The section also imposes fines and imprisonment up to twenty years for knowingly destroying documents or falsifying records that impend a legal investigation (Sarbanes). The strict fines and penalties help to detour accountants and business employees from participating in fraud and other illegal activities. There are also many other parts of the Sarbanes Oxley Act that help protect investors and minimize corporate fraud. CEO’s and CFO’s are required to personally certify the accuracy of financial reports (Bumgardner, 2003).
CEO’s and CFO’s that partake in falsifying statements also face strict penalties, up to ten years for knowing and up to twenty years if willing (Bumgardner, 2003). I think this part of the Act was in response to scandals such as Enron and Worldcom. The CEO’s and CFO’s of those corporations that participated in fraud were made examples of, but to keep CEO’s from participating in these frauds they made a law to detour them and to keep these type of people from having the legal defense of not knowing.
Also to protect investors in these cases of fraud, any public company that makes a required restatement due to misconduct, the CEO can be forced to forfeit any bonuses or profits gained from selling company stock for a one year period ( Bumgardner, 2003). The Sarbanes Oxley Act also requires all material off the balance sheet transactions and special purpose entities be disclosed in annual and quarterly financial statements (Bumgardner, 2003). Previous to the Sarbanes Oxley Act off the balance sheet financing occurred to frequently and was not being disclosed properly, leading to financial tatements that were not fairly stated or true representations of a corporations finances. The establishment of the PCAOB, Public Company Accounting Oversight Board, was perhaps the most fundamental change made by the Sarbanes Oxley Act (Ernst & Young). The PCAOB inspects auditing firms. For firms that perform annual audits of more than 100 issuers the inspections are annual, for firms that perform less than 100 the inspections are at least every third year (Ernst &Young). The PCAOB has enforcement power against auditing firms that violate laws, regulations, and professional standards.
The board also imposed new auditing independence standards in response to Anderson’s audits of Enron may have been compromised by the fact the accounting firm was earning more from Enron from consulting services than for auditing (Bumgardner, 2003). Now an auditor is prohibited from providing services such as bookkeeping, appraisals, financial information systems design, and many more (Bumgardner, 2003). However, Congress did choose not to impose a complete ban on consulting services and still allow auditors to provide tax services (Bumgardener, 2003).
Another important implementation is that SEC requires lead auditors and concurring audit partners to rotate off that client’s audit every five years (Bumgardner, 2003). The Sarbanes Oxley Act also expanded the responsibilities of audit committees, and requires the boards of companies listed on the US stock exchange to consist of audit committees completely separate from management (Bumgardner, 2003). One major issue to public accounting firms in response to the Sarbanes Oxley Act was the extra costs the firms would have to charge clients to keep within regulations of the Act.
However, the benefits to the profession outweigh the costs in my opinion. The Act protects accounting firms and the clients they service. I believe that the accounting profession is better off being government regulated than self regulated. It is just simple logic that every successful group needs a leader. Without laws and punishments for breaking them their or no deterrents for committing crime. Also, before the Sarbanes Oxley Act was put into effect and the PCAOB appointed the accounting profession was losing creditability, and major changes had to take place to ain back the public’s confidence in the profession. A firms internal controls are only as good as the people implementing them. Guidelines had to be established to get internal controls to the point that they could prevent fraud. However, many accountants would argue with government regulation being the best alternative. An article, written by Michael Shaub, CPA argues that the profession has been self regulated for fifteen years of his career (Shaub, 2010).
He argues that almost every financial scandal goes back to the CFO whom is almost always a CPA, for example Andy Fastow of Enron, Mark Swartz of Tyco International, and Scott Sullivan of WorldCom (Shaub, 2010). He goes on to say that it was them whom were not self regulated not the profession. He states, “They did not care about public interest, peoples pension plans, or parent’s dreams for their children (Shaub, 2010). ” “Because they could not control themselves, because they were not self regulated, Congress made the entire profession pay the price (Shaub, 2010). My argument to Mr. Shaub is that although all of his points are very valid, often time the majority must pay the price for a few. Sometimes people get made examples of in order to detour further persons from engaging in the same activities. In fact almost all of the laws known to man came about from the acts of a few not the majority. So almost every argument against every law would be the same as his argument. I would like to say that I predict that corporate fraud will decrease based on the requirements of audits of publically traded companies as required by the Sarbanes Oxley Act.
However, from my research it is not looking like this will be the case. A recent report from the PCAOB found that deficient audits performed by the Big Four accounting firms doubled in 2010, reaching a rate of about thirty three percent (Brehmer, 2012). Mr. Brehmer states, “similar in the way that auditing standards aren’t guaranteed to discover fraud; SOX can’t be relied upon to shine the spotlight on independence regulations (Brehmer, 2012). Mr. Brehmer is a former partner at one of the Big Four, and isn’t the least bit surprised that fraud hasn’t decreased.
He admits that ten years ago when the SOX Act originally came about many firms were going exactly by the book, but now they seem to be creeping back in to their old practices. The bottom line is firms face pressure to increase profits. It seems auditing firms are using their audit influence to win work, after which they audit their own work (Brehmer, 2012). In years to come this will lead to more disasters. Brehmer also goes on to say, “That while the good parts of SOX are being eroded, the bad parts remain (Brehmer, 20120. Because the law has imposed so many regulations and requirements and thousands of questions to be answered audit reports are becoming thicker and thicker and even the competent CFO could overlook something. I have to say I agree with Brehmer. I think that SOX has good intentions but that has to be some way of simplifying some of this. The more complicated the law becomes for auditing standards the more costs involved and the more room there is for companies to try and find shortcuts, it’s human nature. Works Cited Brehmer, Thomas. November 30, 2012. Sarbanes Oxley Has Failed to Address the Problem of
Audit Firm Independence. Retrieved from www. accountingtoday. com on May 20, 2013. Bumgardner, Larry. 2003. Volume 6 Issue 1. How does the Sarbanes Oxley Act Impact American Business? Retrieved from www. pepperdine. edu on May 20, 2013. Ernest & Young. The Impact of the PCAOB and Effect on Audit Committees. Retrieved from www. ey. com on May 20, 2010. Sarbanes Oxley Act 2002. Sarbanes-Oxley Section 802. Retrieved from www. soxlaw. com On May 20, 2010. Schaub, Micheal. April 21, 2010. What Self Regulation Look Like. Retrieved from www. maysbusiness. tamu. edu on May 20, 2010.