Essay Example on Depict the entity's overall financial Health









The information found within the primary financial statements of an organization can be used to depict the entity's overall financial health Hermanson Edwards and Maher 2015 indicate that this financial information is useful to both internal and external parties Internally the management team can utilize this information to make better decisions in the future knowing the financial impact of previous actions Externally financial statements are utilized to gauge investment related decisions by both current and potential stockholders Naturally the data within the financial statements can sway the decisions of both parties Without regulation to the reporting practices the information found within these statements can be intentionally and unintentionally misleading As a result there is a genuine need for regulation standardization and control for organizations that report their financial data This lack of regulation in the financial reporting process was exposed by the numerous accounting scandals uncovered in and around the early 2000s To increase control and to provide a level of regulation to financial reporting the Sarbanes Oxley SOX Act was instituted Bainbridge 2007 Bainbridge notes that a highly contested part of SOX is section 404 which primarily focuses on creating assessing and implementing internal controls for the financial reporting process 

The goal of this section is to set legal guidelines in the financial reporting process that work to minimize the legal and ethical concerns that may impact the accuracy of the reported data A large part of SOX and section 404 concentrates on developing financial reporting processes and procedures that promote executive honesty and data accuracy Considering the use of financial reports by investors SOX and section 404 makes an effort to restore investor confidence through improved regulation and assessment Litvak 2014 Section 404 directly affects the managerial and accounting related functions within an organization From the perspective of management compliance with section 404 of SOX should be viewed as a continuous process Bainbridge 2007 Considering that organizations report financial data continuously the management team needs to ensure that the evaluation assessment and oversight processes for internal controls is also viewed as an ongoing process Bainbridge notes that section 404 of SOX should be implemented using a top down organizational approach In this approach the organization applies global controls first and then incrementally evaluates these controls under specific departments during significant financial transactions Bainbridge indicates that documentation and training is a key piece of section 404 Training ensures that employee understand the concepts and changes to the internal controls and promotes consistency within the reporting practice A direct result of these regulations is an increase in spending to ensure that the processes and procedures are implemented correctly with consistent levels of oversight an assessment It can be concluded that organizations are less profitable due to the regulations of SOX and section 404 

Management s opinions on the overall effectiveness of SOX and section 404 appears to be split Schroeder and Shepardson 2016 indicate that the results of an internal control audit yielded information that inferred that management assessments have a minimal impact on the quality of the internal control system These results question the effectiveness of the assessment requirements in section 404 Litvak 2014 also indicates that section 404 is a costly measure that contributes to a reduction of risk within an organization due to increased resources allocated toward processes and procedures that are necessary to implement the internal control structure In contrast Bainbridge 2007 notes that an effective internal control system can reduce the level of inaccuracy with the reporting process by standardizing how transactions are processed From the perspective of the accountant SOX has impacted their role in numerous ways Internally the accountant's role comes with a higher level of accountability as processes and procedures are in place to reduce the misstatement of financial data In relation to the external auditor Bainbridge 2007 notes that their opinions on the management's assessment of internal controls and the effectiveness of said internal controls has a great impact on the organization Litvak 2014 indicates that accountants highly value section 404 as it sets best practices and poses regulations for financial reporting Opinions on SOX and section 404 continue to be mixed While this act poses regulations and procedures for accountants to follow managerial resources must be devoted to properly implement and evaluate this system Since SOX is an ongoing process within an organization costs are continuously incurred to meet the guidelines of the act Corporations will be less profitable due to the resources needed to management and evaluate this system Accounting firms performing the audits will require continuous training to address any changes and updates to the process The party that sees the most benefits from section 404 is the investor These regulations promote data accuracy and disclosure that help the investor formulate a more accurate picture of an organization's financial health

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