The Sox Act of 2002
Congress instituted legal reforms in direct response to the Enron and WorldCom accounting scandals of the early 2000s. The most sweeping and consequential of these was The Sarbanes-Oxley Act of 2002, which represented an overhaul of the accounting and auditing profession. Although not all provisions of The Sarbanes-Oxley Act directly impacted the work done by accountants, many sections of the new law imposed strict and sometimes burdensome new requirements on public accountants and accounting firms who provide auditing services. As a result, the work of accountants who provide auditing services has been significantly increased, and, in some respects, radically changed.
The provisions of The Sarbanes-Oxley Act that effect public accountants are summarized below:
- Title I of The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB). PCAOB is an independent overseer of those public accounting firms that perform audits.
- Title II of The Sarbanes-Oxley Act specifies standards for external auditor independence. The aim is to prevent conflicts of interest that would motivate an accountant to make a client’s financial numbers to look more positive than they actually are or inhibit an accountant from revealing the truth about a client’s financial status. These standards address requirements for auditor approval and auditing reporting requirements. Post Sarbanes-Oxley, public accounting firms can no longer provide auditing and consulting services to the same client.
- Title IV of The Sarbanes-Oxley Act of 2002 imposes increased reporting requirements on companies, which, in practical terms, must be met in many cases by the public accounting firms that offer auditing services to the companies. For example, the law enhances the requirements for reporting transactions such as purchase and sale of company stock by corporate officers and requires the inclusion of off-balance-sheet transactions in financial reports.
- Title VIII and Title IX of The Sarbanes-Oxley Act of 2002 provide for new and enhanced criminal penalties for accounting fraud; manipulation, destruction, or alteration of financial records; interference with auditing investigations; and other white-collar crimes.