Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 307

report on the effectiveness of the company’s internal controls.^3 These reports are

required to be filed with the company’s annual 10-K report with the Securities and

Exchange Commission. The act also encourages companies to include these reports in

their annual reports to stockholders. An example of such a report by the management

ofGeneral Electric Company(GE) is shown in Exhibit 1.

3 These reporting requirements are required under Section 404 of the act. As a result, these requirements

and reports are often referred to as 404 requirements and 404 reports.

Management’s Annual Report on Internal Control over Financial Reporting

The management of General Electric Company is responsible for establishing and

maintaining adequate internal control over financial reporting for the company.

With the participation of the Chief Executive Officer and the Chief Financial Officer,

our management conducted an evaluation of the effectiveness of our internal con-

trol over financial reporting based on the framework and crite-

ria established in Internal Control—Integrated Framework, issued

by the Committee of Sponsoring Organizations.... Based on this

evaluation, our management has concluded that our internal

control over financial reporting was effective as of December 31,

2004.

General Electric Company’s independent [accountant] audi-

tor, KPMG LLP, a registered public accounting firm, has [also] is-

sued an audit report on our management’s assessment of our

internal control over financial reporting.

JEFFREY R. IMMELT KEITH S. SHERIN

Chairman of the Board Senior Vice President, Finance

and Chief Executive Officer and Chief Financial Officer

Exhibit 1

Sarbanes-Oxley Report

General Electric

Company

GE based its assessment and evaluation of internal controls upon Internal Control—

Integrated Framework,which was issued by the Committee of Sponsoring Organizations.

This framework is the widely accepted standard by which companies design, analyze,

and evaluate internal controls. For this reason, we use this framework in the next sec-

tion of this chapter as a basis for our discussion of internal controls.

INTERNAL CONTROL

As indicated in the prior section, effective internal controls are required by Sarbanes-

Oxley. In addition, effective internal controls help businesses guide their operations

and prevent theft and other abuses. For example, assume that you own and manage a

lawn care service. Your business uses several employee teams, and you provide each

team with vehicle and lawn equipment. What issues might you face as a manager in

controlling the operations of this business? Below are some examples.

• Lawn care must be provided on time.


• The quality of lawn care services must meet customer expectations.


• Employees must provide work for the hours they are paid.


• Lawn care equipment should be used for business purposes only.


• Vehicles should be used for business purposes only.


• Customers must be billed and payments collected for services rendered.

Describe and illustrate the
objectives and elements of
internal control.

2

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