Sarbanes-Oxley Act in Accounting

Introduction

With a chain of scandals hitting the American corporate world, its image in the public’s eye was greatly tainted. Accordingly, the government had to take a step that would restore the confidence and integrity and put corporate America back on track. The best approach was through stricter measures to management and accounting brackets of companies, both small and big. This led to the passage of the Sarbanes-Oxley Act, by the Congress in July 2002. This step was aimed to change the accounting and audit professions so that scandals like Enron, Tyco, Global Crossing et cetera would not be repeated. This paper will examine the effects of this Act specifically on the American accounting industry.

Main body

To have a clear comprehension of the effects of this Act on the accounting profession, it is important that the main provisions are examined. To begin with, Sarbanes-Oxley Act was formed to establish standards within the accounting industry. This was to be achieved through the formation of the Public Company Accounting Oversight Board (PCAOB). Secondly, the Act touched on the independence of auditors by formulating strict measures on consultation services offered by auditing firms to their clients. Thirdly, the Act aimed at curbing corporate fraud through the formulation of tough penalties for this offence. Finally, the Act purposed to reduce fraud through by obligating companies to offer their financial details to their clients in a more detailed manner and in a timely way.

What, therefore, are the effects of these provisions on the accounting profession? To begin with, Sarbanes-Oxley Act changed the auditor-audit committee relationship. Under the proposed law, the auditors will have to report to audit committees, it will be the responsibility of audit committees to preapprove auditors’ services, both non-audit and audit, policies and practices to be employed by the auditor must be communicated to the committee and finally, it restricts auditors from offering non audit services. In order to reduce fraud, the Act specifies ten year sentence for any auditor will fail to maintain his records knowingly and purposefully for a period not less than 5 years. In addition, destruction of documents in the event of a federal investigation guarantees one to 20 years in jail.

Audit processes and financial reporting procedure by the companies assumed a new look after the formation of new procedures. All auditor information must be subjected to second partner review for thorough analysis. Furthermore, the reporting procedure must also comply with the new PCAOB specifications. This means that accountants will have to forget the old methods of reporting and also the internal reporting structures and assume the new specifications.

Conclusion

In conclusion, this Act was formed to restore integrity and public trust to corporate America. To achieve this, new provisions were proposed and passed so that checks and balances would be put upon the accounting profession. To begin with, the Public Company Accounting Oversight Board (PCAOB) was formed to regulate the activities of the accountants. The new law brought changes in company financial reporting procedures where accountants were forced to comply with the new reporting procedures developed by PCAOB. In addition, the auditor’s independence was reduced through the compulsory close association with the audit committee which would subject the reported information to secondary review for further analysis. All these point out that the Sarbanes-Oxley Act had great effects on the accounting profession.

Reference List

Bisoux, T. (2005). The Sarbanes-Oxley effect. Web.

Cosgrove, S. and Niederjohn, S. (2006). The effects of Sarbanes-Oxley on the public accounting industry. Web.

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