The Sarbanes-Oxley Act
The bankruptcy of the one of the best companies in the United States, Enron, resulted in big shock and decrease in the public confidence. After Enron, to improve the public confidence of the United States people and the rest of the world, and also to strengthen weaknesses in the accounting profession, there had to be something done. The introduction of the Sarbanes-Oxley Act was then the key to address all these matters. Passing of Sarbanes-Oxley Act was important in setting the foundation for some accounting principles and filling the gaps shown by the Enron scandal and other accounting scandals, including WorldCom, in the accounting profession.
3.2 Sarbanes-Oxley Act of 2002 Background …show more content…
The introduction of Sarbanes-Oxley Act had to correct the systemic weaknesses in the governance of corporate structure and boost the public confidence. These were seen as the most important goals that the Act had to achieve. The following were some of the important objectives of Sarbanes-Oxley:
• Improving the accounting oversight
• Strengthening the auditor independence
• Demanding increased transparency in financial matters of the company
• eradicating analysts’ conflicts of interests, and
• Demanding more accountability from corporate official
3.3 Auditor’s incentives and Independence
Many of the weaknesses, that were not discovered prior the Enron bankruptcy, in auditing the company’s financial statements were pointed out after Enron scandal. According to Ribstein and Larry (2002, p. 5) the major issues that caused the auditing of Enron financial statements not to be efficient …show more content…
• Insufficient evaluation of accounting firm’s work by the client company’s audit committees.
• Insufficient industry examination of accounting firm’s work, and
• Excessively sloppy accounting standards.
Every companies’ (excluding non-profit organisations) intention is to make profit, same goes for accounting firms. No matter how big the size of the accounting firm, the firm may have incentives to overlook any non-compliance by the client from which its makes material fees for non-audits work and consulting.
In response to these issues mentioned above and lack of auditors’ independence, Sarbanes-Oxley Act (s 201,), stated that it is unlawful for accounting firms to perform both the audits and any non-audit work for the same client. The Act (Sarbanes-Oxley Acts s 201 (a) 2002) listed the following as the non-audits services that should not be performed together with the audit by the accounting firm to the same client.
• Actuarial services
• Internal audits outsourcing servicing
• Designing and implementing the financial information system
• Valuation and appraisal services
• Experts and legal services that are not related to the