Section 404 of the Sarbanes-Oxley Act directs the SEC to adopt rules requiring annual reports of companies with publicly traded securities, other than registered investment companies, to disclose management’s assessment of the effectiveness of the company’s ICFR and an auditor’s independent attestation to the effectiveness of those internal controls. These rules were adopted by the Commission on May 27, 2003. The act gave large filers that are traded publicly till the end of the fiscal year in 2004 to become compliant.
Internal controls are in place to require reporting of financial reports to be analyzed and audited. Companies are also hiring internal personnel to ensure accuracy and high ethical standards are being followed. The auditors who review the financial statements are covered by the whistleblowers protection.
“Because the cost of complying with the requirements of Section 404 of the Act (“Section 404”) has been generally viewed as being unexpectedly high, efforts to reduce the cost while retaining the effectiveness of compliance resulted in a series of reforms in 2007.” (SEC Staff, n.d.) Companies have since the implementation of Section 404 improved effectiveness of compliance to result in a decreased cost. Depending on the company size the cost varies in correlation with its industry. “The Section 404(a) cost is borne through increased internal labor and outside vendor expenses, while the Section 404(b) cost is experienced primarily through increased independent-auditor fees.” (SEC Staff, n.d.) However, financial stress isn’t the only thing that came of Section 404, the new Section 404 had benefits as well.
Companies financial reporting’s were looked at more carefully and CEO and CFO that weren’t trying to be crooked were in a way forced to have their reports audited for accuracy. This audit ensured their finances were more strictly looked at and a better company was evolved. This boosted confidence as the financial statements were...