¶ … Law Is Likely to Affect All of the Following: Audit Committees of Public Company Boards of Directors According to Sections 201 and 204 of the Sarbanes-Oxley Act (SOX), auditors must report "all critical accounting policies and practices" and the members of an audit committee cannot offer "non-audit services for public company audit clients" (PowerPoint, slide 6). According to SOX Section 303 and 404, company officers are prohibited from influencing auditors and "the auditor shall attest to, and report on, the assessment of internal control made by the management of the public company" (PowerPoint, slide 6).

A study of U.S. Securities and Exchange Commission (SEC) sanctions against auditors before and after the implementation of SOX up to 2010 found that common reasons for auditor failure to detect fraud include "failure to exercise due professional care;" "insufficient levels of professional skepticism;" "inadequate identification and assessment of risks;" and "failure to respond to identified risks with appropriate audit responses to gather sufficient competent audit evidence" (Beasley, Carcello & Neal 2007). Clearly, SOX did not prevent such failures from occurring after it was passed in 2002 although ensuring a separation between auditors and other firm activities by prohibiting non-audit services should at least theoretically increase the motivation for auditors to be objective and identify risks. The demand that the auditor sign off on assessments of identified control and be held responsible for failures should at least theoretically...

"Dialogue with business unit leaders about performance-based incentives and management-imposed pressures may provide the audit committee with effective information about the risk of potential management override of internal controls to fraudulently distort financial performance" (Management override of internal controls, 2005, p.11). For example, tying bonuses to demonstrated performance metrics may increase the incentive for fraud and "and whether business unit leaders have been asked by senior management to engage in questionable activities to meet those targets may provide insightful information to the audit committee about the potential presence of management override of internal controls" (Management override of internal controls, 2005, p.11). While SOX demands a more scrupulous level of investigation than practiced in the past, the extent to which rigorous questioning is needed and potential 'red flags' are being raised still lies within the subjective perceptions of the auditor. This is not to dismiss the potential valuable impact of SOX but rather to highlight that professional ethics and diligence are still needed by members of the profession to protect the public from the negative impact of potentially fraudulent financial statements.
B. If you believe that legislation can guarantee the accuracy of public company financial…