Introduction

The legislation came into force in 2002 and introduced major changes to the
regulation of financial practice and corporate governance. Named after Senator Paul
Sarbanes and Representative Michael Oxley, who were its main architects, it also set
a number of deadlines for compliance.

The Sarbanes-Oxley Act is arranged into eleven titles. As far as compliance is

concerned, the most important sections within these are often considered to be 302,
401, 404, 409, 802 and 906.

An over-arching public company accounting board was also established by the act,
which was introduced amidst a host of publicity.

Sarbanes-Oxley Compliance
Compliance with the legislation need not be a daunting task. Like every other
regulatory requirement, it should be addressed methodically, via proper analysis and
study.

Also like other regulatory requirements, some sections of the act are more pertinent
to compliance than others. To assist those seeking to meet the demands of this act,
the following pages cover the key Sarbanes-Oxley sections:

Sarbanes-Oxley Section 302

Sarbanes-Oxley Section 401
Sarbanes-Oxley Section 404
Sarbanes-Oxley Section 409
Sarbanes-Oxley Section 802

Sarbanes-Oxley Act Section 302

This section is of course listed under Title III of the act, and pertains to 'Corporate
Responsibility for Financial Reports'.

Summary of Section 302

Periodic statutory financial reports are to include certifications that:

The signing officers have reviewed the report

The report does not contain any material untrue statements or material
omission or be considered misleading
The financial statements and related information fairly present the financial
condition and the results in all material respects
The signing officers are responsible for internal controls and have evaluated
these internal controls within the previous ninety days and have reported on
 their findings
A list of all deficiencies in the internal controls and information on any fraud
that involves employees who are involved with internal activities
Any significant changes in internal controls or related factors that could
have a negative impact on the internal controls

Organizations may not attempt to avoid these requirements by reincorporating their

activities or transferring their activities outside of the United States

Summary of Section 401

Financial statements are published by issuers are required to be accurate and

presented in a manner that does not contain incorrect statements or admit to state
material information. These financial statements shall also include all material off-
balance sheet liabilities, obligations or transactions. The Commission was required to
study and report on the extent of off-balance transactions resulting transparent
reporting. The Commission is also required to determine whether generally accepted
accounting principals or other regulations result in open and meaningful reporting by
issuers.

Summary of Section 404

Issuers are required to publish information in their annual reports concerning the
scope and adequacy of the internal control structure and procedures for financial
reporting. This statement shall also assess the effectiveness of such internal controls
and procedures.

The registered accounting firm shall, in the same report, attest to and report on the
assessment on the effectiveness of the internal control structure and procedures for
financial reporting

Summary of Section 409

Issuers are required to disclose to the public, on an urgent basis, information on

material changes in their financial condition or operations. These disclosures are to
be presented in terms that are easy to understand supported by trend and
qualitative information of graphic presentations as appropriate.

This section is listed within Title VIII of the act (Corporate and Criminal Fraud
Accountability), and pertains to 'Criminal Penalties for Altering Documents'.

Summary of Section 802

This section imposes penalties of fines and/or up to 20 years imprisonment for
altering, destroying, mutilating, concealing, falsifying records, documents or tangible
objects with the intent to obstruct, impede or influence a legal investigation. This
section also imposes penalties of fines and/or imprisonment up to 10 years on any
accountant who knowingly and wilfully violates the requirements of maintenance of
all audit or review papers for a period of 5 years

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Sarbanes-Oxley Act
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Before the signing ceremony of the Sarbanes-Oxley Act, President George Bush meets
with Senator Paul Sarbanes, Secretary of Labor Elaine Chao and other dignitaries in the
Blue Room at the White House on July 30, 2002.

The Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745, also known as the
Public Company Accounting Reform and Investor Protection Act of 2002 and
commonly called SOX or Sarbox; July 30, 2002) is a controversial United States federal
law passed in response to a number of major corporate and accounting scandals including
those affecting Enron, Tyco International, Peregrine Systems and WorldCom (recently
MCI and now currently part of Verizon Businesses). These scandals resulted in a decline
of public trust in accounting and reporting practices. Named after sponsors Senator Paul
Sarbanes (D-Md.) and Representative Michael G. Oxley (R-Oh.), the Act was approved
by the House by a vote of 423-3 and by the Senate 99-0. The legislation is wide ranging
and establishes new or enhanced standards for all U.S. public company boards,
management, and public accounting firms. The Act contains 11 titles, or sections, ranging
from additional Corporate Board responsibilities to criminal penalties, and requires the
Securities and Exchange Commission (SEC) to implement rulings on requirements to
comply with the new law. Some believe the legislation was necessary and useful, others
believe it does more economic damage than it prevents, and yet others observe how
essentially modest the Act is compared to the heavy rhetoric accompanying it.
The first and most important part of the Act establishes a new quasi-public agency, the
Public Company Accounting Oversight Board, which is charged with overseeing,
regulating, inspecting, and disciplining accounting firms in their roles as auditors of
public companies. The Act also covers issues such as auditor independence, corporate
governance and enhanced financial disclosure. It is considered by some as one of the
most significant changes to United States securities laws since the New Deal in the
1930s.

Contents
[hide]
1 History
2 Provisions
3 Overview of PCAOB's requirements for auditor attestation of control disclosures
under Section 404
4 Internal controls
o 4.1 Information technology and SOX 404
o 4.2 IT controls, IT audit, and SOX
o 4.3 IT Impacts
5 Cost of implementation
6 The future of SOX 404 compliance
7 Legislative information
8 Law Review commentaries
9 References
10 See also
11 External links
o 11.1 Forum
o 11.2 Articles
o 11.3 Surveys
o 11.4 Similar legislation in other jurisdictions

11.4.1 Australia

[edit] History
The House passed Rep. Oxley's bill (H.R. 3763) on April 25, 2002, by a vote of 334 to
90. The House then referred the "Corporate and Auditing Accountability, Responsibility,
and Transparency Act" or "CAARTA" to the Senate Banking Committee with the support
of President George W. Bush and the SEC. At the time, however, the Chairman of that
Committee, Senator Paul Sarbanes (D-MD), was preparing his own proposal, Senate Bill
2673..

Senator Sarbanes bill passed the Senate Banking Committee on June 18, 2002, by a vote
of 17 to 4. On June 25, 2002, WorldCom revealed it had overstated its earnings by more
than $72 billion during the past five quarters, primarily by improperly accounting for its
operating costs. Sen. Sarbanes introduced Senate Bill 2673 to the full Senate that same
day, and it passed 97-0 less than three weeks later on July 15, 2002.

The House and the Senate formed a Conference Committee to reconcile the differences
between Sen. Sarbanes' bill (S. 2673) and Rep. Oxley's bill (H.R. 3763). The conference
committee relied heavily on S. 2673 and most changes made by the conference
committee strengthened the prescriptions of S. 2673 or added new prescriptions. (John
T. Bostelman, The Sarbanes-Oxley Deskbook 2-31.)

The Committee approved the final conference bill on July 24, 2002, and gave it the name
"the Sarbanes-Oxley Act of 2002." The next day, both houses of Congress voted on it
without change, producing an overwhelming margin of victory: 423 to 3 in the House and
99 to 0 in the Senate. On July 30, 2002, President George W. Bush signed it into law,
stating it included "the most far-reaching reforms of American business practices since
the time of Franklin D. Roosevelt." (Elisabeth Bumiller: "Bush Signs Bill Aimed at Fraud
in Corporations", The New York Times, July 31, 2002, page A1).

[edit] Provisions
The Sarbanes-Oxley Act's major provisions include the following:

Creation of the Public Company Accounting Oversight Board (PCAOB)

A requirement that public companies evaluate and disclose the effectiveness of
their internal controls as they relate to financial reporting, and that independent
auditors for such companies "attest" (i.e., agree, or qualify) to such disclosure
Certification of financial reports by chief executive officers and chief financial
officers
Auditor independence, including outright bans on certain types of work for audit
clients and pre-certification by the company's Audit Committee of all other non-
audit work
A requirement that companies listed on stock exchanges have fully independent
audit committees that oversee the relationship between the company and its
auditor
Ban on most personal loans to any executive officer or director
Accelerated reporting of insider trading
Prohibition on insider trades during pension fund blackout periods
Additional disclosure
Enhanced criminal and civil penalties for violations of securities law
Significantly longer maximum jail sentences and larger fines for corporate
executives who knowingly and willfully misstate financial statements, although
maximum sentences are largely irrelevant because judges generally follow the
Federal Sentencing Guidelines in setting actual sentences
Employee protections allowing those corporate fraud whistleblowers who file
complaints with OSHA within 90 days to win reinstatement, back pay and
benefits, compensatory damages, abatement orders, and reasonable attorney fees
and costs.
[edit] Overview of PCAOB's requirements for auditor
attestation of control disclosures under Section 404
Auditing Standard No. 2' of the Public Company Accounting Oversight Board (PCAOB)
has the following key requirements:

Assess both the design and operating effectiveness of internal controls related to
relevant financial statement assertions for all significant accounts and disclosures
in the financial statements;
Understand how significant transactions are initiated, authorized, supported,
processed, and reported;
Document sufficient information about the flow of transactions to identify where
material misstatements due to error or fraud could occur;
Evaluate company-level (entity-level) controls, which correspond to the
components of the COSO framework;
Evaluate controls designed to prevent or detect fraud, including management
override of controls;
Evaluate controls over the period-end financial reporting process;
Evaluate controls over the safeguarding of assets; and
Conclude on the adequacy of both management's assessment and internal control
over financial reporting.

[edit] Internal controls

Under Sarbanes-Oxley, two separate certification sections came into effectone civil and
the other criminal. 15 U.S.C. 7241 (Section 302) (civil provision); 18 U.S.C. 1350
(Section 906) (criminal provision).

Section 302 of the Act mandates a set of internal procedures designed to ensure accurate
financial disclosure. The signing officers must certify that they are responsible for
establishing and maintaining internal controls and have designed such internal controls
to ensure that material information relating to the company and its consolidated
subsidiaries is made known to such officers by others within those entities, particularly
during the period in which the periodic reports are being prepared. 15 U.S.C. 7241(a)
(4). The officers must have evaluated the effectiveness of the companys internal
controls as of a date within 90 days prior to the report and have presented in the report
their conclusions about the effectiveness of their internal controls based on their
evaluation as of that date. Id..

Moreover, under Section 404 of the Act, management is required to produce an internal
control report as part of each annual Exchange Act report. See 15 U.S.C. 7262. The
report must affirm the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting. 15
U.S.C. 7262)a). The report must also contain an assessment, as of the end of the most
recent fiscal year of the Company, of the effectiveness of the internal control structure
and procedures of the issuer for financial reporting. Id. To do this, managers are
generally adopting an internal control framework such as that described in COSO.

Under both Section 302 and Section 404, Congress directed the SEC to promulgate
regulations enforcing these provisions. (See Final Rule: Managements Report on Internal
Control Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, Release No. 33-8238 (June 5,2003), available at
http://www.sec.gov/rules/final/33-8238.htm.)

In addition, outside auditors for companies must, for the first time, attest to managers'
internal control assessment, pursuant to SEC rules, which currently require only large
public companies comply with this part of SOX. This presents new challenges to
businesses, specifically, documentation of control procedures related to information
technology ("IT"). Public Company Accounting Oversight Board (PCAOB) has issued
guidelines on how auditors should provide their attestations.

[edit] Information technology and SOX 404

The PCAOB suggests considering the Committee of Sponsoring Organizations of the

Treadway Commission (COSO) framework in management/auditor assessment of
controls. Auditors have also looked to the IT Governance Institute's "COBIT: Control
Objectives of Information and Related Technology" for more appropriate standards of
measure. This framework focuses on information technology (IT) processes while
keeping in mind the big picture of COSO's "control activities" and "information and
communication". However, these certain aspects of COBIT are outside the boundaries of
Sarbanes-Oxley regulation.

[edit] IT controls, IT audit, and SOX

The financial reporting processes of most organizations are driven by IT systems. Few
companies manage their data manually and most companies rely on electronic
management of data, documents, and key operational processes. Therefore, it is apparent
that IT plays a vital role in internal control. As PCAOB's "Auditing Standard 2" states:

"The nature and characteristics of a company's use of information technology in

its information system affect the company's internal control over financial
reporting."

Chief information officers are responsible for the security, accuracy and the reliability of
the systems that manage and report the financial data. Systems such as ERP (Enterprise
Resource Planning) are deeply integrated in the initiating, authorizing, processing, and
reporting of financial data. As such, they are inextricably linked to the overall financial
reporting process and need to be assessed, along with other important process for
compliance with Sarbanes-Oxley Act. So, although the Act signals a fundamental change
in business operations and financial reporting, and places responsibility in corporate
financial reporting on the chief executive officer (CEO) and chief financial officer (CFO),
the chief information officer (CIO) plays a significant role in the signoff of financial
statements.

For a detailed discussion on the impact of SOX on IT audit and controls, see Information
technology controls.

[edit] IT Impacts

For another description of the COSO framework, see: COSO

The SEC identifies the COSO framework by name as a methodology for achieving
compliance. The COSO framework defines five areas, which when implemented, can
help support the requirements as set forth in the Sarbanes-Oxley legislation. These five
areas and their impacts for the IT Department are as follows:

Risk Assessment. Before the necessary controls are implemented, IT management must
assess and understand the areas of risk affecting the completeness and validity of the
financial reports. They must examine how the company's systems are being used and the
current level and accuracy of existing documentation. The areas of risk drive the
definition of the other four components of the COSO framework.

Control Environment. An environment in which the employees take ownership for the
success of their projects will encourage them to escalate issues and concerns, and feel
that their time and efforts contribute to the success of the organization. This is the
foundation on which the IT organization will thrive. Employees should cross train with
design, implementation, quality assurance and deployment teams to better understand the
entire technology lifecycle.

Control Activities. Design, implementation and quality assurance testing teams should
be independent. ERP and CRM systems that collect data, but feed into manual
spreadsheets are prone to human error. The organization will need to document usage
rules and create an audit trail for each system that contributes financial information.
Further, written policies should define the specifications, business requirements and other
documentation expected for each project.

Monitoring. Auditing processes and schedules should be developed to address the high-
risk areas within the IT organization. IT personnel should perform frequent internal
audits. In addition, personnel from outside the IT organization should perform audits on a
schedule that is appropriate to the level of risk. Management should clearly understand
and be held responsible for the outcome of these audits.

Information and Communication. Without timely, accurate information, it will be

difficult for IT management to proactively identify and address areas of risk. They will be
unable to react to issues as they occur. IT management must demonstrate to company
management an understanding of what needs to be done to comply with Sarbanes-Oxley
and how to get there.
[edit] Cost of implementation
Some people in the business community have acknowledged that, as John Thain, CEO of
the New York Stock Exchange states, "There is no question that, broadly speaking,
Sarbanes-Oxley was necessary" [1]. However, the cost of implementing the new
requirements has led some to widespread questioning of how effective or necessary the
specific provisions of the law truly are.

For companies, a key concern is cost of updating information systems to comply with the
control and reporting requirements. Systems which provide document management,
access to financial data, or long-term storage of information must now provide auditing
capabilities. In most cases this requires significant changes, or even complete
replacement, of existing systems which were designed without the needed level of
auditing details.

Costs associated with SOX 404 compliance have proven to be significant. According to
the Financial Executives International (FEI), in a survey of 217 companies with average
revenue above $5 billion, the cost of compliance in the first year was an average of $4.36
million. The high cost of compliance throughout the first year can be attributed to the
sharp increase in hours charged per audit engagement. These compliance costs can be
minor for a Fortune 500 company but insurmountable for a smaller company with only a
few million in revenue. On the other hand, SOX 404 is not yet effective for smaller
companies (i.e., less than $75 MM in market capitalization), and it is not yet clear what
SOX 404 will require for smaller companies when it does it take effect.

As more companies and auditors gain experience with SOX 404, audit costs have been
falling. Audit firm revenues are still higher than they were prior to the Act, although audit
fees were rising prior to the Act, partly as a result of the accounting scandals that
prompted the Act.

Some have asserted that Sarbanes-Oxley legislation has helped displace business from
New York to London, where the Financial Services Authority allegedly regulates the
financial sector with a lighter touch. But this claim is hard to reconcile with the fact that a
greater amount of resources are dedicated to enforcement of securities laws in the UK
than in the US -- see Howell E. Jackson & Mark J. Roe, Public Enforcement of
Securities Laws: Preliminary Evidence, (Working Paper January 16, 2007). The amount
of business displaced from Wall Street to the City of London remains disputed[2]. The
Alternative Investment Market claims that its spectacular growth in listings almost
entirely coincided with the Sarbanes Oxley legislation, but its self-interest in attributing
its success to its most salient feature (lack of regulation) is self-evident. In December
2006 Michael Bloomberg, New York's mayor, and Charles Schumer, a U.S. senator,
expressed their concern. On the other hand, the NYSE's share of cross-border new stock
listings fell more in 2001 (prior to SOX) than it did in 2002 (after SOX was adopted), and
there is a long-term trend towards more liquidity in markets outside both NY and London
that make strong claims about the effect of SOX on NY's market dominance
questionable, as shown in a recent survey article in the Journal of Economic Perspectives.
[3]

[edit] The future of SOX 404 compliance

In a recent article by the accounting and consulting firm of Deloitte Touche Tohmatsu
entitled "Under Control", the need for "sustainable compliance" is encouraged. The
article suggests leveraging lessons learned to shift to a long-term strategy. The following
areas are described as impediments to the process:

"Project mindset: many companies understandably treated section 404

compliance as a discrete project with a clearly defined ending point."
"Overextension of internal audit: If management continues to utilize internal
audit for intensive 404 and 302 compliance-related work, then a significant
infusion of resources (i.e., budget and headcount) to accommodate the additional
workload will be needed."
"Poorly defined roles: Internal control-related roles and responsibilities, often
poorly defined and segregated from the day-to-day routine of employees during
the first year, will require greater clarity and integration going forward"
"Improvisational approach: Another symptom of deadline pressure showed up
in the jerrybuilt practices that carried many companies through the first year."
"Underestimation of technology impacts and implications: IT is recognized
as critical for achieving the goals of the Act, and the impact and implications of
technology are widely regarded as significant and pervasive. In many year-one
projects, organizations focused heavily on business processes and did not consider
the broader role that IT plays in managing financial information and enabling
controls IT will make a huge impact on compliance going forward. At a
minimum, technology investments will be necessary to support sustainable
compliance in several areas, including repository, work flow, and audit trail
functionality. Technology will also be used to enable the integration of financial
and internal control monitoring and reporting a critical requirement at most
large and complex enterprises."
"Ignored risks: Effective internal control is predicated on risk the controls
themselves exist expressly for the purpose of minimizing the risk of financial
reporting errors In year one, risk assessment was treated as an afterthought if
addressed at all."

The future of SOX 404 will depend on the ability of businesses to respond to the areas
noted above by making it a part of every-day business. Deloitte has developed the
"Sustained Compliance Solution Framework". Key areas of the framework are also taken
from "Under Control":

Effective and efficient processes for evaluating testing, remediating, monitoring,

and reporting on controls
Integrated financial and internal control processes
Technology to enable compliance
 Clearly articulated roles and responsibilities and assigned accountability
Education and training to reinforce the "control environment"
Adaptability and flexibility to respond to organizational and regulatory change.

Accounting Ethics
Uploaded by Buster57 on Dec 15, 2004

Accounting Ethics

When examining the effect of open marketing on the profession of accounting it is important to view it
from three perspectives: the client's, the profession's, and society's. Additionally, two key areas that are
affected by marketing must be addressed, these are concerning competition, and ethical implications.
Marketing in public accounting is here to stay therefore making an argument against its existence would
be fruitless; however, in order to achieve maximum benefit to the firm, the client, and s ociety more
stringent guidelines must be implemented at the firm level. The first, and most obvious, of the effected
areas is competition. Within competition several points are discussed. First, the implications advertising
has on public accounting-- the model of perfect competition versus the model of monopolistic compet
ition. Secondly, the relationship between firm size and advertising expenditures. Thirdly, the effect of
advertising on firm specialization, the implications of client turnover on public accounting practice. Before
making the comparison, a brief explanation why the two models are chosen is in order. Monopolistic
competition has been chosen for the pre-advertising era because it most closely resembles the market
structure in an extreme sense. The elements o f monopolistic competition are as follows: product
differentiation, the presence of large numbers of sellers, and nonprice competition. Although accounting
services between firms offer very little service differentiation, the absence of advertising serve s as a
replacement because clients are not necessarily aware that other options are easily attainable. The post-
advertising era is explained through the model of perfect competition for which the qualifications are as
follows: very little or no service d ifferentiation, many sellers, and price as the only means of
distinguishing one firms service from anothers. In a perfectly competitive market the price of a particular
service is established solely by the interaction of market demand and supply. (Thompson p.277) When
market demand for accounting services increases the resulting demand shifts right causing pri ces to
increase returning the market back to equilibrium. However when supply increases, such is the
theoretical effect of adding advertisement to public accounting practice, the supply curve shifts right
causing prices to fall. The model of monopolistic competition is also price sensitive, however only at the
firm level. For example, the CPA firm of XYZ has an established clientele base and uses referrals as its
sole means of growth. They increase prices only as their cost o f providing the service increases and
therefore are able to maintain their client base. In this example a gently downsloping demand curve
exists (Thompson p.304) causing only drastic changes in pricing to send their client base shopping for a
new firm. The result is XYZ can continue to grow by practicing fair pricing and providing a reputable
service. Cut rate pricing only marginally effects their client base because there is little means to make
their pricing publicly known, and only drastic, unwarran ted increases sends clients packing. Conversely,
in the post-advertising era, XYZ must always be aware of market pricing because the demand curve is
steeper and more volatile. Therefore the client base of XYZ is not stable as in the previous example and
measures must be taken to keep price s competitive with other firms regardless of cost inferences. The
result is the necessity of a more aggressive policy regarding new client recruiting and a higher turnover
of existing clients. Now that the differences are established, the resulting issues in public accounting can
be discussed. The first area deserving discussion is the relationship between firm size and advertising.
expenditures. A study made of CPA firms in Britain in 1985 asserted "the most dramatic contrast between
advertisers and non-advertisers was their size." (O'Donohoe p.122) The obvious reason for this anomaly
is availability of resources. Larger firms ha ve, at their disposal, a much larger profit level; therefore
advertising expense is easily included only marginally affecting bottom line. This implies larger firms to
have gained a great deal more from inclusion of advertising than small firms. Consequ ently, small firms
could be pushed out of the picture entirely in the area of audit services. Why? In the area of audit
services, small firms have little to offer to differentiate themselves from their larger counterparts who can
now freely move in and perform the service at a lower price. This, unfortunately, will be a byproduct of
the adverti sing era. Smaller firms only hope is to emphasize "personalized service" in tax and full
service areas in hope that audit services can result. The major drawback is small firms are offered little
room for growth because of the expense involved. Adverti sing in public accounting causes perspective
clients to become bottom line oriented meaning the firms with the most available revenue to dump into
advertising, coupled with the resources to offer lowest fees are the ones which grow. These resources
are h eld by Big Six firms and large regional firms. As a result these firms will grow while small firms
struggle. The second inference drawn from the model of perfect competition is some smaller firms being
forced to specialize. In order to differentiate themselves some smaller regionally operated firms have
chosen to specialize. In the March 1990 issue of the CPA Journal Arvid Mostad, CPA published an article
in which he set up "Seven Marketing Guidelines." His first guideline was "Create your own special niche."
(Mostad p.54) He goes on to encourage small firms to establish an area of expertise. (Mostad p.54) This
develops significant implications regarding firm longevity in a capitalistic market of industry upswings and
downturns. An example of this is the construction industry in the Baltimore-Washington corridor. The
industry experienced phenomenal growt h in the Eighties followed by a near halt. The result? many small
to medium size firms following the advice of specialization went belly up along with their clients. This
uncertainty exists with any firms who specialize. ! Firm specialization clearly is n The final implication of
the new competitive market is client turnover. Gone are the days when firms could guarantee retaining a
client by providing a quality service at a fair price. New market pressures require firms to constantly
evaluate pricing st rategies, and, in some cases bid on jobs yearly. This creates high levels of client
turnover. The result is firms must always actively seek new clients. Several drawbacks of this are
increased overhead costs to firms, less stability, and greater servic e cost. Firms overhead costs
increase because the expenses of replacing clients must be absorbed. This expense comes from both
marketing tools used to attract clients, and costs of preparing a bid to perform a service. Firms which
previously served a client base from year to year must face the uncertainty of retention of their client
base now. The cost of providing a service to a new client greatly exceeds that of providing the same
service to an existing client. When ! providing a service to a new clie Now that the difference in the
competition aspect of public accounting is established emphasis is changed to examine the ethical
implications derived as a result. In the area of ethics one must examine differences in independence,
and integrity, and eva luate the changes in quality of service resulting from these areas. When examining
independence one must maintain an emphasis on the competitive structure of the market and new
pressures in the area of client retention. Independence, one may argue, never existed before; however
an assumption is made that independence, t o some extent, historically exists. With the competitive
structure now present the process of gaining a new, and retaining an existing, client has become
increasingly costly and time consuming. One may then infer that once a client is obtained, a firm would
wish to do business with that client for an extended number of years, in order to realize the benefit of
expenses incurred. Put simply, a firm would not look kindly toward a partner who lost a new client. This,
inherently, decreases auditor indep endence during the first several years of the engagement. The
partner overseeing the audit must always concern himself with the consequences of losing the
engagement. Previously, firms worked mostly with longstanding clien! ts and the relationship developed
The second major area of ethical effect is that of integrity. Competition has resulted in some firms
damaging the integrity of the profession. This damage has occurred mainly through pricing practices.
Two deviant practices have become commonplace in today's market. These are below cost pricing, and
discount pricing. Many firms have adopted policies of below cost pricing as a tool of market penetration,
(Formichella p.199) implications regarding the motives and integrity of these firms must be explo red. Is it
reasonable to assume that a firm would be willing to absorb a loss from an engagement, or would a more
practical assumption state that firms which lowball would seek means to cut service costs at the expense
of quality? It is not possible to answer this question; however its mere existence creates a damaging
effect on the integrity, or at least perceived integrity, of the profession. The second pricing strategy which
is cut-rate pricing provokes similar questions. In his commentary Mario Formichella states the following:
It is no longer unusual to find firms willing to take on work at substantial discounts from standard fee
levels. While there may be justifications for performing services at reduced rates during off-peak periods
in special situations such as for non-profit institutions or similar organizations, the extent to which this
practice has grown cannot be justified on any logical or professional basis. (Formichella p. 81)

The distaste shown by Mr. Formichella in the area of cut-rate pricing shows it as an issue of concern and
one which damages integrity. Mr. Formichella goes on to call for the implementation of professional
standards to prohibit actions such as this which are damaging to the image and integrity of the
profession. One would have to agree with his statement; however difficulties arise, in the area of
monopolistic activity when guidelines are established regarding pricing strategies across an industry. Unf
ortunately the profession must rely on the integrity of individual firms to guard against this strategy. As a
result, this is a practice likely to continue, albeit damaging to the profession and those which rely on the
statements made by the profession. The existence of advertising in public accounting creates a new
environment to which firms are still adapting. This new environment is largely the result of increased
competition and a clientele which is increasingly more bottom line oriented. In order to compete firms
must place more emphasis on marketing and accept it as a cost of doing business. The result of this will
be more difficult penetration and an increasingly limited number of small firms in the business. Market
pressures also are forcing creating situations where ethical issues such as independence and integrity
are questioned making it imperative that the AICPA create guidelines from which the evolving profession
must base itself. In the age of deregulation accounting jumped on the boa t, now it is becoming
increasingly fashionable to re-regulate, accounting, as a profession must not miss that boat, lest they
drown in the result-- government intervention.

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Working Paper:

Review of Integrity Management of Staff

in the Ghana, Tanzania and Uganda
Revenue Authorities

by Michael Waller
June 2000

Summary
Appendix 1 - Ghana
Appendix 2 - Tanzania
Appendix 3 - Uganda
Appendix 4 - Terms of Reference

Summary
1. Introduction
2. Terms of Reference
 6.6 Strong technical competence amongst the front line tax assessors is essential and in all
cases the revenue authorities inherited a weak base but much has been done to improve
this over the years. There is no trained recruitment pool and recruits who are totally new to
tax are given extended periods of basic training and programmes are introduced when
significant changes are made but there was generally no continuous programme of
training. In Uganda a progressive programme of management training has been introduced
involving not only the use of management reports but also local visits etc, methods which
also contribute to closer review of what is actually happening down the line; such training
was cynically viewed initially but in practice has been warmly welcomed. In spite of such
training staff are generally considered technically weak by third parties.

5. Audit and Other Investigation Procedures

7.1 The Authorities are all subject to both external and internal audit. The former is carried out by
the Government Auditor General with the focus on the annual accounts and generally employs a
transactional approach with few major issues arising. A report is issued to Parliament.

7.2 Internal Audit carries out normal traditional internal audit work and generally reports to
management and the Board. They all expressed satisfaction with the overall systems of internal
control with such weaknesses as they found being addressed by management, although other
issues frequently raised included problems at customs posts, bonded warehouses and goods in
transit to other countries. Internal Audit often undertook other roles such as investigations into staff
allegations and assisting with the control of returns of the Staff Declarations of Assets but this was
otherwise carried out by other specific departments. The Revenue Authorities also reviewed the
work of the assessors as part of their quality control programme, and had departments for
investigation of alleged tax evasion, under-declarations etc. as well as routine checking of tax
returns at the taxpayers. "Sting" procedures, whereby undercover agents are put into situations
where a problem is suspected with either the taxpayer or the staff member, were rarely employed.

7.3 Quality control procedures of internal work is performed through reviews both before and on a
test basis after assessments are provided to the taxpayer.

7.4 Third party reviews can often produce beneficial results and management in all the Authorities
might consider hiring an international firm of accountants to review their systems and internal
controls. This does not mean to say that the internal and external auditors are not doing a good job
but rather that a fresh view often produces innovative ideas.

6. Internal Systems and Computerisation

8.1 The use of modern technology with strong internal and management controls is most
important in any modern organisation but in all three countries the funds made available to
the Revenue Authorities have been sporadic and fallen woefully short of their needs. The
systems are most advanced in Uganda with many hand-written records in the other two
countries, particularly in Ghana but in all the Authorities there remains much to do both
with fundamental accounting and management systems and with front line modern
infrastructure and technologically based equipment. This applies particularly to Customs
where the greatest inefficiencies and loss of revenue exists. Each of the Authorities has
obtained or is hoping to obtain donor support to install modern systems and technology in
parts of their entities - Uganda $4m, Tanzania $70m and Ghana $7m.

7. Other matters

9.1 Each Authority has a Taxpayers Education and Public Relations Department, which plays an
important role in informing the public of their rights and obligations as well as providing
documentation and training on taxes. In some cases whistle blowing is encouraged, sometimes
with rewards measured against additional taxes collected but in general such procedures were not
formalised or well publicised. In each country a Taxpayers Charter has been or is about to be
published clearly setting out the obligations of the Revenue Authority as well as the rights and
obligations of the Taxpayer. Such documents however generally require greater publicity and
follow up procedures where the public feel they are being let down.

9.2 There is much public ignorance about the role of the Authorities as well as its achievements.
For example the Uganda Revenue Authority is blamed for giving tax exemptions whereas they are
wholly the responsibility of the MOF and Parliament. The public also believes that the Authorities
 do not aggressively pursue allegations of corruption amongst staff as they rarely see prosecutions.
The taxpayer often feels unjustifiably hounded and does not understand the problems facing the
Authorities in executing the work. In short the public holds the Revenue Authorities in low esteem.
An annual Stakeholder Report for the public might be a method of furthering accountability and
information by the Authorities. This would be a separate document to any provided to Government
or Parliament and would be no more than say 2 or 3 pages covering brief financial information,
successes over the past year, innovations introduced, staff matters etc. In Tanzania a newsletter is
published periodically and one issue could be utilised to cover such a report.

9.3 An area of constant complaint was that of harassment and ludicrously high assessments from
the Revenue Authorities stemming from weak technical knowledge, lack of care or even frustration,
and if appeals were to be made then the taxpayer was required to prepay substantial amounts on
account first. This sort of situation clearly provides opportunities for corruption between the
taxpayer and the Authority's staff. In Ghana a pre- assessment system is employed at the
commencement of the year based on the previous years assessment which may be appealed
within three months but in any event the agreed pre-assessment is checked against the final
computation. Such a system does not by itself overcome potential problems but it does provide a
formal framework. Some Authorities also expect all assessments and pre- assessments to be
previewed by a supervisor before being sent out. Another issue is that assessments once agreed
are not formally signed off thus leaving them open to review even for very minor points. If they
were formally agreed, there would of course be the ability to reopen past years given just cause.

9.4 The appeal system varies in the various countries with the most formal and transparent being
in Uganda where the independent Tax Appeals Tribunal was recently introduced and has been
greatly welcomed by the public. In Tanzania where there is much being reorganised there is scope
under the law for such an independent tribunal but none has been set up yet, whilst in Ghana
appeals are all handled internally.

8. Conclusion

10.1 In all three countries corruption is considered to be rampant and deeply ingrained
throughout the public and private sectors. It is considered to exist at all levels of society
including government officials but despite the rhetoric and some of the actions
implemented the political will is universally considered weak. Without strong, clear
leadership, and support throughout Government, its various departments and the law
enforcers, it is unlikely that any real advance in the fight against the evils of corruption will
be made.

10.2 The primary task of tax collections has been successfully achieved by the semi-
autonomous Revenue Authorities and continues to be their principal focus. Strong internal
and other management controls together with sound human resource policies are the
fundamentals to controlling low ethical standards amongst staff and in this the Revenue
Authorities have achieved much particularly given the paucity of funds for investment in
modern equipment but there is much still to do. Nevertheless the Revenue Authorities are
considered to be no exception to the malaise of corruption in their respective countries
amongst their staff.

10.3 Concerted action not only by Government but by all sections of society including the
Revenue Authorities is required in each of the countries if the culture of corruption is to be
curbed and the economies are to prosper for the good of all their people.

June 2000

Main Observations

All three countries are considered corrupt throughout all levels of society and the Revenue
Authorities are no exception.

Government makes anti-corruption pronouncements, introduces some measures but the

political will is lacking.
Revenue Authorities have been most successful in their primary task of tax collection but
leakage arise in Customs, VAT and under declarations of personal incomes as well as from
the informal economy.
 Tax base is now broader and deeper but care must taken not to be overzealous and harass
the taxpayer.
Generally systems are adequate but inadequate funds have been provided to invest in
modern back and front office technology.
No incentive exists for management of Authorities to effect efficiencies as savings revert to
the MOFs.
Revenue Authorities have been set up to be semi-independent of MOF and Civil Service but
this has been eroded over time.
The Revenue Authority Boards are not strong independent bodies and leadership comes
from management, whose organisation appears sound.
Management has organised relevant sub-committees for contracts, property, staff appeals
and internal audit.
Staff complements vary widely in the three countries but not immediately apparent why.
Staff Manuals have been prepared and are available for staff to look at. These contain
references to recruitment processes, letters of employment, annual assessments and
promotion, vacations, loans and expenses, investigations, dismissals and appeals etc.
Behavioural standards are implicit and generally not spelt out, particularly regarding
conflicts of interest. A separate Code of Conduct (ethics and integrity) would be preferable
as in Tanzania and under consideration in Ghana. Confirmation of compliance with the
Manual and the Code should be obtained annually from each employee.
A summary of the Code of Conduct should be prominently placed in relevant public places
e.g. Customs Halls
Declarations of Assets are obtained in Tanzania and Uganda and used when any staff are
investigated but abandoned in Ghana as impractical.
When set up as semi-independent Revenue Authorities they were freed from the low levels
of Civil Service remuneration and staff were given salaries and wages near to those in the
private sector as one step to reduce corruption. Increases thereafter were often denied by
the MOF and remuneration rates have fallen well behind the private sector. In Ghana there
is talk that the Revenue Authorities salaries and wages will fall back into the new Civil
Service scales which are well below those in the Authorities at present, which will
undoubtedly cause further problems amongst staff and with recruitment.
Staff rotation is attempted in vulnerable posts but is not always practicable.
The technical standards have improved considerably over the years but many still consider
the Revenue Staff to be weak. Training is given and staff is subjected to periodic quality
control reviews of their work.
Staff in Customs in Tanzania is regularly reviewed as to their integrity standards, a
procedure that is said to have an impact. In Ghana recent summary dismissals have
focussed attention on integrity and the resulting "fear factor" rather than any new
procedures is having an impact. Generally management should pull together all the anti-
corruption procedures and make it known that they are having a drive against low integrity
standards.
Audits and tax investigations units including for those staff alleged to have been involved
in dubious matters are in place and operate as a matter of course. There are also audits and
reviews of taxable entities.
Internal quality reviews of work performed by staff are performed both before assessments
are issued and on a "cold" basis.
It can be very beneficial if a fresh independent view is taken of issues and it may be very
useful to the Revenue Authorities if an international firm of accountants were asked to
review the systems and internal controls.
Over the years simplification of taxes and rates have taken place including the successful
introduction of VAT and are said to have contributed to improved compliance and
collections. An example of this is the flat low rate of VAT in Ghana. Simplification also
reduces opportunities for corruption amongst staff.
Educational standards in the countries are low (and do not include basic ethical behaviour
standards) and the Revenue Authorities have therefore set up Taxpayers Education and
Public Relations Departments which promote tax understanding through leaflets, radio and
occasionally television. They have also published or are in the process of preparing
Taxpayers Charters which set out not only the taxpayers rights and obligations but more
importantly for the taxpayer the obligations of the Revenue Authority.

The appeals process against assessments includes in Uganda a right to go to the

independent Appeals Tribunal but no such external body exists in the other two countries
thus leading to a lack of transparency and furthering the belief that the Revenue Authorities