Revise
tkrmaslatwbha81
sarbanes.docxRunning head: SARBANES-OXLEY ACT OF 2002 1
SARBANES-OXLEY ACT OF 2002 10
Sarbanes-Oxley Act of 2002
Latasha Thomas
Keiser University
Abstract
Sarbanes-Oxley Act of 2002 (SOX) introduced several amendments to the requirements for credible auditing in publicly listed companies. The bill’s aim was to introduce some safeguards to ensure that the investors and shareholders of the companies are protected against mischievous and unprofessional conduct by external auditors in regard to the financial reports they audit. External auditors are supposed to provide professional opinion about truthfulness and correctness of financial records prepared by the management. In this regard, SOX introduced amendments to prevent loss of independence by external auditors when they review the reports. Further, the amendments provided new responsibilities to the management of companies while forming independent oversight body in regard to auditing of a company’s records. This research focus on how the amendments have changed the accounting profession and importance of the amendments.
Impact of Sarbanes-Oxley Act of 2002 to Accounting Profession
Introduction
Sarbanes-Oxley Act of 2002 was a constitutional amendment that was tabled before the congress and adopted on October of 2002 in response to the growing lack of credibility by management in management of resources and accounts of publicly listed companies. Accountants play a crucial role in any company and their input ranges from advisory to the execution of financial plans. However, accounting firms are also involved in auditing of companies to ensure that detailed reports presented to the public present a true and fair view of the accounts of a company. In regard to the growing failure by companies to report truthfully, auditors came into focus for colluding with the management to defraud the investors and shareholders. In effect, many companies employ accounting companies to act as external auditors and as consultants thereby affecting the credibility of opinions presented. SOX aimed at ensuring that the auditors are credible through ensuring that their independence is guaranteed as well as objectivity of their reports. Sarbanes-Oxley Act of 2002 changed the accounting and auditing environment by assigning new responsibilities and limitations to the stakeholders in an external audit including the auditing firms or auditors and management as well as new liabilities resulting to changes in the auditing field.
Background
Prior to 2002, the US financial markets were embroiled by revelations of major financial wrongdoings and misstatements in major publicly listed companies. Some of the companies that failed such as Enron, Tyco, and WorldCom led to loss of public confidence and investors were wary of the financial losses. The US Senate and House of Representatives voted for the passing of Sarbanes-Oxley Act of 2002 by the highest votes ever recorded sending it to President Bush for signing. The measures that were put in place to curb financial reporting problems became law on July 30, 2002 after it was signed. Implementation of the proposition of the law started with the creation of Public Company Accounting Oversight Board (PCAOB). SOX continue to undergo review and amendments to ensure that it serves the purpose of strengthening corporate governance. After the implementation of the law, the public confidence in the US financial markets has continually grown enabling growth in the financial markets. Further, the independence of external auditors has increased ensuring that the financial reports are credible. Research on the importance and implications of the SOX continues to be undertaken and provides several implications to the company’s management, auditors and accounting firms, liability of financial wrongdoings to companies, and businesses.
Establishment of PCAOB and Regulation of Public Companies Auditing Firms
Public Companies Accounting Oversight Body (PCAOB) is one of the fundamental establishments created by SOX to provide an oversight and regulatory framework for all auditing firms working in the country. PCAOB ended a century of self-regulation by the auditing firms by ensuring that the firms are placed under some regulation when undertaking their auditing functions. Prior to the establishment of the regulatory body, auditing firms and profession was professionally regulated by policies and professional ethics. PCAOB creates framework for regulation, regulates the audit firms, conducts quality inspections, disciplines auditors of public companies and ensures that the code of ethics are reviewed and followed and implemented. The end results of such regulations by the independent body of auditing ensure that the external auditors work within a framework that is ethically guarded ensuring that auditors are work professionally.
The three main functions of PCAOB are to set auditing standards, carry out inspections of accounting companies that audit public companies, and enforce the laws and policies set by the body. The board reviews the standards of auditing from time to time and identifies areas that require new standards to be set and implemented to ensure that auditors work ethically and independently. Standing Advisory Group of the board helps in setting of new standards since it has professional and experts from the auditing and quality assurance field. PCAOB also carries out independent review of auditing firms to ensure that they carry out their functions independently and ethically. PCAOB also have an enforcement arm that investigates misconduct of auditors and audit firms for violation of laws, regulations and professional standards. The main enforcement and disciplinary actions are sanctions and fines. In some circumstances, the board may revoke registration of auditing firms and also bar individuals from being registered in auditing associations.
Relationship between Auditing Firms and Public Companies under SOX
Transparency, Executive Accountability and Liability, and Investor Protection
SOX placed the responsibility of financial reports on the management’s top brass, the CEO and CFO who must ascertain that they review annual and quarterly reports prepared by accountants. CEO and CFO must also ascertain that based on their knowledge, the financial information in the reports are fairly represented and that the reports do not contain any untrue information or omission of material facts that could make the statements misleading. The top management must always acknowledge their responsibility of establishing internal controls in financial disclosures and reporting as well as evaluating the effectiveness of the controls. These measures place the responsibility and accountability of financial statements on the management. Sarbanes-Oxley Act set a clear tone of responsibility and accountability on the management which helped in improving and restoring investor confidence. Certification of financial statements of a company that contain erroneous statements may lead to stiff penalties. Such measures in addition to criminal proceedings by SEC place much responsibility and liability of financial statements on the executive of a company.
SOX established extra protection to investors through four main policies. Firstly, public companies are required under the law to provide disclosures in annual and quarterly reports regarding off-balance sheet transactions, obligations and engagements. In this context, the investors are able to analyze the effect that such transactions and obligations may have on their investments. Material changes in financial conditions and operations are also reported by the management must be reported to the shareholders on an annual basis. Officers, board members, and investors who own more than 10% of the company’s shares are required to specify their transactions within 2 days. Lastly, the board members and executive officers who are usually aware of the earning as of a company and likely trend in the market are prohibited against trading during a specific blackout period. The measures aim at ensuring that investors are protected against fraud and insider trading by the management of a company.
Auditor’s Independence
Auditor’s independence is important in the audit reports for publicly listed companies for ensuring that reports are objective and free from interference from the management. SOX strengthened the auditor’s independence through creation of the audit committees and thereby removing direct association between the auditors and the management in regard to the audit reports and other important services. In a move to eliminate chances of the auditors being influenced by the management, the laws established certain types of non-audit services that are off-limits whereby, accounting firms that provide auditing services cannot engage in with the companies they audit. Audit committees are responsible for approving non-audit services that accounting firms that act as external auditors may engage in with the companies they audit. Mandatory rotation of lead engagement partner in auditing of a company is done every five years rather than the previous seven years to enhance credibility and objectivity. Sox prohibits the auditing firms from providing certain non-audit services to the public companies they audit to enhance their independence.
Recommendations
Companies are continually operating in a more volatile, dynamic, and complex global market conditions that necessitates audits to become more complex. The broadness of the audit spectrum is laudable as it continually enhances audit quality and strengthens corporate governance. The existing and upcoming auditing standards create reliance, relevance, and transparency in the accounting and auditing process and the efforts bears fruits of strengthening capital markets. Increased globalization of companies leads to facilitation of the necessity of cooperation between different auditing regulatory bodies and will lead to facilitation and adoption of collaborative framework. Continuous collaboration should be geared towards creation of a global framework and policies of accounting. Some of the most significant efforts should enable auditor’s identification, assessment, and response to the risks associated with misstatements and engagement of quality review. Enhancements to the auditing standards concerned with the communication of auditors to the audit committees will lead to better reporting models, considerations of the concerned parties to enhance evaluation and fair reporting.
While there are numerous improvements to the auditor’s independence and oversight created by the SOX, continuous improvements are necessary to continually address upcoming and risks created by the changes in the business environment. Auditors should always seek to improve their work given the increased dynamics and complexity of companies, globalization of markets, financial products which are changing with time, and the trends in the business environment. Fostering alignment through increased transparency and communication among the auditors, audit committees, PCAOB, shareholders, and interchangeably may go a long way in ensuring that concerns by the stakeholders are addressed. The approaches employed by the bodies created by SOX have a long-standing implication on the way the industry of financial markets operates. In this context, stakeholders should always put accountability, transparency, and markets confidence in the forefront to ensure that market failures resulting from inadequate financial reporting and misconduct by auditors and accountants as well as management of organizations ends. Further research in the field of effects of SOX to the accounting profession may help in generation of more knowledge and recommendations.
Conclusion
Maintenance of audit quality and independence of auditors was the main aim of SOX. Over the years since its enactment, Sarbanes-Oxley Act of 2002 has helped in strengthening investor confidence in the US financial markets. Changes in the relationship between the management and accounting firms that provide auditing services is one of the major impacts of the SOX. Further, the creation of auditing oversight body, auditing committees, and a regulatory board, PCAOB, have impacted the quality of financial reports as well as provided a framework that makes the management liable for financial reporting misconduct. Further research and changes in the SOX will greatly help in ensuring that auditing takes its role of ensuring credibility, accountability and transparency in financial reporting.
References
Earnest & Young. (2012). The Sarbanes-Oxley Act of 2002. Earnest & Young LLP.
Stein, D. (2012). The Sarbanes-Oxley Act - Accounting and Conservatism: An analysis mainly based on section 404 of the Sarbanes-Oxley Act. Accounting Journal , 124-138.
Woods, M. (2012). Risk Management in Organizations: An Integrated Case Study Approach. Routledge.
