Question

Facts taken from problem 5.64 in your textbook. Your long-time client, Central Office Supply, has been rapidly expanding, and the board of directors is considering taking the company public. CEO Terry Puckett has heard that costs of operating a public company have increased significantly as a result of the Sarbanes–Oxley Act. Puckett is particularly concerned with reports that audit fees have doubled because of internal control provisions of the act and PCAOB Auditing Standard No. 2201. Puckett has asked you to explain the possible effects on the audit of complying with the requirements of Sarbanes–Oxley.

Required: Outline for yourself your thoughts on the changes in the company's responsibilities for internal control and changes in the audit due to Sarbanes–Oxley and PCAOB Auditing Standard No. 2201.

Answer 1

Solution :

The fact which Mr Puckett heard about a public company is right as per the resources that after the Sarbanes-Oxley Act was passed the auditing parameters and the strictness in meeting the internal control requirements are tightened in order to make public companies more trustful and transparent. Looking at the market situations about the corporate frauds such as Enron, Worldcom. Arthur Anderson etc it gave up the conclusion that the private companies lack internal control policies and the upper management was never caught in between the cook the books decision, though they are the main people behind the results.

Due to this the CEO'S of the company were not caught in the matter and were not held to answer which was going wrong. However as per the Sox's act ( Sarbanes-Oxley Act which is also called as SOX act) the company CEO is held and answerable to all the good and bad results by the company. They are the only responsible person for that. This gave CEO's a burden to work properly with law and order and not try to manipulate books of Accounts because Books of accounts must show a real picture to understand the business phase and it is way investors study the business and invest in it.

The main changes which are made by the Sox Act is that they have introduced a new auditor watchdog, the Public Company Accounting Oversight Board. It set standards for audit reports. It requires all auditors of public companies to register with them. The PCAOB inspects, investigates and enforces compliance of these firms. It prohibits accounting firms from doing business consulting with the companies they are auditing. They can still act as tax consultants. But the lead audit partners must rotate off the account after five years.

The second thing and major change was the Sarbanes-Oxley Act of 2002 cracks down on corporate fraud. It banned company loans to executives and gave job protection to whistleblowers. The Act strengthens the independence and financial literacy of corporate boards. It holds CEOs personally responsible for errors in accounting audits. It was earlier thought that this was causing too much cost to the company but later it actually was realised it benefits the life f business in a better n trustworthy way.

Due to the deregulation of banking business in 2008 which contributed to financial crisis and great depression it was realised that saving a company can be done only by keeping a watchdog on it and that is the way PCAOB works.