Ethics and financial reporting assignment

Instead of focusing on celebrities, athletes or other CEOs, boards should be comprised of a mix of “ functional and industry experts” who have the business’ best interest at heart (p. 6). Their involvement and understanding of the financial environment is crucial, as it allows them to intervene when necessary and choose the audit committee, CEO and CFO judiciously. It is now imperative for boards of directors to focus on risk management and internal control procedures, and to do so, board composition is critical. They should also eliminate any leniency while questioning the CEO and focus on best practices in the company. . Audit committees of public company boards of directors The audit committees have been subjected to new constraints on operating frameworks and committee composition ever since the passage of the Sarbanes-Oxley Act (Sherman, Cary ; Brust, 2009). The audit committee is a subset of the Board of Directors. They are usually in charge of various monitoring functions including financial records, external auditors, regulatory compliance, internal controls and reviewing risk with the senior management team (p. 1).

The audit committee has been impacted by the negative publicity emanating from the various financial scandals, because they failed to ensure the financial statements’ compliance with established accounting principles and disclosure standards (ICC, 2009). Audit committees incorporating SOX principles have spent a lot of time on SOX compliance issues, while sometimes neglecting strategy concerns. However, once past the learning curve, they started focusing more on increasing business value (p. 1). They are paying more attention to effective accounting principles and risk, since they have to help restore confidence in corporations (p. ). They need to make sure financial projections are sound and accurate based on earnings and income estimates, before the information is released to the public. They should also assist management mitigate financial risks, as their responsibility is to understand and sign off on management’s approach (p. 2). Ever since SOX, restatements have increased (from 50 to 3000 from 2005 to 2007; increasing costs and driving declines in stock prices) and audit committees have needed independent auditors more often to be compliant (p. 3).

It should also contain an assessment (at the end of the fiscal year) stating that the structure and procedures were followed effectively. Moreover, it directs the SEC to make sure each issuer has adopted a code of ethics for its senior financial managers (responsible for the financial statements’ integrity and accuracy). It also required the SEC to emphasize prompt disclosure when there are any changes or alterations made to the issuer’s code of ethics (Form 8-K). 6. The accuracy of public company financial statements CEOs and CFOs have both been under a lot of pressure to maintain the accuracy of financial statements.

Section 302 of SOX explicitly states that they both need to prepare a statement certifying that the audit report has not been tampered with (Center for Audit Quality, 2009). Anyone not acting in compliance with this section will be severely punished. Moreover, the board of directors and the audit committee are supposed to be vigilant and sign off on the accuracy of the company’s financial statements. Ultimately, it is all of their responsibility; otherwise, their careers and reputations, as well as the company’s may suffer from the negative publicity of a restatement.

Section 906 (a) and (b) provide that the CEO & CFO certify that financial statements filed with the SEC are fully compliant with requirements set forth in the SEC Act of 1934. A SOX violation is treated as a violation of the SEC Act of 1934. Per Jackson & Kleckner (2004), CEO and CFO report certifications claim the following: * They have reviewed the report. * Based on their knowledge, the report is truthful and does not omit information. * Based on their knowledge, the financial statements fairly represent, in all material aspects, the financial position, results of operations, and cash flows. They are responsible for disclosure controls and procedures and have reviewed those procedures within the 90 days preceding the report filing date. * All material weaknesses in internal controls have been disclosed to the audit committee and the independent auditors. Additionally, all known instances of fraud, material or not, that involve personnel involved with internal control have also been disclosed. * Significant changes to internal controls subsequent to the most recent evaluation have been disclosed, including corrective action with regard to deficiencies.

CEOs and CFOs face criminal penalties here, if found to be dishonest. Violations of these sections must be “ knowing and intentional” to be subject to liability (AICPA, 2009). Intentional violation of these certifications can result in fines up of to $5 million, and as much as 20 years in prison. This could occur under Section 906 (c) (1) if the officer “ willfully certifies” financial statements which misrepresent a company’s financial condition (Johnson ; Johnson, 2005). It also provides for a $1, 000, 000 criminal penalty and 10 years imprisonment for knowingly making a false certification.

Similar to Sections 302 and 906, the prison sentences faced in violation of Sections 802 and 1102 are very severe. They were enacted to ensure that CEO’s, CFOs, (and their auditors) comply with these respective SOX provisions. As stated earlier though, there are no guarantees regarding management’s adherence to SOX. Consider this past week, where former CFO Frank DiPascali, Bernard Madoff’s right-hand man, pleaded guilty to conspiracy and other charges, which contradicted claims made by disgraced financier Madoff that he acted alone.

DiPascali said that account statements showing the firm was making trades for clients were “ all fake” and something “ I knew, Bernie Madoff knew and other people knew” (Hays ; Neumeister, 2009). Madoff is serving a 150 year prison sentence for a Ponzi scheme that wiped-out the life savings of thousands of people, wrecked charities, and created great doubt in our financial system, facilitating in part the severe recession from which we are slowly emerging. Per Hays and Neumeister (2009), DiPascali’s cooperation with authorities over the past year may earn him some leniency.