In his 2018 report “Independent Review of Financial Reporting Council” Sir John Kingman commented as follows:
“a number of stakeholders have suggested to the Review that there is a case for considering introducing in the UK something more closely similar to, though not the same as, the Sarbanes-Oxley (SOX) regime in the US specifically relating to internal controls, and assurance by directors around internal controls. The Review is particularly struck by the support for this amongst senior audit committee chairs with experience of operating this regime in US-listed companies. This would however clearly be a very major step. It could impose significant costs, particularly on medium-sized companies.”
Under the Sarbanes-Oxley Act directors and auditors have to report on the adequacy of the company’s systems of internal control over financial reporting. In substance, it applies to listed companies.
You are required:
(1) To choose a UK listed company and select their most recent financial statements and complete the table in Appendix 1 based on that company.
(2) Discuss the above quotation which was written in the context of strengthening internal controls in listed companies. In your response you should address, but you need not limit your answers to the perspectives of (a) the board of directors; (b) the shareholders; (c) the auditors and (e) society at large. (85 marks)
Your response should be about 1800 words long. Words included in completing the table in Appendix 1 do not count toward this total. The output from completing the table in Appendix1 should be incorporated as an appendix to the discussion of the quotation. You should only upload one document to Moodle.
• Define and explain SOX Section 302 & 404 – how US was prior and after SOX
• Why it was needed and why it was introduced in the US – Highlight key scandals e.g. Enron and WorldCom
• Explain the similarities and difference between UK Auditing and SOX
• Explain what the purpose of the report/essay will be
• Address essay question
Discuss the above quotation which was written in the context of strengthening internal controls in listed companies. In your response you should address, but you need not limit your answers to the perspectives of (a) the board of directors; (b) the shareholders; (c) the auditors and (e) society at large.
• (a) the board of directors;
costs of SOX – in relation to section 404 – expenses for IC testing and reporting and audit fees to attest to IC effectiveness
• (b) the shareholders;
A 2005 survey by the Financial Executives Research Foundation found that 83 percent of large company CFOs agreed that SOX had increased investor confidence, with 33 percent agreeing that it had reduced fraud. https://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/#cca26f1478c1
• (c) the auditors and
• (e) society at large.
• (F) Employees
• (g) Regulators
Regulators such as the IFRS will benefit from a SOX regime particularly in relation to the Internal Audit report which will provide greater confidence on the integrity of the internal control environment of the business and hence the accounting information that is produced from these systems. The Internal Control Report under SOX requires the CEO and CFO of limited companies to assess the internal controls present and address any shortcomings found that would impact on the records produced. The management will be required to make a judgement on whether the systems are sufficient to enable the preparation of financial statements under the reporting standards adopted (https://www.icaew.com/-/media/corporate/files/technical/audit-and-assurance/the-future-of-audit/internal-control-effectiveness–who-needs-to-know.ashx).
The external auditor will then need to provide reasonable assurance that the records produced from these systems
Internal controls are one key area where fraud permeates as shown by key scandals in the UK. One notable scandal – Tesco – Directors failed to provide assurance of internal controls –
• Balance up for and against argument. Bring in any implications there may be to adopting US styled SOX – better for UK to adopt a less stringent version of SOX
Company Name: Aggreko PLC
Question Response Page number in report
1 How many members did the audit committee have? There are four members of the audit committee comprising of four independent Non-executive Directors, including the Audit Committee Chair (Ian Marchant). 60
2 How many times did the audit committee meet in the year? They met three times. 60
3 What does the audit committee say about its relationship with internal audit Closely works with the internal Audit department and closely monitors and reviews the activities of the internal audit at each Committee meeting. 63
4 What does the audit committee say about its responsibility for maintaining internal controls? The audit committee states its responsibilities in relation to internal audit are as follow:
• Approve Audit annual plan prior to start of each financial year
• Review detailed report from the Group Internal Audit Director at each meeting
• Follow up with the Group Internal Audit Director on areas where audit actions were outstanding 63
5 What did the audit committee identify as the key risks in preparing the financial statements? One risk was how to report the direct and indirect tax positions for work undertaken in certain countries in particular in Bangladesh. This was due to an ongoing court dispute relating to a tax assessment in Bangladesh. There are still ongoing court proceedings, and it is expected that the case is going to take a significant time to resolve.
Another key risk identified by the audit committee was in relation to outstanding trade receivables especially as it operates in countries where customer payments are volatile and at high risk of defaulting due to economic and political issues facing the Country e.g. Venezuela, Yemen and parts of Africa. In order to account for this risk, Agreeko has increased its provisions for doubtful debts e.g. In Yemen, given the ongoing civil war, the Group increased its provision by $7 million. 61
6 Who is the external auditor – name and firm
7 How many days after the year end was the audit report signed?
8 Who is the Independent Auditor’s report addressed to?
9 What materiality did the auditor use as a % of pre tax profit?
10 How was materiality calculated?
11 Was materiality the same as last year – if not why not?
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