FI504 – Accounting and Finance
Case Study #2
Evaluation of Internal Controls
Bruce Van Apeldoorn
Attention Mr. President,
The Sarbanes-Oxley Act of 2002 is a United States federal law which sets new or enhanced standards for all U.S. public companies. The reason that this Sarbanes-Oxley Act of 2002 bill was created was because of a number of major corporate and accounting scandals. When these scandals occurred they cost investors billions in losses because the share prices fell it shook public confidence in our securities markets. That is why it is important to comply with the Sarbanes-Oxley Act of 2002 requirements. This means that LJB would be required to maintain a system of internal control. The controls must be reliable and effective, which the executives and Board of Directors must monitor. Also, an outside auditor must confirm that the control systems are sufficient.
Something to consider when going public is that the costs of being a public company have almost doubled as a result of the Sarbanes-Oxley Act of 2002. Additional disclosures, internal controls, legal counsel, higher audit fees, and other costs are now part of how publicly traded companies must function. Although there will be additional work on both designing, testing and auditing of controls if LBJ decides to go public, but the control system may result in money and time saved in the long-term regardless. We have to foresee the importance and understand thr advantages when the company goes public;
1. Broader access to raising capital leading to increased financial stability. By going public, you tap into the single biggest source of capital in the United States. And one third of all companies that go public do a secondary offering within the first five years of going public; so for growing companies, this is a critical source of capital.
2. Establishes a market price for the company. This can be important for “marketing” the company. Owners often try to...