The Sarbanes-Oxley Act

The Sarbanes-Oxley Act Overview:

The development of the Sarbanes-Oxley Act (SOX) was a result of public company scandals. The Enron and Worldcom scandals, for example, helped investor confidence in entities traded on the public markets weaken during 2001 and 2002. Congress was quick to respond to the political crisis and “enacted the Sarbanes-Oxley Act of 2002, which was signed into law by President Bush on July 30” (Edward Jones, 1), to restore investor confidence. In reference to SOX, penalties would be issued to non-ethical or non-law-abiding public companies and their executives, directors, auditors, attorneys, and securities analysts (1). SOX significantly transformed the procedures in which public companies handle internal controls and reporting within accounting and finance and the managerial aspects of public companies (2). Among the many objectives of SOX the most important objective is to oversee public accounting, publicly reporting companies, and the investment industry; however, SOX needed assistance in order follow through with these objectives:

To better observe the actions of public accountancy, SOX has established the Public Company Accounting Oversight Board. This board oversees the accounting profession and publicly reporting companies with respect to audits and other reporting. It also has created rules designed to assure that auditors of publicly reporting companies are independent of the companies on which they report (3).

The Public Company Accounting Oversight Board (PCAOB) employees are required not to have any direct relationships with the public companies and/or employees of the companies in order to keep all terms of accountability fair. Title I of the Sarbanes-Oxley Act describes the role of the PCAOB who is now in charge of making sure the act is followed through to the greatest extent.

Title I: Public Company Accounting Oversight Board:

The PCAOB gives a new meaning to the public accounting industry. The board must be composed of five members, appointed for a 5-year term, two of which are Certified Public Accountants (CPAs) or have previously been CPAs, and three of which have never been CPAs. The chair of the PCAOB may be a CPA, but only if he has been out of practice for at least five years. “The members must be independent of the accounting profession as no member may, concurrent with service on the board, share in any of the profits of, or receive payments from, a public accounting firm, other than fixed payment such as retirement payments” (4). All members of the PCAOB must be appointed by the Securities and Exchange Commission (SEC). The board performs various jobs which include: “oversee the audit of public companies, establish audit report standards and rules, inspect, investigate and enforce compliance on the part of registered public accounting firms and those associated with the firms” (4). Not only do public accounting firms who audit the financial reports of public companies have to register with the PCAOB, but foreign public accounting firms must register as well. The standards of auditing include:

A seven-year retention period for audits work papers, second partner review and approval, evaluation of whether internal control structure and procedures include records that accurately reflect transactions and dispositions of assets, receipts and expenditures that are made only with authorization of senior management and directors, description of both material weaknesses in internal controls and material noncompliance (4).

In order to regulate the standards issued by SOX, the PCAOB is required to make full inspections of all public accounting firms. The inspections must occur annually for firms auditing over 100 issuers and at least every three years for firms auditing 100 or viewer issuers. If the firm does not comply with the standards within a certain time after the results of inspection, the board has the power to take disciplinary or remedial action on any firm registered through the PCAOB (5).

The Mission of the PCAOB:

In the 2003 Annual Report provided by the PCAOB the inside cover states:

The Public Company Accounting Oversight Board is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interest of investors and further the public interest in the preparation of information, fair, and independent audit reports.

The members of the board are the Chairman, William J. McDonough, and four other Board Members including, Bill Gradison, Kayla J. Gillan, Charles D. Niemeier, and Daniel L. Goelzer (2003 Annual Report, 2). Together these five members work together to make sure every aspect of the PCAOB