1. In two to three paragraphs, describe the Sarbanes-Oxley Act and why it is important to the accounting profession. (15 points)
The Sarbanes-Oxley Act was passed in 2002 by Congress after a series of scandals involving companies such as Enron, WorldCom, and Tyco. This was passed because of shady transactions and misrepresented financial data which caused shareholders to lose millions of dollars and their trust in investing in public companies. It was passed to create new rules of accountability and accuracy for public companies.
It is important to the account profession because companies were required to have met certain conditions or face the consequences. The Act requires all public companies to create an audit committee, which will be part of the board of directors, and will need to include at least one accountant or someone who is “financially literate” and knows what he/she is doing at all times.
It also requires public companies to hire outside firms to perform their financial audits on an annual basis, no company can use the same firm for more than five years at a time, allowing a different set of eyes to look at their financial statements and taking away the risk of fraud.
Each public company’s Chief Executive Officer (CEO) or Chief Financial Officer (CFO) is required to certify that the company’s financial date is accurate and correct. If they’re not correct either the CEO and/or the CFO can face criminal penalties if there is a hint of fraud within the reports. Finally, the Act makes it a crime if any document is either destroyed or concealed from government investigation.
2. Name and briefly describe the five components of COSO’s internal control framework.(10 points)
The Control Environment: This relates to the control consciousness of people within the work environment/organization. This is the basis for all the
other components of internal control.
Risk Assessment: This refers to the organization’s identification, analysis, and management of the risks related to the financial statement preparation. In order to ensure that the financial statements are presented fairly and within regulation with the general accept accounting principles.
Control Activities: This refers to the organization’s policies and procedures which help ensure that the necessary actions are taken to speak out and address potential risks.
Information and Communication: This focuses on the “nature and quality” of information that is needed in order to effectively control the systems used to develop such information and reports used to communicate effectively.
Monitoring: This involves assessing the quality and effectiveness of the company’s internal control process over time. This includes assessing the design and operation of controls, the compliance with polices and procedures, and making sure everything is done according to the rules.
3. Describe the relationship between the Sarbanes-Oxley Act and COSO. (10 points)
There are some close relationships between the SOX and the COSO. The COSO would essentially the framework for the SOX which took effect in 2002, forcing businesses to comply with different rules, policies, and producers. Though SOX is more rigorous about setting these standards and have implemented more guidelines, the COSO was essentially what the SOX Act used in order to stop fraud within a business setting.
4. Tom Jackson is a CPA who really likes to go to Las Vegas, play poker, and bet on football games. Tom knows that the accounting profession disapproves of gambling, but because he spends a lot of time studying sports facts and how to win at poker, he feels that he is simply making educated decisions based on facts. He says that this is no different from using accounting
information to buy stocks. Use the fraud triangle as a basis to comment on Tom’s gambling activities. (15 points)
The fraud triangle consists of Opportunity, Pressure, and Rationalization. Tom Jackson has all three of these traits when it comes to his gambling issue.
Rationalization: Tom feels that what he’s doing isn’t wrong and that it’s okay for him to gamble because he feels that it’s the same way he would use his accounting skills when trying to buy stocks. He has the information, the knowledge, and the facts needed in order to invest his money into something that’s essentially bad because his profession disapproves of his gambling habits. How he studies each stock he invests in, he also does the same with his gambling habit. He feels that he is making educated decisions based on what facts he knows, just like he would when it comes to his profession.
Opportunity: Because he is an accountant and his savvy with numbers he feels that he could use his skills into something else in order to make a personal gain, essentially gaining more money into his pocket. Since he had learned how to win at poker, gaining knowledge in sports facts, and learning how to gamble as a whole he has the opportunity to place a bet on different subjects. Since no one has confronted him about his gambling habits and is unaware of his actions, he feels that he’s able to continue doing so without worrying about losing his job.
Also, his company may not have told him about how gambling is wrong because there isn’t a rule that stops him, so he feels that it’s right because there isn’t a set rule about it.
Pressure: Pressure can come into play depending on what Tom’s condition is. Tom could be getting paid less than what he needs in order to pay his bills and gambling is a means of making extra cash to support himself or his family. His boss could constantly ride him and tell him that his job is at stake each day if the “numbers” don’t show up or add to what his boss actually wants, basically not making his quota for that day or month.