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Chapter 5
Title II of the act addresses auditor independence. Among other things, this section of
the act limits the nonaudit services that an auditor can provide to an audit client; the
prohibited nonaudit services include the following:
• Bookkeeping or other services related to the accounting records or financial
statements
• Financial information systems design and implementation services
142 • Legal services
• Expert services unrelated to the audit
• Management functions
• Human resources functions
• Any other service that the Public Company Accounting Oversight Board
(PCAOB) determines to be impermissible. (The PCAOB was created in Title I of
the act with broad powers to regulate audits and auditors of public companies.)

Title IV of the act covers enhanced financial disclosures, and it specifies more stringent
requirements for financial reporting. Section 404 of Title IV requires that a public company’s
annual report contain management’s internal control report. The control report must outline
management’s responsibility for establishing and maintaining adequate internal control over
financial reporting, and it must also assess the effectiveness of the company’sinternalcontrol
structure and procedures. Section 409 of Title IV addresses the timeliness of reports, and may
require companies to file an SEC report within two days of a significant trigger event—for
example, completion of an acquisition or a default by a major customer.

IMPLICATIONS OF THE SARBANES-OXLEY ACT
FOR ERP SYSTEMS

The Sarbanes-Oxley Act has had significant ramifications for the design of information
systems of publicly traded companies. To meet the internal control report requirement, a
company must first document the controls that are in place and then verify that they are
not subject to error or manipulation.
An integrated information system provides the tools to implement internal controls, as
long as the system is configured and managed correctly. However, even the passage of the
Sarbanes-Oxley Act and the availability of state-of-the-art ERP technology cannot prevent
the type of insidious and systematic fraud that was involved in the Enron scandal. An ERP
system relies on a central database with accurate information. ERP systems make it difficult
to hide fraudulent dealings, and perhaps Enron’s problems would have been more obvious to
stakeholders of the company had the company implemented an ERP system. But it is
unlikely that an ERP system or the Sarbanes-Oxley Act can prevent all fraud.

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