Question

How has the Sarbanes Oxley Act affected the profession of public accounting and CPA's?

Answer 1

The Sarbanes-Oxley Act(SOA) is the most far-reaching and significant federal regulatory statute affecting accountants and corporate governance since the Securities Acts of 1933 and 1934.It is a large and complex statute that contains eleven titles Corporate scandals involving Enron, WorldCom and others had shaken the capital markets and all this led to the passage of the SOA which was signed into law on July30, 2002.

The SOA increased the legal liability of accountants. A new regulatory agency, the Public Company Accounting Oversight Board(PCAOB) was created to oversee auditors’ work, with authority to conduct inspections, create new standards and punish violators. Conflicts of interest is prohibited, and a high wall has been erected separating the audit function from consulting and other non-audit functions. Auditors’ civil and criminal liability has been increased, and additional strict record-keeping burdens have been imposed.

The relationship between accounting firms and their publicly held audit clients is different under the new law. The basic implications are:

• Now, auditors will report to and be overseen by a company's audit committee, not management.
• Audit Committees Must Approve All Services. Audit committees must preapprove all services (both audit and non-audit services not specifically prohibited) provided by its auditor.
• Auditor Must Report New Information to Audit Committee. This information includes: critical accounting policies and practices to be used, alternative treatments of financial information within GAAP that have been discussed with management, accounting disagreements between the auditor and management, and other relevant communications between the auditor and management.
• The new law statutorily prohibits auditors from offering certain non-audit services to audit clients. These services include: bookkeeping, information systems design and implementation, appraisals or valuation services, actuarial services, internal audits, management and human resources services, broker/dealer and investment banking services, legal or expert services unrelated to audit services and other services the board determines by rule to be impermissible.
• The lead audit partner and audit review partner must be rotated every five years on public company engagements.
• An accounting firm will not be able to provide audit services to a public company if one of that company's top officials (CEO, Controller, CFO, Chief Accounting Officer, etc.) was employed by the firm and worked on the company's audit during the previous year.

The law creates tough penalties for those who destroy records, commit securities fraud and fail to report fraud.

• Failure to Maintain Workpapers. It is now a felony with penalties of up to 10 years to willfully fail to maintain "all audit or review workpapers" for at least five years. The SEC will establish a rule covering the retention of audit records and the Board will issue standards that compel auditors to keep other documentation for seven years.
• It is a felony with penalties of up to 20 years to destroy documents in a federal or bankruptcy investigation.
• Criminal penalties for securities fraud have been increased to 25 years.
• The statute of limitations for the discovery of fraud is extended to two years from the date of discovery and five years after the act. It was previously one year from discovery and three from the act.
• Other provisions protect corporate whistleblowers, ban personal loans to executives, and prohibit insider trading during blackout periods.

Thus the advent of Sarbanes Oxley Act has greatly affected the CPAS and profession of audit and accounting since the overall rules and regulations have been made more stringent to avoid scams like before.