Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE credits
With the advent of corporate scandals in North America most notably the Enron case, the US congress passed the Sarbanes-Oxley Act to redress the situation. This act aims to restore confidence of investors in financial markets, and to improve the management of companies. The three main principles of the Act are: exactitude and availability of information, responsibility of managers, and independence of auditors. The section 404,which is one of the main sections of the act, deals with internal control and requires that management undertake an assessment of internal control over financial reporting. This section can be considered to be the focal point of the Sarbanes-Oxley law and is the main focus of our study. The Sarbanes-Oxley act is an American law but European companies who seek funds in the US markets also have to comply with the act. This led us to formulate the following question:
How does the section 404 of Sarbanes-Oxley Act impact on European companies in terms of Internal Control over Financial Reporting?
To answer the research question, we have chosen to undertake an exploratory study,concentrating on Sweden.
We have conducted our study using a qualitative method, making interviews to gather primary data. The companies we interviewed all had their headquarters located in Sweden and had to comply with SOX. We conducted four interviews with companies of different sizes, different industries and which most importantly, had implemented Sarbanes-Oxley for different reasons.
Basing our research on the following theory:
Risks when realizing the financial statements.
Material misstatements (errors) in financial reports.
The Sarbanes-Oxley act,
And more precisely the section 404 of the act,
We built up an interview guide that we used for the interviews. Our theory and the interview guide helped us to focus on key points during our research. We looked for the consequences of the implementation of Sarbanes-Oxley, the impact of section 404 on material errors, the European perspective following Sarbanes-Oxley and the general point of view of the interviewees.
The result of our studies is that the implementation of the section 404 of the Sarbanes-Oxley Act had a positive impact on the companies. Indeed many improvements have been noticed after the implementation of Sarbanes-Oxley, such as the improvement of the organization of the company, the level of competence of the employees (especially of the management and the employees of the financial department), better communication, and improved IT systems. Companies are more able to focus on internal control and they recognize that it’s an important and useful tool for the company. Companies also agreed on the benefits of the COSO framework for developing internal control within the company.
Umeå: Handelshögskolan vid Umeå universitet , 2007. , 87 p.