Glencoe Accounting

Unit 6: Additional Accounting Topics

WebQuest Internet Project

Legislating a New Path for Accounting

The Sarbanes-Oxley Act (SOX), signed into law in 2002, applies to publicly held companies and the accounting firms that audit them. The law was passed in response to corporate failures and accounting irregularities that resulted in job losses, massive bad debts, and deep plunges in the values of certain stocks ad retirement plans.

The Sarbanes-Oxley Act is a 66-page document that addresses everything from audit partner rotation to criminal penalties for altering documents. The SOX contains elements that affect corporate boards, auditors, corporate management, and public accounting firms. Many of these public accounting firms are organized as general or limited liability partnerships. Your task is to prepare a report about public accounting firms and the services they offer, the advantages of a limited liability partnership, and the ways in which the Sarbanes-Oxley Act has impacted the operation of the public accounting firm. You will also investigate how corporate ethics and investor confidence has changed since the legislation was passed.

To successfully prepare your presentation you will need to complete the following items.

• Review the following Web resources for information on the Sarbanes-Oxley Act, limited liability partnerships, ethics, and public accounting firms.

Summary of the Sarbanes-Oxley Act of 2002

www.aicpa.org/info/sarbanes_oxley_summary.htm

Will Sarbanes-Oxley Improve Ethics?

www.allbusiness.com/periodicals/article/172153-1.html

Limited Liability Partnership

http://en.wikipedia.org/wiki/Limited_liability_partnership

General Partnership

www.toolkit.cch.com/text/P12_4225.asp

KPMG, LLP

www.hoovers.com/kpmg-l.l.p./--ID__117186--/free-co-factsheet.xhtml

www.us.kpmg.com

Anchin, Block & Anchin LLP

www.hoovers.com/anchin,-block-&-anchin/--ID__123363--/free-co-factsheet.xhtml

Earning the Investor's Trust

www.globalagendamagazine.com/2005/johnthain.asp

SOX: Not So Bad After All?

www.businessweek.com/bwdaily/dnflash/aug2005/nf2005081_7739_db016.htm

• Prepare a brief synopsis of the kinds of services offered by a public accounting firm like KPMG, LLP.
• Determine why a company might choose to organize as a limited liability partnership.
• Identify and list the sections of the SOX that impact the operations and scope of services offered by a public accounting firm.
• Identify and list the section or sections of the SOX that addresses ethics.
• Summarize the negative results of the SOX.
• Summarize the positive results of the SOX.

To improve your report, consider the following questions and suggestions:

1. Provide a general description of the limited liability partnership and how it differs from a corporation or a general partnership.
2. Discuss why you believe passage of the SOX was a positive or a negative step toward ensuring reliable financial reporting.
3. Explain why the Conflict of Interests section is an important part of the SOX.
4. Create a chart of services that a public accounting firm might offer, and shade the services that could not be offered to an audit client during an audit.

Here are some suggestions for finishing your report:

• Describe any recent news items you have found regarding the Sarbanes-Oxley Act.
• Create a PowerPoint presentation that outlines the primary points of your report.
• Interview a public accountant who practices in your community about the impact of SOX on his or her business.

• Three CPAs form a partnership, contributing $10,000, $15,000, and $9,000. Their partnership agreement does not specify how profits and losses will be divided. How will the CPAs split the first year's net income of $129,000?
• The conviction of Arthur Anderson in 2002 all but forced that accounting firm out of business. Today the company employs approximately 200 people, down from 26,000. If the partnership had sold noncash assets like furniture at a loss, what general ledger accounts would have been affected?
• Why might the creation of a code of ethics for a company increase investor confidence in that firm?
• Describe two potential situations in which a public accountant does not maintain independence from an audit client.

When a group of people with an entrepreneurial spirit decides to create a business, it often begins operations as a partnership. The partnership business organization requires no special legal requirements, and partners pay personal income taxes on their share of the net income of the business.

Question:

• Describe the ways in which partners might choose to divide profits or losses.

When partnerships are liquidated, a variety of tasks must be completed. The process involves selling all noncash assets, allocating gains or losses from those sales to capital accounts, paying creditors, and distributing remaining cash to partners. Each step requires journal entries by the accountant.

Question:

• Assume a partnership sells its merchandise inventory for $22,000. The cost of the inventory was $26,000. If the loss is divided equally between Partner A and Partner B, what entry is recorded for the sale?

The Enron accounting scandal and failure of the company affected Arthur Anderson employees, Enron's creditors and investors, Enron employees and executives, the accounting industry, and the nation's economy. Certain principles vital to the accounting profession and to corporate management were violated, leading to one of the most publicized scandals in accounting history.

Question:

• What is the principle of integrity relative to the accounting profession?