The word “partnerships” in Enron collapse has brought in somewhat controversial in accounting. Big companies are looking more profitable than it actually was, but accounting firms assist in the profit crime which erosion of the public confidence.
Consequently, billions of dollars in market value evaporation. Investor suffered huge losses. In order to establish public confidence again, the U.S.
Congress passed the Sarbanes-Oxley Act on July 30, 2002. The law promulgated four fundamental changes in the relationship between auditors and public companies.First of all, regulators limited the auditor’s ability to provide consulting services to audit clients. The law separating consulting and accounting work, dividing investment banking from analysts and making disclosure of stock holdings and investment banking ties more prominent in research reports, potentially term limiting auditor contracts for individual companies, requiring outside entities be incorporated into financial disclosure statements so as not to understates liabilities and overstates earnings, and encourages diversity by employees with 401Ks.Second, the responsibility of hiring auditor switched from management team to independent directors in the company’s audit committee.
To make sure governance of company is effective and commit to fair and accurate financial disclosure, the company’s audit committee has the responsibility to oversight. In that regard, the relationship between the company’s auditor and its independent audit committee is key. Third, both management and the auditor are responsible for reporting the effectiveness of the company’s internal control over financial reporting. That responsibility is required by the Sarbanes-Oxley Act. In order to make sure they will execute responsibility, PCAOB issued an auditing standard to regulate this area of the auditor’s responsibilities.At last, the Public Company Accounting Oversight Board (PCAOB) set up the Sarbanes-Oxley Act. It ended long period of self-regulation by accounting profession. That is a good way for accounting practice which improved the quality by making examination recommendations instead of by taking punishment actions.
That is also good for auditing firm or an individual auditor to act in a good faith and to establish a good image to the public and the clients.