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What
SOX 404 is about ?
“SOX”
stands for "Sarbanes Oxley Act of 2002,"
promulgated by the SEC of United States. This act was legislated as
a result of the Enron event and other scandals which badly damaged
the creditability of large companies, the accounting profession as
well as the stock market.
Section 404 of the Act requires each
annual report of a public company listed in US to include a
report by management on the company's internal control over financial reporting. This
report should contain:
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A statement of management's
responsibility for establishing and maintaining adequate
internal control over financial reporting for the company
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A statement identifying the
framework used by management to evaluate the effectiveness
of internal control
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Management's assessment of the
effectiveness of internal control as of the end of the
company's most recent fiscal year
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Disclosure of material weaknesses
(A material weakness is a significant deficiency or
combination of significant deficiencies that result in more
than a remote likelihood that a material misstatement will
not be prevented or detected.)
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A statement that its auditor has
issued an attestation report on management's assessment
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SOX 404 also requires the company's auditor to
attest to, and report on, management's assessment of the effectiveness
of the company's internal control over financial reporting.
Because
SOX 404 focuses on internal control over financial reporting, it is
important to understand what that means. "Internal
control over financial reporting" is defined as a process
designed by, or under the supervision of, the principal executive
and principal financial officers, and effected by the board of
directors and management, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. It includes those
policies and procedures for maintaining accounting records,
authorizing receipts and disbursements, and safeguarding assets.
Compliance
with SOX 404 will require large commitments of time and effort for
both public company management and public company auditors. An
accelerated filer (a U.S. company with market capitalization over
$75 million that has filed at least
one annual report with the SEC) must comply with the SOX 404
requirements for its first fiscal year ending on or after November
15, 2004. A non-accelerated filer must begin to comply for
its first fiscal year ending on or after July 15, 2005.
A
survey conducted by executive recruiter Korn/Ferry concluded that
Fortune 1000 companies are spending, on average, $5.1 million to
comply with Sarbox in general, and are projected to pay another $3.7
million in ongoing compliance bills, said a Financial Times
report. The vast bulk of this cost relates to meeting
Sarbox 404 internal controls requirements.
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