2RQ - Horngren'S Financial And Managerial Accounting

Question

Question: How does the Sarbanes-Oxley Act relate to internal controls?

Step-by-Step Solution

Answer

Answer:

Sarbanes-Oxley Act revamped corporate governance in the United States and was introduced to establish the internal control system in an organization to prevent the accounting scandals.

Step 1: Meaning of Internal Control

Internal control refers to a process followed by business organizations to safeguard assets, motivate and encourage employees to follow the company's policies, and decrease the chances of fraud.

 

Step 2: Relation of Sarbanes-Oxley act with internal control

The Sarbanes-Oxley Act relates to internal control because according to this act companies need to review controls and take all the responsibility for the accuracy of the financial reports. This act has a provision that the company must issue an internal control report in which all the responsibility and the accuracy of the financial reports are described.