s assessment and the internal controls themselves.
Who is responsible for establishing and maintaining an adequate internal control structure?
Management is responsible for establishing and maintaining an adequate internal control structure under Section 404 of the Sarbanes-Oxley Act. This responsibility specifically lies with the company's top executives, including the CEO and CFO. These executives must ensure that the internal control system is effective in providing accurate and reliable financial reporting.
What must the report contain?
The internal control report required by Section 404 of the Sarbanes-Oxley Act must contain the following elements:
Management's Responsibility Statement: A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
Assessment of Effectiveness: An assessment, as of the end of the most recent fiscal year of the company, of the effectiveness of the internal control structure and procedures for financial reporting.
These components ensure that management not only acknowledges its responsibility for internal controls but also evaluates and reports on the effectiveness of these controls, which is crucial for accurate financial reporting and investor protection.
Does the SEC require disclosure as to whether the company has adopted a code of ethics for senior officers?
Yes, the SEC requires companies to disclose whether they have adopted a code of ethics for senior financial officers. This disclosure is mandated by Section 406 of the Sarbanes-Oxley Act. If a company has not adopted such a code, it must explain why it has not done so. This requirement aims to promote ethical conduct among senior management and ensure transparency for investors.
Is the auditor required to report on the assessment concerning internal control that management has made?
Yes, the auditor is required to report on the assessment of internal control over financial reporting that management has made. Under Section 404(b) of the Sarbanes-Oxley Act, the auditor must attest to and report on the effectiveness of the company's internal control over financial reporting. This includes evaluating management's assessment and independently testing the effectiveness of the internal controls. This requirement enhances the reliability of financial reporting and helps ensure that companies maintain adequate internal controls.
Look over the table of contents and find the section that describes Section 404.
After reading the section, respond to the following questions.
Answering these questions will help you understand what Section 404 requires of management's internal control report.
1. Who is responsible for establishing and maintaining an adequate internal control structure?
Ans: Management.
2. What must the report contain?
Ans: Assessment of effectiveness.
3. Does the SEC require disclosure as to whether the company has adopted a code of ethics for senior officers?
Ans: Yes.
4. Is the auditor required to report on the assessment concerning internal control that management has made?
Ans: Yes.
Expert Explanations
Section 404 of the Sarbanes-Oxley Act (SOX) outlines specific requirements for management regarding internal control over financial reporting.
Responsibility for Internal Control Structure: Management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting. This responsibility lies specifically with the company's top executives, including the CEO and CFO.
Contents of the Report: The internal control report must include; a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, and an assessment of the effectiveness of the internal control structure and procedures for financial reporting, as of the end of the most recent fiscal year of the company.
Expert Explanations
Section 404 of the Sarbanes-Oxley Act (SOX) outlines specific requirements for management regarding internal control over financial reporting.
Responsibility for Internal Control Structure: Management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting. This responsibility lies specifically with the company's top executives, including the CEO and CFO.
Contents of the Report: The internal control report must include; a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, and an assessment of the effectiveness of the internal control structure and procedures for financial reporting, as of the end of the most recent fiscal year of the company.
Code of Ethics Disclosure: The SEC requires companies to disclose whether they have adopted a code of ethics for senior financial officers. If a company has not adopted such a code, it must explain why it has not done so.
Auditor's Role: The auditor is required to attest to and report on the assessment made by management regarding the effectiveness of the company's internal control over financial reporting. This means that the auditor must evaluate and report on the accuracy of management’s assessment and the internal controls themselves.
Who is responsible for establishing and maintaining an adequate internal control structure?
Management is responsible for establishing and maintaining an adequate internal control structure under Section 404 of the Sarbanes-Oxley Act. This responsibility specifically lies with the company's top executives, including the CEO and CFO. These executives must ensure that the internal control system is effective in providing accurate and reliable financial reporting.
What must the report contain?
The internal control report required by Section 404 of the Sarbanes-Oxley Act must contain the following elements:
Management's Responsibility Statement: A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
Assessment of Effectiveness: An assessment, as of the end of the most recent fiscal year of the company, of the effectiveness of the internal control structure and procedures for financial reporting.
These components ensure that management not only acknowledges its responsibility for internal controls but also evaluates and reports on the effectiveness of these controls, which is crucial for accurate financial reporting and investor protection.
Does the SEC require disclosure as to whether the company has adopted a code of ethics for senior officers?
Yes, the SEC requires companies to disclose whether they have adopted a code of ethics for senior financial officers. This disclosure is mandated by Section 406 of the Sarbanes-Oxley Act. If a company has not adopted such a code, it must explain why it has not done so. This requirement aims to promote ethical conduct among senior management and ensure transparency for investors.
Is the auditor required to report on the assessment concerning internal control that management has made?
Yes, the auditor is required to report on the assessment of internal control over financial reporting that management has made. Under Section 404(b) of the Sarbanes-Oxley Act, the auditor must attest to and report on the effectiveness of the company's internal control over financial reporting. This includes evaluating management's assessment and independently testing the effectiveness of the internal controls. This requirement enhances the reliability of financial reporting and helps ensure that companies maintain adequate internal controls.