Managerial Accounting

APPENDIX I

The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

ANSWERS TO REVIEW QUESTIONS

I-1 The Sarbanes-Oxley Act of 2002 was enacted by the U.S. Congress to bring about reform in companies’ financial reporting processes, as well as the internal and external auditing of the financial reporting process.

I-2 Internal controls over financial reporting refers to the broad set of policies, processes, and procedures that enable both the organization’s management and interested outside parties to have confidence in the organization’s financial reports. Internal controls over financial reporting include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets, and separation of duties.

I-3 The Public Company Accounting Oversight Board (PCAOB) is an agency established by the Sarbanes-Oxley Act to oversee and investigate the audits and auditors of public companies, and sanction both firms and individuals for violations of laws, rules, and regulations.

I-4 SOX 302 is a section of the Sarbanes-Oxley Act, which requires the signing officers of a company’s financial reports to establish, maintain, and periodically evaluate the effectiveness of the company’s internal controls over financial reporting.

I-5 SOX 404 is a section of the Sarbanes-Oxley Act, which requires a company to include in its annual report a report on the company’s internal controls over financial reporting.

I-6 SOX sections 302 and 404 are controversial because they place a great burden on businesses to document and report on their internal controls over financial reporting. This burden is particularly costly for small businesses, which often do not have the resources to fully comply with SOX 302 and 404. Some in Congress have called for the repeal of SOX or its modification. Other lawmakers have urged that its requirements be waived for small businesses. Many, however,...