Chapter 17 - Solution Manual

V one of the more controversial provisions of sox is

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v. One of the more controversial provisions of SOX is Section 404 that contains two subsections sections – 404(a) and 404(b). 404(a) outlines management’s responsibility under the act, and requires that the annual report include an internal control report by management that: (1) Acknowledges its responsibility for establishing and maintaining adequate internal control over financial reporting and (2) Contains an assessment of the effectiveness of internal control over financial reporting as of the end of the most recent fiscal year. It also requires the principal executive and financial officers to make quarterly and annual certifications as to the effectiveness of the company’s internal control over financial reporting. Section 404(b) outlines the independent auditor’s responsibility. It. requires the auditor to report on the internal control assessment made by management and also to make a separate independent assessment of the company’s internal controls over financial reporting. The result of these provisions is to require the auditor to issue two separate opinions. The first opinion states whether management’ assessment is fairly stated, in all material respects. The second opinion indicates whether, in the auditor’s opinion, the company maintained, in all material respects, effective internal control over financial reporting as of the specific date, based on the control criteria used by management. In summary, the auditor reports: (1) on whether management’s assessment of the effectiveness of internal control is appropriate, and (2) whether he or she believes that the company has maintained effective internal control over financial reporting. The cost of compliance with this legislation was seen by some as excessive. According to one study, the net private cost amounted to $1.4 trillion. This amount was obtained by an econometric estimate of the loss in total market value caused by SOX. That is, the costs minus the benefits as perceived by the stock market as the new rules were enacted. Zhang’s study has since been criticized on the grounds that no single factor can be attributed as the cause of stock market behavior. Her critics note that all of the stock market trends around the time SOX was enacted were attributed to the legislation, while the subsequent increase in market value was ignored. Never-the-less, a survey by the Financial Executives Institute in 2005 estimated that companies’ total costs for the first year of compliance with SOX averaged $4.6 million. . The new provisions that emphasize the importance of internal control have obvious benefit; however, a standard rule of thumb for internal control measures is that the benefits should outweigh their costs. Some critics of SOX maintain that its effect has been that the costs of regulation exceed its benefits for many corporations. SOX was effective for companies meeting the definition of accelerated filers (having an equity market capitalization of over $75 million and filing a report with the SEC) for fiscal years Unknown Deleted:
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