Auditing paper

Only available on StudyMode
  • Download(s) : 130
  • Published : October 27, 2014
Open Document
Text Preview

“Accounting did not cause the recent corporate scandals, unreliable financial statements were the results of management decisions, fraudulent or otherwise”. (Lin & Wu, 2006, para. 5) Waste Management, HealthSouth, Enron, Satyam and Madoff are just a few names that come to my mind when I think of fraudulent accounting. Disguised loans, inflated income, improper accounting and misstated earnings, different words all describing the same thing, FRAUD. Fraud affects the company, the consumers and it puts the entire economy at risk. According to the Huffington Post the top scandals of all time produced losses due to fraud totaling over one hundred and sixty nine BILLION dollars. ("The biggest accounting," 2010) Upon first glance the Sarbanes Oxley Act of 2002 which was signed into law on July 30th 2002 seemed like a great policy geared towards preventing fraud. Investors as well as the general public had lost faith in the financial system after the above mentioned companies defrauded them. The Sarbanes Oxley Act also known as SOX was created with the intention of restoring financial confidence within the public. The Sarbanes Oxley Act of 2002 is a complex series of regulations, it is also “one of the most influential—and controversial—pieces of corporate legislation ever to have hit a statute book” ("A price worth," 2005, para. 1). The fact that SOX is very controversial is not at the heart of this paper. The objective of this paper is to allow me to make an informed decision on whether or not I believe The Sarbanes Oxley Act of 2002 has proven to be effective and worth the initial cost. The Sarbanes Oxley Act of 2002 is made up of many sections, I am going to focus on the sections that I feel have the most importance and offer the greatest benefits. My intention is to describe the purpose of each section along with any pros and/or cons that may sway my opinion one way or another. Section 201 states that public accountants who audit the financial statements of a company are advocates of that company and cannot perform any independent forensic work. This section although just a small part of SOX is extremely important as it ties in with section 806, which I will discuss later. Basically if I am the auditor of Company ABC I am not able to perform any forensic work that may be needed to be verify information in the face of a whistleblower tip. Section 203 requires that lead auditors and concurring review audit partners rotate every five years. Audit partners who spend more than ten hours of audit services must rotate every seven years, the reasoning behind this is to hopefully avoid another scandal. Scandals hopefully could be avoided by switching out auditors and giving a fresh set of eyes to the financials of the company. There are no negatives to this Section of the act, I feel it creates a more positive environment. Auditors are now aware that someone else will be taking over in a few years and any thoughts to commit fraud would hopefully just be a passing idea. Section 204 requires that the auditor gives the report to the clients audit committee before filing with the SEC, also a positive aspect of SOX. Allowing the committee to review and verify the financial information before the SEC gets ahold of it just decreases the chances that errors or fraud will be intentionally committed. Section 302 puts the responsibility for the content of the financial reports in the hands of corporate officers. Corporate officers are now responsible for viewing all financial reports, verifying there are not any untrue statements. They are also now responsible for the internal controls, requiring them to report any deficiencies as well as noting any significant changes in the internal controls. Another section of SOX that I agree with on the basis that officers should be aware of what is going on financially within their company. Section 401 relates to disclosures in periodic reports such as annual reports. This...
tracking img