+48 22 104 20 98
Let’s start with the Sarbanes-Oxley Act. What is the standard about?
What were the main changes reflected in SOX?
The law essentially addressed issues related to:
financial statement preparation;
internal control system assessment;
corporate governance;
auditor independence.
What is the area of application for SOX?
What are the main objectives of SOX?
SOX pursues the following goals:
oversight of financial reporting;
supervision of accounting principles;
supervision of internal control processes;
control over the selection and operation of external auditors.
Essentially, all law provisions boil down to two simple truths:
Managers, auditors, and board members should act ethically and safeguard the interests of shareholders.
The companies' financial statements should accurately reflect the current status and offer investors enough details to independently evaluate the actual situation in the company.
What are the key provisions of the law?
Every company should have an obligatory code of corporate conduct, which is a set of standards intended to counteract abuse and promote principles of honest business conduct.
In boards of directors, the majority of members should be independent, and this is determined by strict criteria.
CEOs and CFOs are required to review all financial statements and are responsible for internal financial control.
The company’s executives are deprived of all bonuses and securities compensation in the case of severe regulatory complaints about reporting.
Companies are obliged to disclose off-balance sheet operations and connections with other companies in their reports.
The company’s management and employees are prohibited from any actions that might mislead the auditor.
Employees who report fraud are protected by the state and cannot be fired.
What are the key provisions regarding the company’s managers?
The CEO and CFO of the company must personally attest to the financial statements with their signature, ensuring that the report is prepared in accordance with all the requirements.
Managers must implement a strong internal control system to ensure that financial reports are accurately prepared for investors.
If a manager tampers with a report resulting in misleading investors about the true state of affairs in the company, it will be considered a criminal offense with significant prison terms.
The provision of loans by the company to its top managers and any business relationships between the company and its managers are prohibited (with some exceptions).
Top managers are required to immediately (within 2 days) disclose their transactions regarding the purchase/sale of shares of the company where they work.
What are the key provisions regarding the members of the boards of directors?
The audit committee, under the company's board of directors (or the board itself in the absence of a distinct committee), should select an auditor for the review of the financial statements.
Members of the audit committee under the board of directors must be independent of management (they should not be employees of the company).
The audit committee has the right to engage independent experts to support its activities.
What are the key provisions regarding external auditors?
Public Company Accounting Oversight Board (PCAOB): issuing audit work standards and ensuring that auditors comply with audit standards and meet the requirements of SOX. If serious violations are identified, PCAOB has the right to revoke or suspend the auditing licenses of individual specialists or auditing firms as a whole.
Auditing companies are prohibited from simultaneously providing consulting services to a client while also providing financial statement audit services (with rare exceptions).
During their assessment, external auditors must evaluate the efficiency of the company's internal control system pertaining to financial statement preparation. The auditor's report routinely includes their findings on the efficacy of this internal control system.
Audit project leaders must internally rotate at least every five years.
Ensuring rigorous internal control and audit-ready reporting is no easy feat. How do companies cope?
protect financial data;
control access to financial data;
identify fraud;
deliver an assessment of internal controls efficiency.
What are the internal controls necessary for SOX compliance?
What are the requirements of SOX?
Implementation of an internal control system that is sufficient to ensure the security of financial data. For example, tracking how users handle confidential data, reviewing changes in documentation, and detecting potential security breaches using predefined and customizable alerts. Such systems can also include setting up detailed financial access control using access control tools; protecting user credentials with password management; and implementing multi-factor authentication.
Reporting on the internal control efficiency — creating reports with the necessary data through sophisticated reporting tools.
Legal prosecution of anyone who in any way falsifies financial documentation — continuous monitoring of all user actions to collect proof of falsification, and exporting this data for use as evidence in legal investigations.
SOX isn't the sole standard governing financial reporting. IFRS also plays a significant role, so let's delve deeper into it.
What are the objectives behind the creation and global adoption of IFRS?
Transparency
Accountability
Efficiency
Who develops IFRS?
How do international standards differ from national ones?
What are the types of international standards?
There are several types of international standards. To avoid confusion, they can be broadly divided into three groups:
IAS – International Accounting Standards. These are so-called “old” standards that were developed before 2004. In total, 41 IAS standards were developed.
IFRS – International Financial Reporting Standards. These are colloquially called the “new” standards that were developed after 2004. To date, 17 IFRS standards have been developed.
In essence and legal force, both the new and old standards are equivalent.
In addition to the standards, interpretations are also mandatory. Interpretations clarify certain issues related to the application of the standards.
IFRIC, SIC – Interpretations prepared by the International Financial Reporting Interpretations Committee and approved by the IFRS Council.
The validation process before adoption takes a bit more than 6 months and updates are made on a regular basis. You can find a complete list of standards here IFRS Standards .
What are the key principles of IFRS?
3 major principles of IFRS
Underlying assumptions:
Financial reporting quality criteria
Limitations
Let’s take a closer look at each principle starting with underlying assumptions.
Accrual basis
Going concern principle
What are the quality criteria for financial reporting?
Understandability: This means that the information is comprehensible to users who have sufficient knowledge of accounting.
Relevance: The information implies that it will impact the decision-making process of users. In some cases, the nature of the information alone is sufficient for its disclosure, regardless of its significance. In other instances, significance matters when the omission or misrepresentation of information can affect the economic decisions of report users.
Reliability: The information is considered reliable if it does not contain significant errors and distortions and is impartial.
Comparability: The information should ensure comparability of financial reporting data both with previous periods and in relation to other companies. This means that any changes in accounting policy must be disclosed in such a way that this requirement is met.
What about limitations?
Timeliness: It is related to the need to properly balance the reliability and relevance of information. On the one hand, to meet the requirement of relevance, information should be collected for all business activities that have occurred. On the other hand, obtaining comprehensive and reliable information may result in delays in presenting the financial statements, which can consequently impact its relevance. Thus, it is recommended to find an optimal balance between these two requirements.
Balance between benefits and costs: This means that the benefits derived from the information should not exceed the costs of obtaining it. The process of weighing benefits against costs requires a professional assessment.
Balance between qualitative characteristics: This should be subject to the professional judgment of an accountant and should aim to satisfy the needs of financial statement users.
Statement of Financial Position: Also known as the balance sheet. IFRS defines its various components and how they should be reported.
Statement of Comprehensive Income: This can either be one report or two separate ones; one for profit and loss and another for other income, such as capital assets.
Statement of Changes in Equity: This report, often known as the statement of retained earnings, provides detailed information about the change in the company's income or profits over a pre-defined financial period.
Statement of Cash Flows: This document should summarize your company's financial activities over a specified period of time, categorizing your cash flow into three categories: financing, operations, and investments. Recommendations for this report are provided in IFRS 7.
Should a company choose to harmonize its financial statements with global standards, what actions it must follow?
Formulating accounting policies.
Choosing both a functional and a presentation currency.
Calculating opening balances.
Creating a model for data transformation.
Reviewing the company's organizational structure to pinpoint subsidiaries, affiliated entities, joint ventures, and associates for accounting purposes.
Recognizing the distinct attributes of the company's operations and gathering the requisite data for transformation corrections.
Transitioning financial statements from domestic standards to align with IFRS.