Sarbanes-Oxley Act

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Historical Information: Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act of 2002, is a United States federal law that was passed due to a number of major corporate financial scandals such as including Enron, Tyco International, and WorldCom (now MCI). The first and most important part of The Sarbanes-Oxley Act is the Public Company Accounting Oversight Board which is in charge of overseeing, regulating, and inspecting accounting firms as auditors of public companies. The House passed the Sarbanes-Oxley Act on April 25, 2002, by a vote of 334 to 90. The House then looked at the “Corporate and Audtiting Accountablitly, Responsibility, and Transparency Act” with the support of President Bush and the Securities Exchange Commission. Senator Sarbanes (D-Md) was working on a bill of his own which was passed by the Senate Banking Committee on June 18, 2002. Then on June 25, 2002, WorldCom revealed that it had overstated its earnings by improperly recording the accounting for its operating costs. The Committee aprroved the final bill on July 24, 2002, and gave it the name “the Sarbanes-Oxley Act of 2002.” On July 30, 202, President Bush signed it into law.

Historical Information: Scandals That Lead to the Sarbanes-Oxley Act One such scandal that led to the creation of SOX was that of the Enron corporation. The company’s managers reported fraudulent financial accounts, but after exposure of such illegal practices, the company declared bankruptcy in December of 2001. The Sarbanes Oxley Act was prompted by this case and others because the illegal accounting activities of Enron officials. Since it took a long time to discover such illegalities, Congress knew that a change must be in order to improve prevention techniques against such scandals as Enron from occuring.

In a scandal similar to Enron, WorldCom energy company falsely reported $3.8 billion of operating expenses, allowing it to claim a profit when it was in fact losing money. In December 2001, WorldCom reported a $1.4 billion net profit. The company admitted that it had incurred losses, but could not specify the amount. WorldCom shares were suspended and are priced at nearly nothing, where its prices dropped from a high of $64.50 in June 1999. WorldCom insisted that it would stay in business but is unsure of staying out of bankruptcy. Since WorldCom is the most important computer company in the war against terrorism, the United States government will not allow the company to go into bankruptcy. WorldCom provides internet services to over 75 federal agencies such as the Defence Department.

Technical Information: How the Sarbanes-Oxley Act Affects Information Systems The Sarbanes-Oxley Act of 2002 (SOX) affects Information Systems in a few key ways. For one, it affects the way in which publicly owned companies report their financial information. Most large corporations that are affected by the Sarbanes-Oxley Act use Information Systems to create their financial documents such as their Balance Sheet, Income Statement, and their Cash Flows statement. Because Information Systems are used to prepare these statements, the credibility of the statements relies not only on approval of the CFO and CEO, but now also upon the CIO (Chief Information Officer). This is important because SOX now delegates that more control must be taken when a company prepares its financial statements information systems. As stated by PCAOB (Public Company Accounting Oversight Board) #2 “The nature and characteristics of a company’s use of information technology in its information system affect the company’s internal control over financial reporting.”

Another technical aspect of SOX is that IT is expected to adhere to the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework. This framework has five areas in which IT should operate. First, the IT department needs to understand what its company must do to comply with SOX regulations as well as perform Risk Assessment which identifies its department’s areas of risk. Second, IT should provide an environment in which the employees feel as though they are contributing to the company’s success. This means that employees will properly learn the uses of the software and be confident working in the control environment. Next comes the designing, creation, and testing of the software, which should track who enters data into they system so the company is aware of who is changing the books. These protective measures are called Control Activities because they enforce a more stringent control over the use of the company’s information systems. Fourth is the monitoring of the company’s databases to make sure that information is being entered correctly and that the databases are functioning properly. Finally IT must stress that the information be entered in a timely fashion so they have time to record and check it. These five procedures help the IT department control the validity, quality, and timeliness of the information that is being entered into its information systems.

Ernst & Young is one of the largest professional services firms in the world and one of the Big 4 accounting firms, along with PricewaterhouseCoopers (PwC), Deloitte Touche Tohmatsu (Deloitte) and KPMG. Ernst & Young main service lines. One is Assurance and Advisory Business ServicesGlobally, in which EY has the highest revenues of the Big Four in this area and this service line accounts for 70% of its revenues. This compromises Assurance, Business Risk, Fraud Investigation and Disputes, Technology & Security Risk, Actuarial and Business Advisory services. Two is Global Tax Advisory Services which provides flexible and cost effective independent tax services for the tax department. Lastly, three is Transaction Advisory Services which offers seasoned transaction experience from strategy and execution through to post-deal solutions.

PricewaterhouseCoopers (or PwC) is again one of the largest professional services firms in the world along with Ernst &Young, Deloitte Touchhe Tohmatsu and KPMG. PricewaterhouseCoopers has up six service lines. One is Audit and Assurance which examination by an independent third party of the financial statements of a company. Two is Tax which includes the plans and compliance with local tax laws. Three is Advisory and Consulting wich allows PwC to look over performance and improvement. Four is Consumer and Industrial Products and Financial Services. Five is Energy, Utilities and Mining. Lastly, six is Technology, Information, Communications and Entertainment.

Ernst & Young and PricewayerHouseCoopers are both examples of how companies today apply SOX to their corporations and also are examples of the technical uses of the Sarbanes-Oxley Act. There are many other accounting firms that could be used as examples as well but Ernst& Young and PricewaterHouseCoopers are two of the four widely known firms.

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Sarbanes-Oxley Act

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