Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, May 18, 2007

Vo on SOX 404

Recently posted on SSRN: Lifting the Curse of the Sox Through Employee Assessments of the Internal Control Environment, by THUY VO, William Mitchell College of Law.  Here is the abstract:

This article posits that the goal of Section 404 of the Sarbanes-Oxley Act to enhance financial reporting accuracy and improve corporate behavior is not being achieved under the current implementation of the statute. Section 404 requires public companies to assess the companies' internal control system, but both the statute and the ensuing regulations provide little guidance as to the content or scope of the assessment that is required for compliance. Without the necessary clarification and guidance from policy makers, management has been focusing its efforts on assessing the company's multitude of internal accounting activities instead of evaluating the company's overall internal control environment.

In this article, I propose a unique and effective process for assessing and improving financial reporting accuracy and organizational integrity. Instead of requiring management to assess the company's internal accounting activities, the company should be required to evaluate its internal control environment. Such assessment of the internal control environment can be achieved by having employees evaluate senior management's behavior and ethics. Management's reporting of a weakness in the company's accounting activities does not reveal the integrity of the organization, whereas the employees' reporting of a weakness in management's behavior and ethics brings to the forefront the executives' standard of leadership and personal commitment to business integrity. An employee assessment of management's behavior and ethics will be more cost effective and efficient in detecting financial reporting fraud and improving corporate behavior than the current requirement of a management assessment and reporting of internal accounting activities.

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