A paper on
Professor Leeann Lane
In partial fulfillment for the requirements of
ACC 403 – Auditing
Strayer University at Woodbridge
William J. Thomson
February 23, 2013
The Sarbanes-Oxley Act (SOX) was signed into Law in July 2002. The necessity of such an act was considered needed to combat the fraud committed by corporations and duped investors out of billions of dollars. From the 1980’s through 2001, the Savings and Loan scandal, and most notably Enron failure and fraud on investors were responsible for the formation of the act. These are just a few of the scandals that caused the passage of the act. Many others were responsible for duping people out of over 900 billion dollars of investments, but these were 2 of the most notable. Since the inception of SOX, a review of the impact of SOX on business, and auditing firms.
Effectiveness of Sarbanes-Oxley Sarbanes-Oxley has had a profound effect and has dramatically changed the accounting industry, financial reporting, and the auditing of public companies in particular. Since the inception of SOX, the verdict remains an open question. However, it has noticeably improved the financial reporting and transparency (Croushore, 2009). The transparency and reliability of reporting has improved and the fear of failing an audit directly resulted in motivation for improved internal controls. It could be argued that most companies were already responsible and had internal controls and an environment where doing the right thing is paramount. The SOX, just made it a regulatory function for publically traded companies and attempted to eliminate the corporate fraud that many companies had committed in order to protect investors and the public form the evil few. Many companies have had to change their business practices in revenue recognition and restatements of financial report. These changes have come with a cost. However, the benefits have not come without a cost. The costs of including smaller profit margins due to increased compliance costs, opportunity costs of deciding not to pursue some otherwise economically valuable opportunities, redundancy costs, increased costs to hire auditors (Croushore, 2009), have contributed to the increased costs. It should be noted, that after SOX was passed, we had the worst meltdown in the financial sector since the great depression. The transparency and corporate governance may have increased, but the meltdown was wide and covered a variety of business areas. These were in the financial sector, mortgage and other business areas. SOX may have delineated certain functions business may have to follow, but it apparently did not prove effective in the sense that poor investment strategies in the mortgage and finance sector were eliminated. Transparency as an investor is important, and holding the corporate executives responsible for their financial statements is a huge benefit for the industry. Corporate Executives must now put in writing that their statements are accurate and they have sufficient internal controls to combat fraud. It appears to the extent possible that SOX is effective, but it comes with limitations. Government regulation appears to always have consequences that were not identified. Sometimes, even though the need exists, the government never looks at practicality when adopting some of the laws, and the costs that may be involved in order to take action.
Impact on Auditing Firms and Public Accounting Profession Many of the Sarbanes-Oxley requirements directly affect the accounting and auditing industry. Sarbanes-Oxley establishes accounting and auditing standards through oversight by the newly created Public Company Accounting Oversight Board (PCAOB). Public auditing firms must now register with the PCAOB, pay