As a result of the Enron debacle and based on a wave of revelation of accounting irregularities and securities fraud inter linked to Adelphia, Tyco and WorldCom, Congress passed the Sarbanes-Oxley Act (SOX) in June 2002. This was the most significant securities law change since passage of the original Federal Securities Law in 1933 and 1934. This paper provides background information on sections 302 and 404 of the Act. Based on that information, The Internal Controls Report of management and the Independent Auditor's Report of General Motors Corporation and Ford Motor Company from the years 2002 through 2008 are summarized, analyzed, and compared.
Keywords: Financial reporting, Auditors, Management, Internal controls, Sarbanes-Oxley Act.
In response to numerous accounting scandals that rocked corporate America at the turn of the 21st century, the US Government passed the Sarbanes-Oxley Act of 2002 (SOX). Scandals affecting corporations such as Tyco International, Enron, WorldCom, HealthSouth, and Adelphia resulted not only in the loss of millions of dollars in shareholdings and thousands of jobs, but also in the decline of public trust in financial accounting and reporting.
Accordingly, SOX established standards for all public company boards, management, and public accounting firms in the United States and thus giving publicly traded companies a much greater understanding of internal controls and the need for such controls. These standards require corporations to evaluate and disclose the effectiveness of their internal controls as they relate to financial reporting as well as the Independent Auditor's Report attesting to such disclosure. In addition, SOX requires that any material weaknesses in a corporation's financial reporting be disclosed in the annual and quarterly filings, and that the CEOs and CFOs verify financial reports. This paper focuses on the internal control reporting format and content as well as the Independent Auditor's Report.
This complex and wide ranging statute deserves section-by-section analysis. The provisions include accounting reforms, the SEC, financial reporting, corporate governance, Wall Street practices, securities fraud, officer conduct, document destruction, whistleblowers, attorneys, and internal ramifications. The focus in this paper is on financial reporting. After addressing auditor's shortcomings, Congress turned directly to the corporations themselves and set forth a broad range of rules addressing corporate disclosure, the responsibility of officers and directors, and corporate governance reforms. The Sections 302 and 404 of the Act are considered applicable for corporate reporting.
The problem, solution, implications and consequences for those two sections are clearly stated by Robert Prentice in his Student Guide Booklet on the Act. His presentation includes:
Corporate management has the primary responsibility for the presentation of financial statements and the creation of processes and systems of control to ensure that accurate information finds its way into those statements. That theoretical responsibility notwithstanding, in the white hot competition and excitement of the dot.com bubble, many corporate executives seemed to believe that it was their job to not produce accurate financial statements for the auditors to certify, but to bully the auditors into certifying as aggressive a set of financial statements as possible. Accuracy was not an important consideration if the auditor's certification could be obtained to "CY" the company's "A." In litigation, CEOs occasionally disclaimed any responsibility at all for financial statements, even though they had signed them.
Section 302 requires each public company's CEO and CFO to certify that they have reviewed the quarterly and annual reports filed with the SEC, that based on their knowledge the reports do not contain any materially untrue statements or half-truths, and that based on their knowledge the financial information is fairly presented. …