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The Sarbanes - Oxley Act (SOX) requires all public companies tohave an internal control system. Section 404 mandates that thecompany's annual report include an annual internal controlreport. Who has the primary responsibility for internalcontrol? What is/are the primary purpose/goals of internalcontrols? What are the limitations of internal controls? What arethe main components of a system of internal controls?

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Elin Hessel
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5 Nov 2018

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Refer to the Columbia Sportswear Annual Report in Appendix A.You will need to find and then read the following reports:

• Management’s Report on the Consolidated Financial Statements(Item 8)
• Report of Independent Registered Public Accounting Firm onConsolidated Financial Statements (Item 8)
• Management’s Report on Internal Control Over Financial Reporting(Item 9A)
• Report of Independent Registered Public Accounting Firm onInternal Control over Financial Reporting (Item 9A)

Requirements

1. Who is responsible for the information in the annual report? Whois responsible for recommending the independent accountants to theboard of directors?
2. Who were the independent auditors? Under what standards did theyconduct their audit? What was their opinion of the auditedfinancial statements?
3. Who is responsible for establishing and maintaining adequateinternal control over financial reporting? Is the effectiveness ofthe internal controls ever reviewed? Do you think that internalcontrol procedures are necessary? Why?
4. Do the auditors have any responsibility with respect to theinternal controls? What was the auditor’s opinion regarding themanagement assessment of internal con- trol effectiveness?

NOTE: Go beyond the textbook and search for articles on TheSarbanes Oxley (Section 404). Include what you’ve learned from yourresearch in your response to the above questions.

Required: After reading the Bye, Bye SOX? Article comment on the issue of small business compliance with Section 404 of SOX

Bye, Bye, SOX?
The Sarbanes-Oxley Act (SOX) SOX compliance has been extended
may be declawed by upcoming four times, but they won’t need to
U.S. Congress and comply at all if the Garrett-Adler
Supreme Court decisions. amendment makes it to the Senate
The House of Representatives floor as a standalone bill.
recently voted to approve the SOX also established the
Garrett-Adler amendment, which PCAOB to oversee and regulate
would exempt small companies audit firms. PCAOB operates under
from SOX Section 404 provisions, the supervision of the Securities
while the Supreme Court is considering and Exchange Commission (SEC),
the constitutionality of the which also appoints PCAOB members.
Public Company Accounting Oversight It is funded by fees charged to
Board (PCAOB). audited firms. When it was established,
These developments may have Congress wanted the board
long-term implications for SOX, the to be separate, with its own funding
2002 legislation passed in the wake stream, and outside normal civil
of the Enron, WorldCom, and Tyco service laws so it could attract
scandals. The outcomes may also highly qualified specialists. PCAOB
have implications for records managers, members’ salaries are more than
information technology specialists, $500,000 and are reviewed by the
and compliance officers SEC.
who devise and implement company Pro-business advocates, represented
controls. by the Free Enterprise
Section 404 of SOX requires Fund, argue that the PCAOB’s governance
company auditors to attest to the structure is unconstitutional
soundness of the firm’s internal because it is an independent
controls and financial statements. agency that does not allow for the
Internal controls may include anything president to appoint members. Additionally,
from transaction approval authorizations because only the president
to records retention can remove SEC commissioners
programs. This provision is widely for cause, and because
blamed for an increase in auditors’ the SEC can only remove PCAOB
fees, as well as increased expenditures members for cause, some court
to ensure that proper internal members believe this is a formerly
controls are in place. unrecognized limit of the president’s
Small firms – those with powers that may contradict
less than $75 million in the constitution.
market capitalization The Supreme Court will take up
– have protested that the issue soon, and some legal experts
compliance with SOX 404 would believe that SOX could be
cost them a disproportionate share abolished completely if the court
of their earnings. The complaint is rules the PCAOB unconstitutional.
supported by an independent study
conducted at Pennsylvania State
University, which showed that
firms just over the $75 million
mark paid nearly $700,000 more in
audit fees and had average earnings
of negative $1.4 million in 2004

4)Managers place a high priority on internal control systems because the systems assistmanagers in all of the following except:

A)Protecting assets.

B)Urging adherence to company policies.

C)Promoting efficient operations.

D)Ensuring reliable accounting.

E)Assuring that no loss will occur.

5)A properly designed internal control system:

A)Insures profitable operations.

B)Eliminates the need for an audit.

C)Is not necessary if the company uses a computerized system.

D)Requires the use of non-computerized systems.

E)Lowers the company's risk of loss.

6)A company's internal control system:

A)Eliminates the need for audits.

B)Eliminates the need for managers' certification of controls.

C)Monitors company and employee performance.

D)Eliminates human error.

E)Eliminates the company's risk of loss.

7)The impact of technology on internal controls includes:

A)Elimination of fraud.

B)Elimination of the need to bond employees.

C)Reduced processing errors.

D)Elimination of separation of duties.

E)Elimination of the need for regular audits.

8)Internal control systems are:

A)Required only if a company plans to engage in interstate commerce.

B)Developed by the Internal Revenue Service for all U.S. companies.

C)Required by Sarbanes-Oxley (SOX) to be documented and certified if the

company's stock is traded on an exchange.

D)Developed by the Securities and Exchange Commission for public companies.

E)Developed by the Small Business Administration for non-public companies.

9)Cash equivalents:

A)Include 6-month certificates of deposit.

B)Are short-term, highly liquid investment assets.

C)Include money orders.

D)Include checking accounts.

E)Are recorded in petty cash.

10)Cash equivalents meet all of the following criteria except:

A)Include short-term investments purchased within 3 months of their maturity

dates.

B)Are readily convertible to a known cash amount.

C)Have a market value that is not sensitive to interest rate changes.

D)Include short-term U.S. treasury bills.

E)Are more liquid than cash.

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