Impact of the Sarbanes-Oxley Act on the Accounting and Auditing Essay

Impact of the Sarbanes-Oxley Act on the Accounting and Auditing Profession - Essay Example The unexpected corporate failures brought the integrity of the financial statement audit into question (Elson & Lynn, 2008). The apparent aim of the new law is to strengthen controls and strengthen compliance with disclosures, in order that the matter of corporate performance and financial condition be made more transparent to the investing public. The Act applies to all corporations registered with the Securities and Exchange Commission (SEC), otherwise known as public companies. The most important sections of the statute are those that require the establishment of the Public Company Accounting Oversight Board (PCAOB), Auditor Independence, and Enhanced Financial Disclosures. The impact of the new requirements listed is to strengthen the role and accountability of the internal audit function, in order that management and the board of directors may be held responsible â€Å"to vouch for accounting controls over financial reporting and disclosure weaknesses to shareholders† (Elson & Lynn, 2008:60). Prior to the implementation of the SOX, internal control was observed to be weak because of the weak internal audit performance, lack of independent directors, and inconsistency and general failure to hold the board of directors and internal audit committee accountable. While prior to the SOX, similar recommendations for chang e were already made by the Blue Ribbon Committee, compliance with these earlier recommendations was not as effective than that subsequent to the implementation of the SOX, mainly because of the absence of legal mandatory power of the Blue Ribbon Committee, in contrast with the requirements of the SOX which were legally binding (Lin, Kang & Roline, 2009:10). At least three studies have empirically determined the effect of SOX on the enhancement of internal audit and control by the management and board of directors. In the implementation of SOX, the Chief Audit Executive played an active leadership role in the implementation of SOX (Section 404), emphasizing on risk identification and control as well as remediation. Most reported increasing their resources devoted to corporate governance activities, including the review of ethics, business conduct, legal and regulatory compliance; audit resources were reported to have been increased (Patterson & Smith, 2007) by as much as 66% (Elson & Lynn, 2008). Significant changes were also made to the composition of the audit committee and the board of directors, which included: (a) an increase in the number of independent directors assigned to the audit committee as well as the board of directors; (b) a significant increase in compliance with the requirement that there should be at least four direct ors on the audit committee, as well as having six to fifteen directors in the board of directors; and (c) an increase in the overall average number of audit committee hearings (Lin, Kang & Roline, 2009). These changes pointed to not only formal but also substantial compliance with SOX requirements. Not all effects expected of SOX had materialized. A study of external auditors’ performance was conducted on the expectation that they had begun to exercise a greater conservatism and a more vigorous audit process prior to issuing going-concern or other qualified opinions. The study showed, however, that there had been no significant difference in the changes in the performance of auditor firms when comparing the pre- and post-SOX contexts (Ryu, Uliss & Roh, 2009). Furthermore, there are what are called â€Å"ripple effects,† such as (1) the negative influence on corporate acquisitions and mergers; (2) increased records-management requirements; (3) decreased