Sarbanes Oxley Act of 2002

Introduction

In response to major corporate accounting scandals at large U.S. companies such as Adelphia, Computer Associates, Enron, and WorldCom, to name a few, the United States Congress passed a sweeping legislation in July 2002 aimed at improving the integrity of financial statements and related audits and mandating certain corporate governance practices within publicly traded U.S. companies. This legislation, called the SarbanesOxley Act of 2002 (referred to here as Sarbanes-Oxley or the Act), has been considered by many to be the most significant new law since the passage of the Securities and Exchange Acts of 1933 and 1934(Stephen, p79).

The Act is most commonly referred to by its section numbers. Each section has specific requirements, affecting either the external auditor or a company or both, or in some instances, creating additional government oversight of companies and their auditors.

Some of the most important sections of the Act and their related requirements are discussed in the following sections, grouped into related categories.

Discussion

The Act has created new mechanisms to monitor the quality of audits performed by public accounting firms that audit publicly traded companies, establishes accounting standards, and includes penalties to punish officers of companies that attempt to profit from fraudulent activities(Norris, p23).

Section 101

It established a newly created and separate nonprofit corporation, the Public Company Accounting Oversight Board (PCAOB; referred to here as the Board) to “oversee the audit of public companies that are subject to the securities laws…in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.” The Board shall be operated under the auspices of a five-member commission, appointed by the Securities and Exchange Commission (SEC; referred to here as the Commission). The Board may have only two members who have been or are Certified Public Accountants (CPAs). Each member of the board is expected to serve on a full-time basis and may not engage in any other business or professional activity during their term of appointment. Board members are appointed for a 5-year term and may only serve for two terms(Lucas, p66).

Section 102

Any public accounting firm that desires to be appointed as the auditor for a publicly traded U.S. company (i.e., an issuer or a registrant) must register with the PCAOB to perform such audits. In addition, the firms must pay an annual registration fee and provide periodic reports to the Board. The firms are also subject to an inspection process as defined by the Board (see Section 104).

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Section 103

This gives the Board the authority to establish, as it deems appropriate, auditing standards to be used by registered public accounting firms in their conduct of financial statement audits of issuers and in the preparation and issuance of their audit reports. The Board issued PCAOB Auditing Standard No. 1 (AS1), which adopted all the previously issued and existing Statements of Auditing Standards of the Auditing Standards Board of the ...