Sarbanes-Oxley Act of 2002 and the Relation to Auditing

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Unit 4 Assignment

Abstract

In this assignment I will be looking at what Sarbanes-Oxley Act of 2002 is and why it came to be. How SOX has affected the accounting and auditing industry and what the benefits and costs are and what changes have happened or should happen moving into the future with SOX.

Unit 4 Assignment

A family man has invested a portion of his retirement into a growing stock and has been seeing remarkable growth over the past year and decides to put most of his life savings into the stock to really see his money grow. A couple years past and he is shocked at how fast his money has grown to where he doesn’t follow it too often. One day he starts to hear news about the company his money is in and doesn’t end up getting around to checking on his stock till a little while later and finds out that his stock in Enron went from a price of $90 a share to just under a dollar and all his money is pretty much gone. A scenario like this has happen too many people with the collapse of such major companies such as Enron, WorldCom, Tyco, and Arthur Andersen. Large amounts of fraud erupted all around the same time frame after the beginning of the century and brought about big change in the form of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 changed the way auditing is done today, but is it worth it? To the investors and creditors that rely on accurate financial information, SOX is worth it, but what about the corporations picking up the bill to stay in compliance of the new regulations. In this paper, I am going to look at what Sarbanes-Oxley Act of 2002 is, how it affects corporations, and auditing. I will also compare and contrast the benefits and costs of SOX and come to an opinion of whether SOX should continue as it is or if it should be stricter in regulation or less strict.

Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act in the Senate and Corporate and Auditing Accountability and Responsibility Act in the house is a controversial United States federal law. SOX was not the most favorable bill at first, but after the major scandals that hit one after another such as Enron, Tyco International, Adelphia and what really got SOX going was when WorldCom revealed it had overstated its earnings by more than $3.8 billion during the past five quarters. The Sarbanes-Oxley Act of 2002 came together quite quickly based on Senator Paul Sarbanes’s and Representative Michael Oxley’s bills. The purpose of the bill was to restore public confidence in American business, which had been hurt by all the major scandals. The act created a new regulator for the accounting industry: the Public Company Accounting Oversight Board. To address some obvious conflicts of interest, auditors were prohibited from doing a variety of non-audit work for clients. Firms had to establish independent audit committees, company loans to executives were banned, top executives had to certify accounts and whistleblowers were given more job protection if they reported any suspicions of fraud. In the act's now notorious section 404, managers were made responsible for maintaining an “adequate internal-control structure and procedures for financial reporting”. Companies' auditors were required to “attest” to the bosses' assessment of these controls and disclose any “material weaknesses”. Failure to comply could result in tough new criminal penalties.

The auditing environment has changed dramatically since the introduction of Sarbanes-Oxley Act of 2002. Accounting firms were trying to gain clients to sell their consulting services pre-SOX, now accounting firms are highly needed to perform the audit work required by Sarbanes-Oxley. The Public Company Accounting Oversight Board was created to provide independent oversight of public accounting firms providing audit...
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