Edward M. Johnson
10/09/2013
DeVry University, Keller Graduate School of Management
Chesapeake, Virginia TABLE OF CONTENTS
INTRODUCTION…………………………
...………………………………………………3
THE SARBANES-OXLEY ACT OF 2002
…………………………………………………4
Section 301…………………….
………………………………………………….4
Section 401…………………….
………………………………………………….5
Section 404…………………….
………………………………………………….5
Section 409……………………
………………………………………………….5
Section 802……………………
………………………………………………….5
INTERNAL CONTROL EVALUATION & RESULTS
……………………………………..Pages 6 - 11
SUMMARY AND CONCLUSIONS……….
……………………………………..Pages 11-15
INTRODUCTION
LBJ Company (LBJ) retained our Accountancy Firm (The Firm) to review LBJ internal control procedures. The Firm is to make recommendations for needed changes in preparation for an Initial Public Offering (IPO). We will make a specific recommendation about whether or not LBJ should purchase the indelible ink machine and link it to principles of internal control procedures. Prior to any IPO the Securities and Exchange Commission (SEC) and the law, require all public companies, regardless of size, to be compliant with Sarbanes-Oxley internal control procedures and financial reporting.
Our evaluation and recommendations focus is primarily on the requirements of the Sarbanes-Oxley Act of 2002, its most applicable sections, and the derivative “Principles of Internal Control Activities”.
We begin the study by giving an overview and summary of the Sarbanes-Oxley Act of 2002 (SOX). 1The focus is on providing the information that assigns responsibility for internal control procedures and financial reporting founded in the law, and enforced by the Securities and Exchange Commission (SEC) and other enforcing committees and administrative government offices. The SOX summary is followed by the audit and evaluation of the company according to the “Principles of Internal Control Activities”.
Summary and impact of the Sarbanes-Oxley Act of 2002 (SOX) focuses on:
1. Section 301, Responsibility for Financial Reports
2. Section 401, Disclosures in Financial Reports
3. Section 404, Management Assessment of Internal Controls
4. Section 409, Real Time Disclosures Requirement
5. Section 802, Criminal Penalties.
Sections 301 and 404 form the critical basis of responsiblitiy and actions for corporate internal control due-diligence. The remainder of the sections expand and provide additional details on financial reporting and disclosures. Section 802 makes known the criminal and civil penalties related to violations of the act.
The 6 principles that guide us in your evaluation form a comprehensive view of the health of your internal control processes and procedures and form a roadmap for improvement and full compliance. The six principles are :
1. Establishment of Responsibility
2. Segregation of Duties
3. Documentation of Procedures
4. Physical Controls
5. Independent Internal Verification
6. Human Resources Controls
THE SARBANES-OXLEY ACT of 2002 (SOX)
The Sarbanes-Oxley Act of 2002 was passed by congress in July of 2002 in response to the widely published “Enron and “WorldCom” financial scandals. That “Enron” and “WorldCom” together with other companies sparked this expansive law is a matter of congressional record. The act was introduced into the congress from a joint committee by the act’s sponsors and first authors, Senator S Sarbanes, and Congressman Michael G. Oxley. Its formal name in the Senate is: “Public Company Accounting Reform and Investor
