The costs involved with compliance of this section are very high which is justified with the long term results it brings by boosting the investors’ confidence in the entity.
They are also required to comment upon the IT issues related to accounting matters. Based on their detailed analysis “Internal Control Report” is generated annually and produced before the shareholders. As per section 404, management and external auditor are required to report about the adequacy of internal controls and its operating effectiveness over financial reporting. This section is one of the most important sections as it speaks of the detailed assessment of internal controls in financial reporting process. SECTION 404 – ‘Assessment of Internal Controls’ It requires financial reports to include all the off balance sheet (OBS) transactions. So this section comes into play and requires financial statements to present true and fair view of entity’s position. With the Enron Scandal, attention was drawn towards the Off Balance Sheet items and how Special Purpose Entities (SPEs) were used to inflate the stock prices. SECTION 401 – ‘Disclosures in Periodic Reports’ Top management also needs to certify that they have reviewed the internal controls existing in the organization and that has been done within a period of 90 days before the reporting date. This has been included to bring an element of accountability on the part of top management, hence increasing the investors’ confidence in the reports.
This section makes it mandatory for the signing officers to certify that they have personally reviewed the statutory reports and are free from material misstatements and omissions. SECTION 302 – ‘Corporate Responsibility for Financial Reports’ These legislations focus on improving the accuracy and reliability of corporate reporting. Sarbanes-Oxley and Clause 49 provides impetus to close the expectation gap by altering and expanding the responsibilities of key participants in the corporate reporting process. The confidence of the investing community will only be restored after the gap between investor expectation, in terms of corporate governance and reporting, and what they have received in the past is bridged. Today’s corporate stakeholders expect greater assurance, more oversight and clear evidence of internal controls. These legislations defined a new system of checks and balances to rebuild investor confidence. To reduce corporate malfeasance and protect investors, Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and Revised Clause 49 of Stock Exchange Listing Agreement were promulgated by the regulators in the Unites States and India, respectively. Recent corporate scandals have eroded investor trust to some extent in corporate reporting.
Senior management must provide assurance on the existence, adequacy and effectiveness of internal controls - and SOX also requires each firm's external auditor to attest and report on management's assessment. The Sarbanes-Oxley Act of 2002 ('SOX')" entrusts the management of SEC registrants with the responsibility of annually reporting the effectiveness of their internal control structure and procedures for financial reporting, and attesting the financial statements. Sarbanes-Oxley and Clause 49 Related Services