Adoption of the Sarbanes-Oxley Act of 2002 as an Important Piece of Legistion - Assignment Example

Adoption of the Sarbanes-Oxley Act of 2002 as an Important Piece of Legislation The purpose of this brief discussion is to describe the fundamentals of an effective accounting system, including the necessary internal control features for cash and accounts/notes receivable transactions. Congress passed the Sarbanes-Oxley Act (henceforth referred to as SOX) on July 25, 2002, by a huge and decisive margin (Chambers, Hermanson & Payne, 2010). The SOX was the state’s response to the corporate scandals of the early 2000s, namely Enron and WorldCom.

Congress sought to restore public confidence in the financial reporting system through the enactment of SOX. Section 404, in particular, treats on the requisites of the internal control system that companies must abide by. This section requires the filing of an internal control report where management must: (1) acknowledge that it is responsible for establishing and maintaining an effective internal control structure and procedures in support of financial reporting; and (2) evaluate and provide a statement on the adequacy and effectiveness of the internal control structure and procedures the company has adopted for financial reporting.

(Porter & Norton, 2011). The objectives of internal control are to ensure: (1) that assets are safeguarded and used for business purposes; (2) that business information is accurate; and (3) that employees and managers comply with laws and regulations (Warren, Reeve & Duchac, 2008, p. 306). There are five elements of internal control set forth by the Integrated Framework, specifically: the control environment, or the overall attitude of employees and management about controls; risk assessment, which includes the assessment of various risks pertaining to the business; control procedures, which provides reasonable assurance that business goals are achieved; monitoring, referring to the evaluation of the performance of the internal control system; and information and communication, which provides feedback to management about internal control (Warren, Reeve & Duchac, 2008, p. 355). Control procedures are those actions that may be done by company personnel to ensure faithful observance of policies imposed by management.

The important accounting controls pertain to the safeguarding of assets and the assurance that accurate financial statements are produced. Among the internal control procedures sound accounting practices require a business to observe are: (1) Proper authorizations that identify only those personnel empowered to perform certain acts, and for such duties to be rotated among personnel to prevent collusions; (2) Segregation of duties whereby those who are charged with the physical custody of assets are separate from those who are charged with the accounting of those assets; (3) Independent verification that entails activities such as inventory counts; (4) Safeguarding of assets and records to ensure that both these items are sufficiently protected; (5) Independent review and appraisal which is discharged by internal audit; and (6) Design and use of business documents that entails control over source documents (Porter & Norton, 2011, p. 335). There are certain specific control procedures that must be observed in exerting control over cash receipts over the counter.

First, cash registers show customers the amount ringed, up, deterring sales clerks from entering an amount less than that received and pocketing the balance. Second, the cash register tape is locked in, and the amount it records as determined by accounting should tally with the amount of cash remitted to the cashier. Third, pre-numbered customer receipts prepared in duplicate (one for the customer and one for the salesclerk) are effective control tools. The salesclerk is held accountable for a series of receipt numbers and the accounts collected from them.

There are also certain control procedures pertaining to receipt of payment for accounts receivable. The principal concern in this case is to ensure that checks sent through the mail or courier should be duly applied to the account balance of the customer who sent the check. Some checks are sent through the mail; therefore, two persons should always be present to open the mail. One person opens the mail, counts the money received, and prepares in triplicate a control list (called the prelist) of amounts received for the day and their corresponding accounts, in the presence of the other person.

The original is brought by the second person, together with the cash, to the cashier. The duplicate copy is submitted to the accounting department as basis for recording the increase in Cash and decrease in Accounts Receivable. The triplicate copy is retained by either of the persons who opened the mail. Monthly customer statements provide additional verification. Payments sent which may not have been listed and deposited in the bank would not appear in the customer statement, and the balance would not have been adjusted.

The customer would have a chance to call and verify from the company why his payment has not been applied against the account, in which case the anomaly would be discovered. Custodians of the cash received through mail, or those employees responsible for record keeping and who authorize adjustment of customers’ accounts, should not be the same employees who prepare and send customer statements (Porter & Norton, 2011, p. 336). The foregoing are but a few of the basic, principles and procedures governing internal control in general, and control of cash and accounts receivable in particular.

Without their observance, internal control may not be effectively imposed to the standards required by the Sarbanes-Oxley Act. References Chambers, D.; Hermanson, D. R.; & Payne, J. L. (2010, Sept.) “Did Sarbanes-Oxley Lead to Better Financial Reporting?” CPA Journal, 80(9), 24-27 Porter, G A & Norton, C L (2011) Financial Accounting: The Impact on Decision Makers, Seventh edition. Mason, OH: South-Western Cengage Learning Warren, C S; Reeve, J M; & Duchac, J (2008) Financial and Managerial Accounting, tenth edition.

Mason, OH: South-Western Cengage Learning