Accounting

The Roles of Sarbanes-Oxley Act & Public Company Accounting Oversight Board (PCAOB)

Accounting Oversight

What is Sarbanes-Oxley?

The Sarbanes-Oxley Act was enacted by Congress in 2002 as a response to a series of major corporate collapses caused by fraudulent accounting practices. Some of the most notorious cases were those of Enron and WorldCom, which filed for bankruptcy after being exposed as massive accounting frauds. The Securities and Exchange Commission (SEC), which was supposed to oversee and regulate the securities industry, failed to hold accountable many CEOs and executives who were involved in or benefited from these schemes. This left investors vulnerable to manipulation by companies that inflated their revenues, assets, and profits beyond reality. The Sarbanes-Oxley Act aimed to restore investor confidence by strengthening the SEC’s authority, enhancing its enforcement capabilities, improving corporate governance, increasing disclosure standards, and reforming the auditing profession.

Sarbanes-Oxley & PCAOB

The Sarbanes-Oxley Act was designed to reinforce corporate ethics and increase transparency in corporate accounting. This was accomplished by creating the Public Company Accounting Oversight Board (PCAOB). The PCAOB is a board appointed by the SEC that is composed of CPA’s and non CPAs. The members of the board are charged with creating and enhancing the Generally Accepted Accounting Principles (GAAP) for auditing and reporting in public companies. PCAOP protects the investor by establishing specific auditing, quality control, ethics, independence, and other standards. Some of the rules that are enforced include compliance inspections for registered accounting firms; conduct investigations and disciplinary proceedings involving public accounting firms as well as levy sanctions; and revoke CPA credentials.

The PCAOB protects the investor by setting standards on accounting practices. As a result, the impact from these new standards provided the SEC with the ability to sanction companies that did not meet specific standards for financial transparency.

Within the scope of SOX, public companies were now required to publish and standardize accounting controls as well as other information pertinent to financial reporting. Some of the most important standards include:

• The financial statements must comply with Generally Accepted Accounting Principles (GAAP) and truthfully represent the company’s financial health and position.
• The signing officers must review the financial documents and certify that they are free of untrue statements or misleading omissions.
• The company must establish and maintain an adequate internal control structure, including controls over financial reporting, and report on the effectiveness of such controls.

Although additional paperwork and requirements are necessitated by the Act, the provision were necessary to deter many executives and accounting professionals from committing fraud. In addition the SOX states that outside auditors will need to be brought in to evaluate the reports, findings, and rule out any type fraud being committed by the organization.

Perhaps the most important provision of SOX is accountability of CEOS and executives for financial fraud and misreporting. Corporate executives and boards of directors must ensure that these controls are reliable and effective. In addition, independent outside auditors must attest to the adequacy of the internal control system. These standards strengthened the enforcement of securities fraud by removing barriers. Prior to SOX CEOs could escape prosecution by claiming they were not aware of the fraud or accounting improprieties. By placing standards on accounting practices that increased transparency and made executives directly accountable it was no longer possible for leadership to claim ignorance. The implementation of SOX has set into motion a series of accounting reforms. Under SOX, the PCAOB is constantly altering and refining accounting practices both for companies and for accountants. For instance, reporting standards for accountants when performing audits is an area that is constantly changing due to different circumstances that arise in being compliant. For instance, defining bad faith estimates for revenue and losses continues to be an area of controversy and constant change in the standards. This practice continues with SOX allowing accounting reforms to continue making a transparent and fair market.

Sarbanes-Oxley and PCAOB’s These new policies have altered the internal accounting controls for all public companies and made them more ethical in accounting practices. Companies that abide by the act and show that they are in compliance can be trusted more than nonpublic companies that do not need to abide by the Act.