Essay About Main Advantages And Auditing Firms

Main Advantages and Disadvantages of the Sarbanes-Oxley Act
The Main Advantages and Disadvantages of the Sarbanes-Oxley Act        The Sarbanes-Oxley Act (SOX) was enacted in July 2002, it was meant to restore “the public confidence in corporate financial statements (Jahmani & Dowling, 2008, p. 57).  SOX was enacted due to some serious and significant losses suffered by investors due to malfeasance by corporate executives in regards to their financial statements.  SOX “was drafted and implemented hastily (Grumet, 2007, p. 7)” because the government needed to show that we would not tolerate financial scandals like WorldCom and Enron; which are the two most famous cases of financial statement frauds; but they weren’t the only financial scandals.           Between 1997 and 2004, investors lost an estimated $900 billion (Jahmani & Dowling, 2008, p. 57) as a direct result of the 30 largest accounting fraud cases; while corporate executives received millions in bonuses and low interest loans. Records revealed that the auditing firms were generating more revenue from their consulting services that from their auditing services, which raised the question of whether the auditors had lost their independence when auditing a corporation that they were also providing consulting services (Jahmani & Dowling, 2008, p. 57).  One of the main advantages of the SOX, is that it addressed this perception that the auditing firms lacked independence, both in Section 201 and Section 204.  Section 201 provides a list of services that auditing firms are prohibited from providing to their clients; such things as bookkeeping, actuarial services, internal auditing, and legal services (Frame, Hughson, & Leach, 2016, p. 429).  These things were all a part of the consulting services that auditing firms were providing and prior to SOX providing these items along with auditing of financial statements led to the perception that the auditing firms were not giving an accuracy assessment of the corporation’s financial statements and could have contributed to the financial scandals of the early 2000s.   Section 204, it states that the auditing firm should report directly to the independent audit committee “all critical accounting policies and practices, alternative treatments of financial information under the General Accepted Accounting Principles (GAAP) that have been discussed with management, the auditor’s preferred treatment and its ramifications, and any material written communications between the auditor and management (Zilizer, 2002, p. 41).” Another advantage of the SOX, is that it addressed executive accountability, in Section 302 by mandating that the financial statements be certified by the CEO and CFO.   This certification means that the CEO and CFO have reviewed the financial statement and to their knowledge there is nothing materially misleading and that all information to make a financial decision is in the financial statement.  Further, Section 302, requires that the CEO and CFO “are responsible for establishing and maintaining internal controls, which are designed to ensure the reports accurately present the financial conditions of the company (Freer Jr. & Burroughs, 2010, p. 48).”  This section has led corporations to considering more corporate responsibility when it comes to the issuance of their financial statements.