The Impacts of the Sarbanes-Oxley Act of 2002 on Internal Controls 1

The Impacts of the Sarbanes-Oxley Act of 2002 on Internal Controls 2

Abstract

On July 30, 2002, the Sarbanes-Oxley Act (SOX) was regulated due to the many

accounting scandals that took place between the years of 2000 and 2002 by companies such as

Enron, WorldCom, and Global Crossing. The purpose of the Sarbanes-Oxley, specifically Section

responsibilities. The Committee of Sponsoring Organization Internal control defines internal

control as “a process affected by an entity’s board of directors, management, and other personnel,

designed to provide reasonable assurance regarding the achievement of objectives” (Dowling &

Jahmani, 2015, p. 129).

increase the chances of having errors in their financial statements. Material misstatements in a

company’s financial statements are a major concern in the world of business. The main purpose of

an audit underlines both an internal and external auditors and management’s responsibility of

detecting and preventing fraud. The Sarbanes-Oxley Act brings to life to new methods of

accounting that managers of public companies are to use in order to prevent fraud from occurring.

Upper-level management must now authorize his or her company’s financial statements prior to

being submitted. The Sarbanes-Oxley Act now also requires management to report on any

The Impacts of the Sarbanes-Oxley Act of 2002 on Internal Controls 3

internal controls put into place, and then writes up an evaluation of those controls and how they

are impacting the company.

The internal control report must include: a statement of management’s responsibility for

establishing and maintaining adequate internal control over financial reporting for the

company; management’s assessment of the effectiveness of the company’s internal control

over financial reporting as of the end of the company’s most recent fiscal year; a statement

annual report. Furthermore, we are adding a requirement that management evaluate any

change in the company’s internal control over financial reporting that occurred during a

fiscal quarter that has materially affected, or is reasonably likely to materially affect, the

company’s internal control over financial reporting. (“Final Rule: Management’s Report on

Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act

Periodic Reports,” 2008)

Management’s job under the new Sarbanes-Oxley is to plan out and put together a

company’s internal control system. Having strong internal controls make fraud harder to commit,

but they can’t totally eliminate the chances of any misrepresentations due to the fact that they have

the last say and can override those controls. “Managers who are intent on committing fraud have

The Impacts of the Sarbanes-Oxley Act of 2002 on Internal Controls 4

an incentive to design weaknesses into the system of controls because the benefits to fraud are

more enticing to dishonest managers when the system of controls is weak” (Patterson & Smith,

2007, p. 428).

a company. They include control deficiencies, significant deficiency, and material weaknesses.