Question

"Ethical Considerations" Please respond to the following:

• Reflect upon the responsibilities placed on auditors by the PCAOB, and discuss whether those expectations are adequate considering current emerging issues.
• Discuss whether the Sarbanes-Oxley Act should be modified to adjust regulation of corporate executives and auditors in response to issues subsequent to the 2002 scandals.

Answer 1

On July 30, 2002, The Sarbanes-Oxley Act, commonly known throughout the world as SOX, and was passed into law with President Bush’s signature after an overwhelming majority of Congress voted in favor of the Act. Sarbanes-Oxley shocked both the U.S. and international accounting communities upon its passage. The primary goal of this law is to protect U.S. investors from future accounting scandals. In the wake of the accounting scandals that rocked U.S. capital markets in the early part of the century, it is “no surprise the issue of corporate governance in the beginning of 2002 became top of the U.S. political agenda.” 1 What is surprising, however, is the significant impact this sweeping piece of legislation has had on countries throughout the world. With over 1300 foreign companies currently listed on U.S. markets, SOX is inherently an all-encompassing international affair that has affected the world tremendously since its creation. 2 In addition to domestic entities, Sarbanes-Oxley impacts foreign companies who are listed on U.S. exchanges and those foreign accounting firms who provide services to any U.S.-listed company.3 The scope of the Act on entities abroad inevitably raises the question of extraterritoriality. The extraterritorial application of SOX has hindered the United States’ foreign relations with numerous countries throughout the world, resulting in the emergence of political, legal, and economic repercussions.

Sarbanes-Oxley’s convoluted language and complicated requirements have left domestic and foreign parties to struggle with the implementation of this legislation. Auditors, lawyers, politicians and executives have all partaken in the laborious plight to incorporate SOX into their professional practices. 4 Tim Becker and Peter Clarke summarize the challenge foreign companies face with SOX by stating, “Simply put, a British or French company with a secondary listing on the New York Stock Exchange must comply with all provisions of the Sarbanes Oxley Act, unless there is an available exemption […].” 5 With a minimal number of SOX exemptions granted thus far, the idea that this law will require entities throughout the world that participate in U.S. markets to comply with the rules and regulations set forth by SOX regardless of nationality has not produced a favorable reaction. Consequently, this negative perception of SOX has resulted in increased efforts internationally to restructure the public accounting profession as an alternative to enduring the U.S. reforms. 6 Protecting investors worldwide and improving public company audits is a righteous objective and SOX will undoubtedly assist regulators in achieving this objective. However, as many critics of the law argue, that is not to say that SarbanesOxley is the optimal solution, especially for international entities. 7 With varying legal, institutional, and cultural systems throughout the world, it is imperative to resort to diplomacy and dialogue when a far-reaching piece of legislation such as SOX is created

Thus auditor would have to adjust regulations in response subsequent to 2002 scandal.