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Chapter 1: Question 26Q (page 23)

The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?

Short Answer

Expert verified

Some of the key provisions of the legislation include:

  • It is essential for CEO and CFO to review all financial reports.
  • Financial report does not include any misrepresentations.
  • Fair representation of information in the financial report.

Step by step solution

01

Meaning of Fraud

When a culprit intentionally commits any immoral act to harm someone in monetary terms, then such activity is called fraud. Various laws and rules are implemented to protect society from these fraudulent activities.

02

Key provisions of the legislation

Some of the key provisions of legislation include:

  • CEO and CFOs are required to verify the accuracy and completeness of financial statements and disclosures as well as forfeit bonuses and profits in case of restatement of accounts.
  • It is also necessary that the audit committeesshould include independent members and members with financial expertise.
  • Code of ethics is necessary for senior financial officers.
  • Stronger independence rules are implemented for auditors, and
  • An oversight board is set up for accounting practices.

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Most popular questions from this chapter

Differentiate between 鈥渇inancial statements鈥� and 鈥渇inancial reporting.鈥�

CA1-14 (Securities and Exchange Commission)

The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organised into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority.

Instructions

(a) Explain from where the Securities and Exchange Commission receives its authority

(b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.

(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

Briefly describe the FASB/ IASB convergence process and the principles that guide their convergence efforts.

(FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

  1. GAAP is the term used to indicate the whole body of FASB authoritative literature.
  2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.
  3. The primary governmental body that has influence over the FASB is the SEC.
  4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.

The following comments were made at an Annual Conference of the Financial Executives Institutes (FEI). There is an irreversible movement toward the harmonization of financial reporting throughout the world. The international capital markets require an end to:

  1. The confusion caused by international companies announcing different results depending on the set of accounting standards applied.
  2. Companies in some countries obtaining unfair commercial advantages from the use of particular national accounting standards.
  3. The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements.
  4. The inefficiency of international companies having to understand and use a myriad of different accounting standards depending on the countries in which they operate and the countries in which they raise capital and debt. Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them.
  5. The inefficiency of investment managers, bankers, and financial analysts as they seek to compare financial reporting drawn up in accordance with different sets of accounting standards.

Instructions

  1. What is the International Accounting Standards Board?
  2. What stakeholders might benefit from the use of International Accounting Standards?
  3. What do you believe are some of the major obstacles to convergence?
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