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The erosion of investor confidence in the wake of accounting scandals at WorldCom, Enron and Tyco led to congressional passage of the Sarbanes-Oxley Act of 2002. Generally, the goal of the law was to make improvements to the quality of audits and the independence of accounting firms. With strict reforms to financial disclosures by corporations, investors could be protected from fraudulent activities. In essence, Sarbanes-Oxley, which is commonly known as SOX, put an end to over 100 years of self-regulating accounting practices.
How SOX Changed the Accounting Industry
Among changing practices for accounting professionals, SOX also led to the creation of a nonprofit organization charged with overseeing outside audits of publically-traded companies. Known as the Public Company Accounting Oversight Board, this satisfies the law's provision that subjects company auditors to external oversight. An amendment to the law occurred with the passage of Dodd-Frank in 2010, which provided funding for the board through accounting support fees.
Additionally, Sarbanes-Oxley made provisions for audit partner rotation and auditor independence. Public companies had to establish internal controls and a reporting system of the sufficiency of the controls. Further, senior executives had to personally certify that financial statements were accurate.
Many considered the latter the crown jewel of Sarbanes-Oxley because of the lack of accountability after the financial scandals. With this requirement, the tone for responsibility was set at the top and trickled down to the accounting staff. Better corporate governance occurred when CEOs sealed the accuracy of the company's financial standing with their signature.
For many stakeholders and accounting professionals, requirements for auditor independence and audit quality have been strengthened since the law's passage. The Act has successfully achieved many objectives that set new standards for corporate governance. Generally, the Public Company Accounting Oversight Board has helped to address issues created by a self-regulating industry that was open to making grave mistakes. Even if problems occurred before the PCAOB, there were no adverse consequences for accounting firms.
Improvements have not simply stopped at fulfilling requirements of the law. As a whole, the accounting profession has proactively built upon the reforms in SOX. Many have enhanced reporting and audit practices that encourage investor protection.
Other Trends from SOX That Shape the Accounting Industry
Emerging trends in the accounting industry has led to a transformative experience for firms that choose to embrace the good things. Some of the specialty areas that are reshaping the industry include forensic accounting and international business.
Forensic Accounting – While forensic accounting is not a new specialty, tighter scrutiny of financial reporting practices following Sarbanes-Oxley have heightened awareness. Financial statements are analyzed through the integration of accounting, auditing and investigative skills to reduce the problems that led to high-profile scandals.
Forensic accounting is an effective tool for taking a closer look behind the numbers reported by corporations. Many sophisticated crimes such as securities fraud, embezzlement, money laundering and bribery are uncovered with forensic accounting techniques.
Demand for forensic accountants will continue to grow based on the success rate of investigations, according to the Bureau of Labor Statistics.
Estate Planning for Older Americans – Based on Census Bureau data, an estimated 72 million Americans will be 65 or older by 2030. The need for competent financial guidance will continue to increase to accommodate this growing part of the population. Retirement planning, wealth preservation and elder care are three of the primary areas of protection that require a solid understanding of financial concepts and legislation.
International Business – The global economy has expanded the need for accounting professionals with a unique set of skills. Many must be fluent in foreign languages and the accounting standards and regulatory requirements for international business. To meet the growing demand for knowledge of tax treaties and cross-border financing, other countries have modeled SOX to improve financial reporting requirements for local companies.
Further, small and large accounting firms are recognizing opportunities with global trade agreements and other sources of international business. Broader perspectives and additional career paths continue to shift the accounting industry.
The View from Opponents of Sarbanes-Oxley
There are some who do not share the same fondness as many accounting professionals and organizations do of Sarbanes-Oxley's successes.
Part of the internal control mandate requires compliance costs for public companies that can be steep. For some, the average annual cost burden is significantly higher than original estimates by the SEC. Even some smaller companies, based on assets, are paying seven times more than what larger companies must pay. Still, initial costs have declined since 2002 for most companies.
Nevertheless, opponents want Congress to eliminate this and other burdensome requirements for all public companies.
Learning from History
A slew of corporate scandals precipitated the need for Sarbanes-Oxley over 10 years ago to address systemic flaws. Corporations had eased into the comfort of financial reporting for decades prior to passage of the law. The law sought to change practices that were bad for investors and bad for the economy.
However, no one expected Sarbanes-Oxley to be an instant fix; 10 years later, new financial woes are proving that point. Practically speaking, these are just rules and legislators cannot mandate integrity within corporations. Just as law enforcement cannot stop a thief from robbing a bank, lawmakers cannot stop corporate crooks from stealing from investors. What can occur is a structured set of controls and consequences when the law is not followed.
Letting down guards is certainly not the answer as the lessons of recent years remain fresh in the investment and accounting worlds. The fundamental principles of objectivity, accountability and auditor independence provide value to the accounting industry. Safeguarding the positive differences is necessary to avoid repeating a negative history.