Thesis on "Sarbanes-Oxley Impact on Auditing"

Thesis 5 pages (2046 words) Sources: 4 Style: MLA

[EXCERPT] . . . .

Sarbanes-Oxley Impact on Auditing

The Impact of the Sarbanes-Oxley Act on the Auditing Profession

The accumulated effects of government-defined compliance legislation on the auditing profession has created significantly greater opportunities for providing services, yet has also introduced an entirely new and higher level of complexity as a result. The intent of this paper is to evaluate how the Sarbanes-Oxley Act (2002) is influencing the auditing profession specifically concentrating on how the advantages and disadvantages of the Sarbanes-Oxley Act (SOX) (2002) are impacting this profession today and in the future.

Despite the significant growth of Governance, Risk and Compliance (GRC) as a framework for ensuring corporate-wide compliance to government-based reporting and auditing, there still exists significant variation between actual auditing practices and performance to standards (Jelinek, Jelinek, 223). The lack of internal controls over the auditing process have also created significantly more work for companies to ensure they adhere to the Sarbanes-Oxley Act (SOX) requirements as well (Shelton, Whittington, 145). This has translated into significantly more work for auditors from a process, system and personnel perspective. This has also forced an accelerated implementation schedule for auditors to adopt a myriad of new report requirements. For smaller firms, the lack of internal controls on audit performance has been particularly costly both in terms of auditing fees and time lost in gaining insights into how to be in compliance to the SOX standards as many of them do not have the accounting staff to specifically deal with these challenges (Swartz, 14).

Internal System and Process Collaboration Is Critical for SOX Compliance

From the experiences of both smaller firms that struggle to stay in auditing compliance to the SOX standard to the larger ones that have staffs of auditors and accounting professionals, there exist common needs for greater levels of collaboration to share critical internal knowledge that can streamline the continual auditing process. All levels of an organization need to have higher levels of internal collaboration surrounding financial information to ensure a higher level of internal audit consistency (Michelman & Waldrup, 32). One of the key benefits of SOX, despite the added costs and time pressures on auditors and the many reporting requirements, is the empirically proven fact that it leads to greater levels of more accurate valuations of companies, and has also created more of a consistent approach to accurately defining how much a company is worth (Shelton, Whittington, 159). Second, the added pressure on auditors to increase the accuracy, consistency and regularity of reporting is serving, over time, to increase the reputation of the accounting profession, which has suffered a lack of credibility in recent years due to the scandals that are now pervasive across many financial services-related industries. Auditors are often perceived as one of the lower-ethic occupations including attorneys who protect a clearly guilty client or engage in politically-motivated strategies of running a smear campaigns to discredit innocent plaintiffs for example (Radtke, et.al). The lack of ethics that pervade the accounting an auditing industry as evidenced by the aiding of senior management at Enron my Arthur Anderson auditors is a case in point. Due to all these factors, it is critical that the adherence to SOX be supported with a multi-departmental focus, relying on cross-collaboration between functional departments and reporting systems within a company. As SOX requires all publicly-held companies in the U.S. To provide greater levels of audit traceability and process management of material financial events, it continues to completely re-order all aspects of financial and managerial accounting. The fact that many companies are choosing to go private vs. adhere to the stringent and costly steps needed to come into compliance with SOX illustrate how pervasive the process steps are in terms of changes within companies. Auditors in these situations must assess the extent to which their firms are in compliance to the SOX standard, even before taking the company private. Even in the exiting of capital markets that SOX was originally created to support, there is intensive and time-consuming work for auditors to complete.

Analyzing SOX by Section to Assess the Impact on Auditors

Of all sections of the Act, Section 302, Corporate Responsibility for Financial Reports, requires that firms audit, verify, and take corrective action to make sure that their financial data has a high level of accuracy and transactions are stored in databases that are highly reliable and considered compliance to read/write standards. This is the most difficult of the sections of the Act to stay in compliance with as the Act was deliberately written to be non-prescriptive in nature. There is no clear line of demarcation as to how this is to be interpreted. This is one of the disadvantages of the SOX Act; it does not delineate the extent to which Section 302 is enforceable or the extent of congruence to its requirements is attained. This leads interpretation wide open and has often led to debate within the auditing profession, between the auditing profession and the U.S. Government including the Securities and Exchange Commission (SEC), and within the community of shareholders for any given company as well.

Section 404, Management Assessment of Internal Controls, is by far the most well-known of the sections in the SOX Act, section 404 calls for support for internal controls that are auditable by a third party. While Section 302 lacks a specific level of prescriptive actions, Section 404 is clearer in its definition of how often reporting will be accomplished and also the extent of which financial events within a company will be reported. What's most interesting about Section 404 is the fact that liability for reporting accuracy also carries forward to outsourcers who are contracted to complete this work, which is a disadvantage from an auditing perspective today. The auditing department of any given company must assess the performance of outsourced accounting or auditing firms and be able to verify compliance of their activities to the Section 404 standard. The confusion over how to be in compliance to Section 404 when outsourcing partners are involved has been one of the more confusing, and as a result, costly aspects of the auditing process surrounding SOX (Jelinek, Jelinek, 223).

Section 409, Real-Time Issuer Disclosures, defines how quickly a company has to report a material event to the public on a rapid and current basis. Many analyst firms say that the rule is 72 hours or less, and define a material event as any task that has a lasting financial impact on a firm. There's considerable debate about just what is and isn't a material event today -- and the fact that synchronization between databases is at the heart of reporting material events throughout a company. This specific section forces auditors to implement entirely new reporting processes that have the ability to generate real-time alerts and exception reporting (Radtke, 281, 282). Often many companies must implement entirely new systems that have real-time capability within them, as the vast majority of companies rely on sequenced or batch-oriented data. As a result of the SOX requirement, auditors often have to implement entirely new real-time processes and back-up systems as well. This process and system-level modification is critical for SOX compliance, yet forces many organizations to spend significantly more on interprocess system integration to attain this level of performance. The real-time reporting requirement is one that forces a high level of costs and process efficiencies into companies who in many cases do not have the necessary resources to achieve that level of performance (Swartz, 14).

As a result, significant new costs are incurred and the real-time process and system status is often used just for SOX compliance requirements, as the remainder of the company still runs on batch-oriented data workflows.

Section 802, Criminal Penalties for Altering Documents, is specifically focused on the requirement of retaining records and defining policies for archiving data, this section has the hardest impact on accounting and auditing, and what's most interesting about this specific area of the Act is that it's not prescriptive, just instructive. From an auditing standpoint, there are many benefits to organizations from being in compliance to this specific section. The first and most obvious is the need for creating a series of corrective actions and preventative action-based processes that ensure documents are not alterable in the first place, and if they are, there is a pervasive audit system in place to see who audits any given document at any given time (Shelton, Whittington, et.al.).

SOXs' Impact on the Audit Profession

First and foremost, there is much more of an emphasis on training and certification of auditors to understand and be able to design processes that are in adherence to the SOX requirements (Michelman, Waldrup, 32, 33). These changes in accounting processes are just the beginning of the much broader and much more pervasive changes at the fundamental business process level within companies. The changes required by SOX also force entirely new approaches to managing, reporting, storing, and accessing financial information, often requiring new it systems and processes as well. The coordination of it systems… READ MORE

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