Several large-scale corporate scandals occurred in the early 2000’s involving financial reporting dishonesty and auditing fraud by corporate board members in multinational companies including Enron Corp., Xerox and WorldCom among others. In response to the losses to public investors, the US government through Senator Paul Sarbanes and House Representative Michael Oxley created the Sarbanes-Oxley Act of 2000 (SOX), which was aimed at bringing reform and enhancing the rules governing corporate reporting accountability, and auditing standards. These have been progressively adopted as the basis for subsequent amendments and development for new national and international GAAP standards. Macy’s Inc. is a publicly listed company operating a national wide retail business and as such is affected by the significant changes on financial reporting standards brought about by the act. The CEO must review the accounting policies currently in use to ensure compliance with the SOX act.
The SOX laws impose significant changes in legislation affecting financial reporting and the accounting industry especially concerning public companies. The act creates the PCAOB and defines regulations directly influencing the management of public companies, recognition and accounting practices for some items in the financial statements, the relationship between public companies and their audit firms, and frequency of reporting.
The Public Companies Accounting Oversight Board (PCAOB) was created in 2000 as mandated by the SOX regulations. The corporation operates as a non-profit private-sector arm of the Securities and Exchange Commission (SEC) mandated by US federal law to provide oversight and legally recognized regulation on financial reporting and auditing practices in public listed companies. The PCAOB’s main objective is to protect the interest of public investors from fraudulent accounting and reporting and to further stakeholder interests in terms of more comprehensive, accurate and informative independent financial and audit reports (Kass-Shraibman & Sampath, 2011, p. 124).
Areas Where the Firm is Vulnerable to Sec Action
There are 11 sections comprising the SOX act with each dealing with a particular aspect of corporate financial reporting, ranging from creation of PCAOB to definition of the responsibility, crimes and penalty in financial reporting. The law defines external auditor relationship with companies and enhances the responsibilities of the SEC in overseeing financial reporting. Areas of focus that directly affect the financial statements and accounting practices in corporations relate to corporate responsibility and enhanced financial disclosures sections, the third and fourth respectively.
The corporate responsibility section puts forward vital regulatory requirements that represent potential vulnerability for companies. The section contains eight sub-sections that deal with the aspects of public company audit committees, corporate responsibility for reports, auditor independence, executive bonuses, bars and penalties, insider trading, attorneys and fair funds for investors. Under corporate responsibility, the entire spectrum of factors for corporate financial reporting is covered. This section holds managers accountable to any errors or omissions in the financial statements. This section defines the composition and responsibilities of the internal audit committees for companies (Skalak, Golden, Clayton, & Pill, 2011, p. 82).
Internal controls instituted in public companies are dealt with in section 304 of corporate responsibility and 404 of financial disclosures. Under section 304 corporate responsibilities, management is required to design and put into place internal controls for guaranteeing that financial transactions information relating to the company and all its subsidiaries are incorporated into the financial reports. The company issuing the financial reports should conduct evaluation of these internal controls 90 days prior to releasing the report and present the findings of this assessment in the report.
Section 404 of enhanced financial disclosures came into force in 2004 requiring the management in public companies to guarantee the efficiency of the internal controls and financial reporting. This section also requires public companies to file a report with the SEC annually detailing the internal control vulnerabilities and material weaknesses in the financial statements. These disclosures outline the deficiencies and detail the practices used in the internal financial controls and methods used in estimate risk and for valuation of current liabilities and assets (Oberheiden, 2004, p. 3)…
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