ACT 211, Principles of Accounting I
Ethics and Social Responsibility
Sarbanes-Oxley Act of 2002
Like all structures, accounting requires a strong foundation. For accounting, part of that foundation is the ethical behavior of those who practice its rules. Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior: Investors, creditors, government, and the general public rely on ethical behavior among those who record and report the financial activities of businesses. A lack of public trust in financial reporting can undermine business and the economy.
The dramatic collapse of Enron in 2001 and the dismantling of the accounting firm Arthur Andersen in 2002 severely shook investors’ confidence in the stock market. Some questioned the creditability of corporate America and well as the accounting profession.
Public outrage over a number of accounting scandals at high-profile companies increased the pressure on lawmakers to pass measures that would restore creditability and investor confidence in the financial reporting process. These pressures resulted in the issuance of the Public Company Accounting Reform and Investors Protection Act on 2002, commonly referred to as the Sarbanes-Oxley Act (SOX), named for the two congressmen who sponsored the bill.
On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002 (H.R. 3763). This law affects the accounting profession like no bills enacted since The Security Exchange Acts of 1934 and the Securities Act of 1933. It is a federal law that mandates certain practices in financial record keeping and reporting for corporations.
The Sarbanes-Oxley Act provides for the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators. These increased requirements have dramatically increased the need for good accounting and, at the same time, highlighted the value of accounting information to investors and creditors.
This law contains eleven provisions (Titles I-XI) that place requirements on all U.S. public companies and their management and boards of directors, as well as public accounting firms. A number of provisions also apply to privately held companies, such as the willful destruction of evidence to impede a federal investigation.
Please familiarized yourself with the bill. Use the link below to assist in completing this assignment: https://www.congress.gov/bill/107th-congress/house-bill/3763
In addition to the Sarbanes-Oxley act, the United States Occupational Safety and Health Administration (OSHA), administers and enforces the Whistleblower provisions of more than twenty (20) statutes including financial reform. These statutes protect employees from retaliatory actions administered by employers. You can read more here: https://www.whistleblowers.gov/
Important as such legislation is in supporting the ethical foundation of accounting, it is equally important that accountants themselves have their own personal standards for ethical conduct. Accountants need to develop their ability to identify ethical situations and know the difference between right and wrong in the context of accounting topics. One of the keys to ethical decision making is having an appreciation for how your actions affect others.
When you face ethical dilemmas in your professional life (and also personal life), you can apply the following framework as you think what to do:
I. Identify the ethical situation and the people who will be affected (the stakeholders).
II. Identify prevailing frameworks (laws, standards, codes, etc.) to use as a guide.
III. Specify the options for alternative courses of action.
IV. Understand the impact on the stakeholders.
V. Decide on the best course of action.
Required:
Complete requirements 1-5 below. Be sure to provide thorough answers by addressing each of the prompts. You will be required to identify specific elements of Sarbanes-Oxley (1-4) as outlined in each requirement.
1. Title I, requires the establishment of the Public Company Accounting Oversight Board (PCAOB). Provide an overview of Title I and its major sections.
2. Title II, Section 201, dictates that auditors providing audit services are not to render certain services to the company client. Further, the law requires preapproval by the audit committee for those non-audit services that are not expressly forbidden by this Act. There are eight specific services that are outside the scope of practice of auditors (prohibited activities). Please list, explain, and include the importance of prohibiting these activities. See the SEC link here for expanded information. https://www.sec.gov/info/accountants/audit042707.htm
3. Title II, Section 203 outlines the rule for audit partner rotation. Please explain the proposed rule and why this provision is deemed important.
4. Title IV, Section 404 specifies important work required by auditors during the course of an audit. Please explain. Include in your explanation, how this information is communicated to the public and users of financial statements.
5. Required: Address the ethical dilemma below by applying the framework above to solve the problem.
Ethical Dilemma: You work for a large publicly-held corporation as a staff accountant. You recently became a licensed CPA in the state of Massachusetts and you are bound by a code of ethics and rules of professional conduct.
a. Three months ago, a new CFO was hired. She is very experienced and receives substantial compensation package in the form of salary and bonuses paid in shares of company stock. She is a dynamic leader. She seems to like your work. At last month’s team building event, she engaged in a private conversation with you, indicating that she thought that you were a great candidate for a future promotion to a management position.
b. Last week, at the end of the quarter, she called you into her office and verbally informed you that a substantial liability was overstated and instructed you to make an adjusting journal entry. As a result of the adjustment, quarterly net income increased ten percent. During the quarter, there was a substantial drop in sales. This adjustment would more than cover the decrease in sales. In fact, it would substantially boost the favorability of the stock.
c. This adjustment seems to be out of the range of normal for the company and you feel uncomfortable. This is a delicate situation. You do not want to lose your job by not following directions of the CFO but you also do not want to violate any ethical standards or company policies.
d. You are aware of the Sarbanes-Oxley Act and you review the provisions to determine if this adjustment is in violation of any of its provisions. You also review the company policies for guidance. Please provide an explanation of possible requirements and/or violations, as outlined in the law. Consider internal controls that may be in place by the company given the dollar magnitude of the adjustment. Consider the information that you may need to substantiate making the adjusting entry and how you will respond to the request of the CFO. Use the framework outlined above to decide on the best course of action.
Note: As part of completing this assignment, please review the University’s academic integrity policies to avoid unintentional plagiarism.
The final paper may not exceed three pages in length (double spaced), plus any exhibits.