Question

 

Discuss the Sarbanes-Oxley Act. What effect has it had on companies’ auditing processes? In what was has this affect been a positive one?

Answer 1

The Sarbanes-Oxley Act was passed by the U.S. Congress. It deals with the protection of the investors when the companies provide financial reports which do not provide true financial position of the company. It is the act in which protection is provided to the investors when the companies present the financial reports which are misleading. The strict rules were created for the accountants, auditors and corporate officers. There was imposition of strict rules for the record keeping.

Provisions of Sarbanes-Oxley Act:

1. The accuracy of the financial statements of the company is required to be certified by the Chief Executive Officer and Chief Financial Officer.

2. The improper influence in the conduct of the audit is considered to be illegal.

3. There should be proper disclosure of the materials off-balance sheet items.

4. There should be establishment of the internal control by the management of the company. There should be reporting of the scope and the accurate measures taken on the basis of the internal control. There should be certification by the auditors regarding whether the internal controls established are reliable or not.

5. There is imposition of fines when the records will be false, or there is stealing of records or the records are destroyed.

6. When the illegal activity is exposed by a whistle blower, then the company should not react and should not strike back.

The Sarbanes-Oxley Act requires that there is rotation of the lead audit partner or the reviewing partner in every five years. It is one of the provisions of the Sarbanes-Oxley Act.The accountants are prohibited from providing the consulting services to the clients to whom the accountants provide the service of audit as per the provisions of the Sarbanes-Oxley Act. The consulting services include the services of book-keeping, internal audits, actuarial services etc. The services which does not relate to the auditing services should not be provided or offered by the accountants.

As per the Sarbanes-Oxley Act the destroying of documents or creation of documents in order to hinder, of for the purpose of influencing the investigation is considered as a crime and there penalties for such act.

The provisions of Sarbanes-Oxley Act also include the protection of the whistleblower. The whistleblower is the person who provides information regarding the illegal activity which is undertaken by a company. So, the whistleblowers are protected under the Sarbanes-Oxley Act and the company is restricted to react or retaliate against the whistleblowers.