The Sarbanes-Oxley Act of 2002

Introduction

Over the last few years, several factors have caused concern over the reliability of corporate financial statements. The downturn in the economy put additional pressure on management to meet financial targets. The complexity of business structures and transactions and the difficult accounting standards have become too complex for the average financial statement user. The greed and dishonesty of some auditors and high-profile business failures have caused criticism and scrutiny of the relationships between accountants and their clients. The scandals surrounding the business failures have also diminished the public's confidence in the accounting profession and company management.

Many organizations, including the Securities and Exchange Commission and the American Institute of Certified Public Accountants, have debated over the issues that led to the business failures. There have been countless suggestions of how to correct the problems that caused the failures. In an attempt to restore investor confidence in the capital markets, new rules for accountants and their clients have already been enacted. Numerous studies and proposals are also being considered to strengthen the reliability of audited financial statements.

Our Service Can Write a Custom Essay on Accounting for You!

The rules dramatically change the accounting profession by creating a new private regulatory structure, restricting the services auditors can provide, and imposing larger fines for violators of the rules. The rules will also require public companies to enhance their audit committees and obligate their top management to certify financial statements. The new rules are intended to protect investors by improving the accuracy and reliability of financial statements. The additional costs of compliance and risk will be passed on to companies through increased audit fees, insurance, and salaries, leaving less for investors. The rules intended to protect investors will unfortunately result in additional costs for investors.

The new rules contain a multitude of provisions that will have far-reaching effects on accounting firms and their corporate clients. It seems certain the new rules will force both accountants and management to focus on their responsibility to provide objective and accurate information. The consequences of the rules will be recognized as accounting firms and their corporate clients struggle with compliance requirements, relationships, and profitability.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is significant legislation affecting the accounting profession and its clients. The intention of the act is to protect investors by improving the accuracy and reliability of corporate disclosures. The Act, passed by Congress in July 2002, is a major reform package that will create a public company accounting oversight board, revise auditor independence rules, revise corporate governance standards, and increase criminal penalties for violations of securities fraud.

Public Company Accounting Oversight Board

Title I of the Sarbanes-Oxley Act of 2002 establishes the Public Company Accounting Oversight Board (PCAOB) to regulate the accounting professionals who audit the financial statements of public companies. The PCAOB was established because the SEC felt accountants were not doing an adequate job policing their profession. Now, an independent board will monitor and discipline the profession with stricter requirements, higher costs, and harsher fines.

The PCAOB is comprised of five members. Two members must be or must have been CPAs. The remaining three members must not be or have been CPAs. Each member shall serve on the PCAOB on a full-time basis. No member can be paid a salary or profit from a public accounting firm. The SEC was required to appoint the chairperson and other initial members by October 28, 2002. It is clear the SEC was committed to finding strong leaders to fill the positions.

The founding members of the PCAOB are as follows:

Chair, William H Webster, former judge and head of the FBI and CIA

Kayla J. Gillan, former general counsel of the California Public Employee's Retirement system

Daniel L Goelzer, CPA and attorney, former SEC general counsel

Charles D Niemeier, CPA and attorney, current chief accountant of the SEC's enforcement division

Willis D. Gradison, Jr., a former Ohio congressman (AICPA)

The PCAOB must be organized and authorized by the SEC to function by April 26, 2003.

After the SEC determines the PCAOB is able to carry out its responsibilities, accounting firms will have 180 days to register with the new PCAOB, or cease all participation in audits of public companies. Applications will include the names of the companies the firm audited in the past year, those companies it expects to audit in the current year, and all fees received for services. It will include the firm's most recent financial information. A statement of the firm's quality control policies must be included. The application must contain a list of accountants who participate in audits, including any information relating to criminal, civil, or administrative actions against the firm, or any associated person of the firm. The PCAOB may request additional information in the application. Firms will be required to submit updated information at least annually. The PCAOB will collect a registration fee and an annual fee from the accounting firms. These fees will be enough to cover the administrative costs of processing and reviewing the applications and annual reports. An annual accounting support fee assessed on public companies will fund the balance of the costs of the PCAOB.

The PCAOB is responsible for establishing or adopting auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports. Previously, the Auditing Standards Board performed this responsibility. The new PCAOB is required to cooperate with professional groups of accountants and advisory groups when setting standards, but they can also amend, modify, repeal or reject standards suggested by these groups.

The PCAOB is responsible for conducting investigations and disciplinary proceedings and imposing sanctions against firms not in compliance with their standards. Annual quality reviews must be conducted for firms that audit more than 100 public