Sarbanes-Oxley Section Effect on Audit Fees

According to Terry Sheridan, in the article, SOX Compliance is Still a Challenge- and Costly- for Many Companies, she states that “Aside from external audit fees,

However, the application of SOX has brought on regulations that public companies must put in place and follow to prohibit these unethical occurrences. One major advantage for associated with SOX is that more thorough audits are being conducted by auditing firms. Audits being conducted more thoroughly will provide accuracy and an increased reliability of financial data. This will affect taxes in a positive way and provide firms with an advantage. Causholli, Chambers, and Payne (2014) suggest that prior to the implementation of SOX in 2002, “an auditor’s opportunity to sell additional non-audit services in the subsequent year, coupled with the client’s willingness to buy services, intensified the economic bond between auditor and client, in turn reducing auditor independence and the quality of financial reporting” (p.681). The regulation of auditor provided non-audit tax services has increased the reliability of tax and financial reporting within companies. Seetharaman, Sun, and Wang (2011) explain that “in a post-Sarbanes-Oxley environment, the benefits of auditor-provided non-audit tax services (NATS) seem to manifest themselves in higher quality tax-related financial statement management assertions” (p. 677).

To execute this plan, it sets requirements for Executive Officers, guidelines for tipsters and procedures for all employees. Specifically, section 404 of SOX works towards fraud prevention by enforcing procedures. This section holds company management and their external audits accountable for regulating the internal controls, and ensuring any material weaknesses or deficiencies are disclosed. The requirements for proper disclosure includes reporting any material change that could change the mind of investor. The company should provide reasonable assurance that details accurately and fairly reflect actual transactions in the business, they comply with GAAP and they are finding unauthorized transactions in a timely manner. Keeping in mind, the primary purpose of the implementation and continual regulation of the internal controls is to prevent fraud. Without the presence of effective and reliable internal controls, companies are susceptible to fraudulent activities. The punishment for failing to provide of the required disclosures includes $5 million fine and up to 20 years in prison. In addition to the increase in severity of punishment, businesses have also felt the raising costs associated with section 404

Under SOX Section 404, all publicly listed corporations are required to maintain an adequate system of internal control. Under SOX, corporate executives and the board of directors are personally responsible for making sure that the internal controls in place are effective and reliable. Independent auditors should also attest to the reliability of the said internal controls. Failure to do so would result to fines and/or imprisonment1.

I am not familiar with the law nor do I know if it is currently being used in my organization. Based on my research, Section 404 of the Sarbanes-Oxley Act requires public companies' annual reports to include the company's own assessment of internal control over financial reporting, and an auditor's attestation. Since the law was enacted, however, both requirements have been postponed for smaller public companies. Under the Sarbanes-Oxley Section 404, all public organizations are mandated to publish information in their annual reports in regards to the scope and adequacy of the internal control structure and procedures of their financial reporting. This information is then used to assess the efficiency in the internal control and procedures

The goal of the Sarbanes-Oxley Act was to deter and prevent corporations from committing financial fraud, protect shareholders and regain the confidence the public had in financial statements that the released (Ferrell, Hirt, Ferrell, 2009). The act did put additional duties on the corporate accounting departments as well as the auditing firms that monitored these corporations. Prior to the law’s enactment, corporations largely had auditors and financial monitors on staff. The law requires that an external auditing firm review not affected by conflict of interest, audit and monitor the financial records of the corporation. While audits are largely seen in a negative manner, having an annual audit done by an outside firm will allow for

In 2002 the U.S. Congress passed the Sarbanes-Oxley Act of 2002 (SOX), a legislation put in place not only to improve the accuracy of corporate disclosures, but also to protect shareholders and the general public from accounting errors and fraudulent practices in all organizations. Although these organizations include corporations, small businesses, non-profit institutions, government bodies and any other entity where business is conducted,

Sarbanes Oxley Act is focused towards identifying accounting frauds in different public companies. This paper discusses about various reasons for the introduction of Sarbanes Oxley Act and causes that has been overlooked.

When discussing Sarbanes-Oxley’s supposed burdens, critics focus on Section 404 of the Act which requires a “publicly-held company’s auditor to attest to, and report on, management’s assessment of its internal controls” (Federal Issues).

In the early 2000s, corporate financial statement fraud was rampant, as companies such as Enron and WorldCom used shady accounting practices to inflate their revenues and hide losses. This led to the introduction of the Sarbanes-Oxley Act of 2002, the most extensive form of accounting reform legislation ever passed. It had many consequences for publicly traded companies and public accounting firms, some of which were positive, while others were detrimental. One of the detrimental impacts, the cost of compliance, was alleviated at least partially by the introduction of Auditing Standard Five in 2007. This paper will examine the time period leading up to the passage of the act, the different parts of the legislation, the introduction of Auditing Standard Five, and the impact on registrants and auditors.

The Sarbanes-Oxley Act of 2002, also known as the SOX Act, is enacted on July 30, 2002 by Congress as a result of some major accounting frauds such as Enron and WorldCom. The main objective of this act is to recover the investors’ trust in the stock market, and to prevent and detect corporate accounting fraud. I will discuss the background of Sarbanes-Oxley Act, and why it became necessary in the first section of this paper. The second section will be the act’s regulations for the management, external auditors, and companies, mainly publicly-traded companies, and the cost and benefits of the act. The last section will be the discussion of the quality of financial reporting since SOX and the effectiveness of SOX provisions to prevent another financial statements fraud, such as Enron and WorldCom from occurring in the future.

a. Inaccurate calculations made by Congress minimizing the costs associated with Sarbanes compliance. (Feeney, T., The Heritage Lectures; No. 995)

Though a plus for auditors, this required the development of two different sets of auditing standards, one for the public accounting sector and one for the private sector. In a 2010 study of SOX, the Institute of Management Accountants Foundation for Applied Research, (IMA), confirmed the following benefits when complying with SOX legislation: 1.) Companies that are SOX compliant have realized and achieved strategic goals, 2.) SOX compliance has led to effective and efficient analysis of performance, 3.) Companies have achieved comprehensive improvements in performance by standardizing and upgrading processes, 4.) Duplicative processes have been identified and eliminated, increasing efficiency and effectiveness, 5.) Transparency of reported information has increased, 6.) Financial reporting has improved as a result of stronger, effective and efficient internal controls over financial reporting, 7.) Increased improvement in the efficiency of both internal and external audits, thereby decreasing audit costs, and 8.) Automating manual controls increasing time efficiency” (Basile, Handy, & Fret,

The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence.   In protecting the shareholders and the general public the SOX Act is intended to improve the transparency of the financial reporting.   Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a

These changes were outlined in the Sarbanes Oxley Act of 2002 (SOX). SOX completely revolutionized financial reporting, requiring senior management of firms to sign off on each financial statement that the company issues. It also stipulated that wrongful doing can result in not only termination but also imprisonment. SOX amplified the requirement for companies, requiring firms to maintain proper levels of internal controls when it comes to operating activities. SOX also established the creation of the Public Company Accounting Oversight Board (PCAOB) which implemented stricter auditing standards for public accounting firms. Not only were accounting firms required to consider internal controls, but they were also required report any significant deficiency directly to the board of directors. SOX stressed the importance of internal controls, and within internal controls it established the need for segregation of duties. Since this time, there have been many additions to accounting policies regards segregations of duties, and many functions of the business process dedicated to it.