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Auditing firms are no longer able to focus primarily on selling additional services. Instead, they are now concerned with providing excellent service to the client. This has resulted in additional tax and financial reporting

The Sarbanes-Oxley Act of 2002 was implemented and designed to “protect the interests of the investing public” and the “mission is to set and enforce practice standards for a new class of firms registered to audit publicly held companies” (Verschoor, 2012). During the early 2000 's, the world saw an alarming number of accounting scandals take place resulting in many corporations going bankrupt. Some of the major companies involved in these scandals were from Enron, WorldCom, and one of the top five accounting and auditing firms, Arthur Andersen. These companies were dishonest with their financial statements, assuring the public the company was very successful, when in reality they were not. This became a problem because if the public believes a company is doing well, they are more likely to invest in it. That is to say, once these companies were exposed, it caused a number of companies going bankrupt and a major mistrust between the public and the capital market. Consequently, the federal government quickly took action and enacted the Sarbanes-Oxley act of 2002, also known as SOX, which was created by the Public Company Accounting Oversight Board (PCAOB), and the Securities and Exchange Commission (SEC). Many have questioned what Norman Bowie (2004) had questioned,

The architectural design of a firm varies greatly. In 1950, the business environment of Arthur Andersen included using the computer effectively for automated bookkeeping. Structure and regulation of the markets, helped Arthur Andersen to develop into a well-respected and reputable auditing company. The federal law in the 1930s requiring companies to turn over their financial statements yearly to an independent auditor not only strengthened Arthur Andersen, but also helped with their impeccable reputation. Arthur Andersen’s strategy included quality audits with a well-managed staff and profits. Promotions and rewards were plentiful when auditors made sound auditing decisions. In the 1990s, Arthur Andersen’s organizational architecture and strategy focused on generating new business, cost cutting, and performance evaluations along with decision rights over its business (Brickley, Smith, & Zimmerman, 2009).

In the Enron case, The Securities and Exchange Commission (SEC) and Congress conducted an investigation into Enron's collapse. The authorities re-examined the roles of corporate watchdogs, including corporate boards of directors, auditors, investment banks, credit rating agencies and lawyers. It could be that the watchdogs had too tight relations with the company's executives. That is why no one questioned the Enron's aggressive accounting strategies. To prevent such collapses, someone needs to look into the possible conflict of interest. The dilemma is that auditors should perform in the interests of the investors, but they are paid by the audited company, which makes it more difficult for them to exercise tough decisions. The auditors should not perform some particular consulting services for the firms that they audit. Another belief is that there should be more severe consequences for those committing financial crimes and causing fall of the companies.

An important decision for any shareholder is deciding whether or not to do business with that company. When a business is audited, the operations are reviewed to make sure that nothing is being hidden. An auditor will review the company’s financial statement and practices to confirm that each are direct and correct. The financial statements are the business’s way of representing them and showing that they are following the Generally Accepted Accounting Principles. The audit process is an important one because it provides a platform for the auditor’s opinion concerning the financial statements of the company. As part of the audit process the auditor will conduct an audit plan that outlines a number of actions that he or she will be perform while also detailing the reason for those actions. With every audit, the business’s management is in charge of handing over the financial statements that the auditor will review; while the auditor will review the statements for any material or immaterial misstatements.

There were several large scandals in the beginning years of the 2000’s. The public had a lack of trust within the capital markets and investors who had invested their capital would soon find out that they had lost a substantial amount, as share prices decreased. Senator Paul Sarbanes and Representative Michael Oxley both came together and were part of creating legislation which would deter future scandals such as Enron, WorldCom, Tyco amongst other frauds that led the public lose trust in the markets- to never happen again. Sarbanes-Oxley Act of 2002 is comprised of 11 sections, and one of them is the creation of the (PCAOB) Public Company Accounting Oversight Board, PCAOB definition “The PCAOB is a nonprofit

This event was unprecedented. The seventh largest company in the United States disintegrated from an annually profitable company in business for over sixteen years to a company claiming to be bankrupt over a period of a few months (O’Leary). Ultimately, fraudulent accounting and misstatements of revenues and debt obligations orchestrated by the CEO, CFO, and other senior managers were to blame. These revelations roiled stakeholder trust in public companies' financial reporting, accounting methodology, and overall transparency. In addition to Enron’s admissions, their accountant and auditor, Arthur Andersen LLP, was determined to have conspired to assist in the inflation of stated profits mainly by not disclosing Enron's money-losing partnerships in the financial statements (PBS). Arthur Andersen eventually surrendered the practices’ CPA licenses in the United States after being found guilty of criminal charges relating to the firm's handling of auditing for Enron

“Outside auditors play a crucial role in our nation’s financial system. As the watchdogs of corporate accounting, they are supposed to protect investors” (Hilzenrath, 2010). The question is how effective are these outside auditors in protecting investors? When you think about the failures that have occurred: Enron, WorldCom, Adelphia, Tyco, and Global crossing to name a few, one would really question the effectiveness of these outside auditors. As a result of these failures, Congress pass the Sarbanes Oxley Act of 2002. This act in turn created the Public Company Accounting Oversight Board (PCAOB) to police the outside auditors and ensures they are protecting the investors.

The Phar Mor case is an example of a fraud that was collusive effort of multiple individuals within the upper management who continually worked to hide evidence from the auditors. With the signs of covering losses, creating fictitious inventory, misstating financial statements, and misappropriating the company’s dwindling assets; the fraud was significant but the oversight inept procedures by the auditors extended this fraud for nearly five-years Currently, accounting firms, with the leverage provided by Statement on Auditing Standard No. 99 are shifting from the cost-pressured audit situation of the past to more quality audits and fulfilling the responsibility to plan and perform.

Enron. Enron was once ranked the sixth largest energy company in the world, however, in October 2001 it’s fate changed and it took a turn for the worse. The Enron Scandal came to light, which led to the bankruptcy of the Enron Corporation and the dissolution of Arthur Andersen, one of the five largest audit and accountancy partnerships in the world. Along with being the largest bankruptcy reorganization in American history at that time, Enron is undoubtedly known as the biggest audit failure (“Enron scandal,” n.d.).

Arthur Andersen LLP was an accounting firm that was hired by Enron for both consultancy and auditing work. It was one of the big five accounting

Jolin Consulting prides itself on being able to provide vendor-neutral hardware and software solutions. You may be asking yourself though; what is a vendor neutral solution? Well, that’s easy!

In the summer of 2007, the media announced that the arms company BAE which is a British defense firm, secretly paid more than $2 billion in bribes for over 20 years to a member of the Saudi Arabia royal family, the Prince Bandar. The Prince had provided one of the biggest weapons contract with Britain; Saudi Arabia was purchasing warplanes, spare parts, and training for Saudi pilots. After they found that BAE was paying bribes to the Prince, some of the payments were channeled by an ambassador through a United States bank. After that, the British Fraud Office started investigating these transactions. Consequently, the Prime Minister Tony Blair gave the order to put an end to the investigation for “national security” reasons. It is worth to mention that the contracts are still valid nowadays, and the 10-15 commissions of agents are distributed between head of state, generals, and their friends.

Lindberg and Beck (2002) claim that auditor independence is hailed as the “cornerstone” in the accounting profession as it is the core reason as to why the public trusts their professional opinion. However, since 2000, many accounting fraud scandals have negatively impacted public opinion on the legitimacy of the audit profession and, if in fact, its independence is uninfluenced by other parties. One of the scandals being the sudden collapse of Enron, given that a few months prior its bankruptcy its auditors Arthur Andersen, which was one of the five largest audit and accounting firms, claimed that Enron was financially healthy, but in fact they were paid off

The purpose of this paper is to highlight the role of external auditing in promoting good corporate governance. The role of auditors has been emphasized after the pass of the Sarbanes-Oxley Act as a response to the accounting scandal of Enron. Even though auditors are hired and paid by the company, their role is not to represent or act in favor of the company, but to watch and investigate the company’s financials to protect the public from any material misstatements that can affect their decisions. As part of this role, the auditors assess the level of the company’s adherence to its own code of ethics.