Audit Implications of Going Public … Essay
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SOX & PCAOB #5
The author of this report has been given a hypothetical situation where a CEO by the name of Terry Puckett is asking the impacts of two major regulations or laws pertaining to public companies and the auditing standards that they must adhere to. The first of those two is the Auditing Standard No. 5 as offered by PCAOB and the other is Sarbanes-Oxley, or SOX. The latter was the massive accounting law overhaul passed in the wake of the Enron/Arthur Andersen scandal in 2001. Puckett wishes to know the effects, in terms of cost and otherwise, that will come to pass when it comes to complying with these two sets of rules and regulations. While it is not insurmountable to comply and adhere to the PCAOB and SOX rules, a post-Enron world has led to much higher accounting standards and compliance time/cost overall. The rest of this report will take on the form of the letter that is asked for in this assignment
You had asked me about the impacts in terms of cost and otherwise when it comes to the PCAOB auditing standard and Sarbanes-Oxley. When it comes to the PCAOB's Auditing Standard No. 5, there are a few things that should be made clear to Mr. Puckett. As is the wise course with most things like this, the following has been obtained from the PCAOB website. There are about half a dozen major sections to the standard. Those sections are a brief introduction, the planning of a proper audit, the use of a top-down approach, testing controls, evaluation of identified deficiencies, wrapping up the audit and reporting to be done regarding internal controls. One of the major nexuses and foci of this report, as one can see, is the subject of controls. One of the major rules that your firm will have to follow, should you go public, is that you will have to have firm internal controls in place so that no one person or entity is too powerful. For example, the payroll process should not, by design, be something that can be completed and executed by one person by themselves. There should be audits and verifications done by at least two sources when it comes to all major functions. As part of our job as an auditor, we would review your controls and we would then have to offer our unvarnished opinion about the quality of controls or lack thereof. As stated verbatim by the PCAOB website, "if one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective" (PCAOB, 2015). As one might expect, retooling and verifying controls takes time, especially if the current system is deficient.
As for Sarbanes-Oxley, that law was the Congressional reaction to the Enron scandal. It was also a situation where the auditing company, that being Arthur Andersen, was themselves involved in the fraud. Incidentally, this is the very law that created the Public Company Accounting Oversight Board, which is the PCAOB entity listed above. The main aims of Sarbanes-Oxley as a while were to enhance corporate responsibility, ensure full financial disclosures and combat the practice of corporate and/or accounting fraud. In short, we as your auditor will take a fair and unbiased look at your books and practices. If you are doing (or not doing) something that will look fishy to the Securities and Exchange Commission (SEC), we will note as such in any of our reports. At the same time, if your practices are on point and the reporting you are issuing pairs up neatly with what you are seemingly actually doing, then we will say that as well. Compliance comes with a price, however, as the amount of documentation, substantiation of transactions and so forth is much higher than it was pre-Sarbanes. You will need to hire the right people and make sure that they do their job the right way. You as the CEO will possible be held accountable if things are amiss. It will be a matter of either you did know something was being faked or that you should have known the same.
Controls Table & Question
1) See below
Are all employees paid by check or direct deposit?
If payments are paid in cash or some other untrackable means, this leads to the possibility of record-keeping errors and fraud.
Is a special payroll bank account used?
Having a dedicated account to meet payroll needs would be much simpler than using an account for other things as well.
Are payroll checks signed by persons who do not prepare check or keep cash funs or accounting records?
The signer of the checks and the person (or people) that control the money should not be the same. If they are, the chance of fraud go sky-high in comparison
Is a check-signing machine is used, are the signature plates controlled?
The signature plates need to be controlled and secured. Cutting of checks should require the approval and consent of more than one person
Is the payroll bank account reconciled by someone who does not prepare, sign or deliver the paychecks?
The person who reconciles the payroll bank account should not be any of the people that controls the checks. If it's the same person or people, the likelihood of errors being concealed is much higher.
Are payroll department personnel rotated in their duties? Required to take vacations? Bonded?
Payroll people should not be locked into the same position for too long, should be taking vacations so they do not get burned out and they should be bonded so as to protect the company.
Is there a timekeeping department (function independent of the payroll department?
Of course, what is rendered on the time-keeping system is what leads to what many people (hourly non-exempt in particular) being paid. Again, the involvement of more than two people or parties lowers the chance of fraud or mistakes.
Are authorizations for deductions signed for the employees on file?
Authorizations can be verbal but having a physical sign-off would be extremely wise in case there is a dispute later on. The same goes for direct deposit.
Are time cards or piecework reports prepared by the employee approved by his/her supervisor?
Records of what lead to payment should not be honored unless first checked and approved by supervisor -- without exception. This prevents employees from padding their total to get paid more.
Is a time clock or other electromechanical or computerized system used?
Digital/computer systems for time clocks can be manipulated anyone with the know-how and access.
Is the payroll register sheet signed by the employee preparing it and approved prior to payment?
Yet another example of one person approving the payments and other person ensuring that there are no red flags or obviously incorrect payments. Having one person do it all leads to mistakes or fraud.
Are names of terminated employees reported in writing to the payroll department?
This would be important because paying people on termination often has to be done on the spot and there should be a written record of any such event.
Is the payroll periodically compared to the personnel files?
Doing this would ensure that the roster of employees being paid matches up and that the rates/salary amounts match up. Prevents mistakes and fraud.
Are checks distributed by someone other than the employee's immediate supervisor?
Unless a very good reason exists and/or the person involved has sufficient authority, only the payroll department or the person's immediate manager should have possession of the checks. Exceptions should be avoided.
Are unclaimed wages deposited in a special bank account or otherwise controlled by a responsible officer?
This should be the norm as those funds should not be spent or intermingled with other assets of a firm. They should be held and ready to pay in case they are claimed.
Do internal auditors conduct occasional surprise distributions of paychecks?
This can be useful so as to fetter out potential problems. The audit being unannounced in advance is very helpful at that. It needs to be verified that who is present to receive checks squares with the check listing.
Are names of newly-hired employees reporting in writing to the payroll department?
This should be done for the same reason as the terminating employees receiving the same treatment. All of the proper departments should know of new hires and no one should be paid outside of the proper payroll channels and departments.
Are timekeeping and cost accounting records (such as hours, collars) reconciled with payroll department calculations of hours and wages?
This is something else that needs to be done to counter mistakes or fraud. The two sets of records should obviously coincided so as to ensure that no over-payment or under-payment of wages occurred.
Are payrolls audited periodically by internal auditors?
This one dovetails with check distribution. There does need to be an auditing of checks cut and a concurrent making sure of the fact that the checks are complete… [END OF PREVIEW]
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