Sarbanes-Oxley Act's impact on the accounting profession

Sarbanes-Oxley Act

The Impact Upon the Accounting Profession

What it does

The Effect of Sarbanes-Oxley on the Accounting Profession

New Rules, New Practices

The past few years have remarkably changed the face of American business. Corporate scandals involving America's largest companies have shaken the confidence and trust that the public once had in big business. The desire to boost earnings has led some executives to commit crimes, in order to fatten their own pockets, at the expense of hard working employees, shareholders and stakeholders. The end result however, has proved disastrous. Workers have been laid off, thousands of people have lost their savings due to rapidly falling stock prices of their firm during rapidly imposed black out periods when employees were unable to pull their monies out. The collapses of Enron and WorldCom, as well as other well-publicized financial debacles, have led to an unprecedented level of attention paid to corporate governance, financial disclosure, and auditing issues. The ensuing Sarbanes-Oxley Act of 2002 has been described as the most important securities legislation since the original '33 and '34 Acts were passed. The SEC, NYSE, and NASD all have weighed in with their own rule changes. Corporate counsel, both in-house and outside, have needed to react to all of these developments rapidly, and often in a crisis environment.

Executive Summary

Corporate greed and corruption has changed the face of American business forever. Consumer confidence has spiraled down and the bottom is unforeseen. Corporate greed was the primary factor in the downfall of Enron, Global Crossing and MCI WorldCom. The governing bodies, the Securities and Exchange Commission also known as the SEC, the Senate, NASD and other powers that be has decided that enough is enough. In 2002, the Senate introduced the Sarbanes-Oxley Act of 2002. This new law impacts CPA's, CPA firms auditing public firms, publicly traded firms and their employees, lawyers, brokers, dealers, investment bankers and financial analysts who work for or have as clients as publicly traded companies. This law has established a New Public Company Accounting Oversight Board (PCAOB), enforces stricter guidelines and well as criminal penalties for firms and individuals within those firms that violate federal law. CPA firms are now held to a higher level of accountability and must now ensure that ethical standards become best practices and they conflict of interests or too close relationships between the auditor and the firm being audited is avoided at all costs.

Sarbanes-Oxley Act of 2002

Purpose and Mission

In reaction to corporate scandals that have occurred over the past few years, the Sarbanes-Oxley Act of 2002 was born. On Tuesday, July 30, 2002 President Bush signed the act putting it into law. The Act was unanimously passed in the Senate and won in the House of Representatives by a margin of 423-3. The main purpose of this law is to increase corporate governance, financial disclosure and to toughen the auditing requirements.

The Effect of Sarbanes-Oxley on the Accounting Profession

In addition to the mandates outlined above, Sarbanes-Oxley Act allows for additional provisions that seek to prevent conflicts of interests that can be a precursor to corporate corruption. The Act bans what is known as the "revolving door," prohibiting registered CPA firms from auditing any SEC registered client whose chief executive, CFO, controller or equivalent was on the audit team of the firm within the past year. This Act is crucial to help lessen the "you wash my back, and I'll wash yours" mentality. Another significant rule calls for auditors to be rotated every 5 years. This way, no auditor can audit a client for more than five consecutive years. Yet another extremely critical aspect of this act is that auditors can no longer provide consulting services for their clients that fall outside of the realm of the practice of auditors. Under this Act the following list of services are prohibited:

1.Bookkeeping and related services

2. Design and implementation of financial information systems, 3. Appraisal or valuation services (including fairness opinions and contribution-in-kind reports)

4. Actuarial services

5. Internal audit outsourcing

6. Services that provide any management or human resources

7. Investment or broker/dealer services

This list is by no means exhaustive as the Board has the authority to object to other services on a case-by-case basis. It is important to note that firms may provide certain tax services, provided the firm is pre-approved by the board. A huge impact of this Act lies in changes to securities laws which toughen corporate and criminal fraud accountability requirements. While images of Arthur Andersen auditors and Arthur Andersen executives shredding important documents loom in the minds of many, this new accountability rule aims at ensuring guilty parties are punished to the fullest extent of the law. Those who are found to have destroyed, altered, hid or falsified records or documents to impede, obstruct or influence an investigation conducted by any federal agency, or in bankruptcy, with fines or up to 20 years imprisonment, or both.

New Rules, New Practices

The Sarbanes-Oxley Act is, at the very least a pivotal revolution in the way publicly held firms and CPA's conduct business. Once a booming industry, CPA's can no longer look to boost revenues by offering their clients the full gamut of related services such as actuarial services and internal auditing which has now been prohibited by the Act. This requires CPA firms to scale back efforts to up sell other services to existing clients thereby forcing them to seek revenue increasing activities elsewhere. Additionally, the Act requires CPA firms to be more efficient and through self-regulators as they must ensure that they are in compliance with the law to avoid stiff penalties. Audit firms must maintain better records and keep these records for longer periods of time. Furthermore, publicly held companies must also ensure that internal accounting procedures and practices are in accordance with the Act. CEO and CFO's are required to implement internal audit controls, which ensure that they are informed of all material information.

In essence, the new Act requires accountants to straighten up or suffer the fate of Arthur Andersen, Enron, MCI WorldCom and the other fallen giants.