It was a few years back that the United States market capital saw the domination of financial fraud revelations performed in so called big Companies of the economy. The stakeholders of the Companies like investors, affiliates in the market, and communities had to incur huge historic losses. The top notch corporate leaders were also the ones affected. The corporate veil was lifted in most cases and many of them had to suffer jail term. Industries were affected in the sense that many big names in the industry, including the biggest American audit firm were desperately out of business. The fall, however acted as a foundation for the rejuvenation of the fallen corporate executives and the capital market, thus producing some results.
Relating to this incident, President George W. Bush signed an Act which had provisions of independence and Company ethics. The ethics clause included in the Act has a direct effect on the business people and their transactions. The clause of ethics is inclusive of:
Transparency: This aspect has high critical value for matters of finance (Campbell & Houghton, 2005). If there is transparency in the part of companies, there can be avoided of financial losses. The transparency for audit firms has been increased by Sarbanes-Oxley Act. There is expected from audit firms that there will be disclosure of some crucial information which helps in understanding of operations with the public. This is the first stage in the entry of the capital market for the audit firms. There is also a requirement for the firm regarding the disclosure of clientele names, charging fees and the quality procedures for the general public. Public confidence is gained through transparency, compliance.
Accountability:
This aspect demands the executives to maintain accountability at all times. If there is a financial fraud happening in the Company, the top professionals of the Company will be taken as accountable. This is because they are the ones under whose supervision all activities are performed. This means that the executives are careful and observant about all the financial activities that are occurring in the organization. There are times when these executives should focus on verification and showing of authority through rubber stamp regarding the financial reports (Campbell & Houghton, 2005).
Protection:
There is a responsibility towards domestic as well as foreign investors for protection of losses that they incur because of fund mismanagement and capital market poor performance. A protected investor will forever have the will for investing their capital more so that the US economy can grow.
Security:
The role that whistles blowers play in checking the irregularities in the finances of a business through their determination and vigor is crucial. The protection guarantee of a whistleblower is in the case when there is proper reporting of accounting and audit in the Company. The irregularity report also brings risk into one’s life. However, the whistleblower will have the confidence to report the misdoings of the Company with prospects of huge losses if there is protection from the Company’s side.
There is also a huge effect from Sarbanes Oxley on the person's independence who has been working in the US capital markets. There is clear indication from the results that independence provision will create fruitful endeavors for the financial markets. The occurrence of these has been affected because of:
Auditor independence:
The Sarbanes Oxley Act does the guarantee of independence of auditors. When there is independence of the auditor, he or she can perform his work of scope devoid of intimidation and threats from the executives of the Company. The Sarbanes Oxley has made the role of auditors strong and delightful which creates power and independence in them.
Additionally, the Act also advocates services of non-audit nature that have limitation to be carried out by public firms as a part of their auditing service to public companies. There is thus a suggestion that there should not be offer of non-audit services by public companies beyond a set limit. There can now be eliminated of potential dealings, which may be a case in case there is hiring of audit firms for the offering of non-audit services. Another factor is that in case there is offering of non-audit services including book keeping, there can be ineffective. There can be luring into corruption so that crucial information can be hidden and financial management can be put in danger when it comes to the public sector. This is clearly a risk factor for the economy of the US.
There should also be an approval of the services of non-audit nature by the internal audit committee of the Company, which is believed to provide autonomous decisions prior to the offer of services by external auditors.
There is also a proper demonstration of independence in the Sarbanes Oxley Act with the change in rotation lead engagement partner nature for a five-year period. The Act also prohibits audit firms to engage of offering of services such as bookkeeping, actuary and investment banking.
There are many ways in which the Act has affected auditors and as a result the growth of the US capital markets has been tremendous. The proof for the same can be explained as:
The auditors and the organizations that they have been involved in have now grown to be far-sighted. The newly established accounting oversight board helps the auditors and their firms to have exposure to oversight. Professionalism is established when oversight is exposed to an auditor, which means that the credibility grows. When auditors are conducting audit activities for a Company of public nature, there should be understanding that in case there is a compliance failure towards professionalism and potential standards, there can be litigations involved. In case there is carelessness in the quality of professional services given by the audit firm, the firm can be sued. They can also be held liable criminally and this will follow additional penalties on the legal front.
Report delivery:
There should not be a failure on the side of auditors for periodically submitting registration reports to the PCAOB. This failure of report submission will impart a message of incompetency, which creates an impression of sun standard in performing audit activities for public companies.
Inspection:
PCAOB carries the responsibility of inspecting of audit firms from time to time so as to confirm that the affiliated auditors fulfill all criteria of performance of duties. Refraining from inspection allows audit firms the opportunity to hire incompetent staff so that the quality of auditing services is degraded.
There can be disciplinary action for the auditor: Auditors involved in corruption will be handled as per law. The consequences are also applicable in case there is a violation of the Sarbanes Oxley Act.
The focus of the auditor should thus be towards offering professional accounting services and working to achieve synergy. The Act was in fact prepared so that professionalism can be established in the capital market (Arens & Beasley, 2014).
Apart from all these, the Act also has significant contribution towards revolutionizing the standards of audit in the system of the United States. The beginning of the Act has created some positive ripples which are easily observable. The favorable transformation of the capital markets in the United States through improved auditing can be observed as:
Auditor and audit firm responsibility towards the independent audit committee- There is obligation for external auditors for reporting to audit committee and not necessarily to Company executives (Arens & Beasley, 2014).
Penalties- An audit firm liable for damaging the Company audit reports can be directly dealt without court favor.
References
Arens, A. A., Elder, R. J., & Beasley, M. S. (2014). Auditing and assurance services: An integrated approach.
Campbell, T., & Houghton, K. A. (2005). Ethics and auditing. Canberra: ANU E Press.
Sarbanes-Oxley Act Today: Changing Perspectives. (2015). Effective Auditing with AS5, CobiT, and ITIL, 13-51. doi:10.1002/9781119197119.ch2
Sarbanes-Oxley Guide for Finance and Information Technology Professionals. (2012). doi:10.1002/9781119201939
Services Provided by Internal Audit Relating to the Sarbanes-Oxley Act. (n.d.). Internal Audit Handbook, 565-594. doi:10.1007/978-3-540-70887-2_38
United States. (2005). Implementation of the Sarbanes-Oxley Act of 2002: Hearings before the Committee on Banking, Housing, and Urban Affairs, United States Senate, One Hundred Eighth Congress, first session, on the dramatic change across the corporate landscape to re-establish investor confidence in the integrity of corporate disclosures and financial reporting, September 9, 23, and October 2, 2003. Washington: U.S. G.P.O.
