Sample Finance Research Paper on Auditing After Sarbanes-Oxley

Auditing After Sarbanes-Oxley

Introduction

Sarbanes-Oxley Act is an act of law that was passed by the United States of America legislature in the year 2002 to address matters of corporate governance and financial reporting, especially of audited reports. There was a professional outcry on imminent alteration in responsibilities and management, external auditing and corporate governance that led to Sarbanes-Oxley Act enactment. Of concern to auditing was official recognition of financial reports by the Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) and the requirement to have an internal audit function, which was to be certified by independent and external auditors.

The legislation was in four-fold; it established new systems to control both the audit procedure and the profession; it amplified roles, responsibilities and liabilities of corporate boards for failure to insure against future malefaction; it provided protection for internal whistle blowers; and enhanced the authority of the Securities and Exchange Commission (SEC) to police the market. The general projection of this policy was to establish a superior transparency and accountability to organizations and individuals within and without the confines of the country.

Establishment of Public Company Accounting Oversight Board

The Sarbanes-Oxley legislation was vital in development of Public Company Accounting Oversight Board mandated with four main responsibilities; establish auditing quality control mechanisms and other auditing professional standards; register public accounting firms that audit public companies, brokers or dealers; carry out inspections, instigate disciplinary measures and put up sanctions when necessary, (Sections 101, 102, 104, and 107). The PCAOB was further given the responsibility of stipulation of non-audit services devoid of precise endorsement by the audit committee prohibited for the auditors (Section 202). The audit company was supposed to give the audit team with a comprehensive report that stipulates the impact of accounting management and its alternatives on financial projections (Sections 204, 203). There was no compulsory change of the auditors; however, the lead auditing partner was mandated to change after a period of five years (Section 203) (Gregoriou et al., 2013).

The Act meanwhile mirrored that an assured number of significant subject matter were not ripe for implementation. According to Section 207, a study was required to bring a clear view of prospective sound effects of requiring the regular compulsory change of registered public accounting firms. Furthermore, Section 207 required GAO to conduct another study and account on the amalgamation of public bookkeeping firms and correlated issues like competition and auditor preference, audit quality, and the auditor independence.

 

Auditing as a profession

The PCAOB was established to guarantee more professional and appropriate conclusion of in-house control audits. However, over a period of time, audit fees have completely declined while audit quality has relatively improved and remained unchanged for quite some time now. Audit report lags have been notably lesser with a standard of 1.85 days, post SOX; this is accredited to Internal Control Weaknesses (ICW). There is a wider variability in reporting lags for ICW firms compared with the non-ICW firms based on annual review plans devoid of any obvious pattern in the period of after SOX. Researches and evaluations conducted for a two to five to seven year’s period depict a minimal change after SOX implementation. This is highly accredited to auditors who have continued to work tirelessly at significant, high-risk quarters coupled with unproductive internal controls. The audit process and profession has significantly improved with the new top-down, risk-based approach that has improved a well-organized and on-time reporting which has led to reduced audit report lags. Noteworthy, there still is a challenge whenever a firm faces financial crises; this always creates undue pressure on audit firms and audit fees eventually influencing audit reports and audit lags. It is worth noting that there is evident proof that tremendous effort is being taken towards mitigating audit report lags and enriching auditing profession. (Santanu, 2015)

Following the 2000’s scandals and creation of Internal Audit Function (IAF) in the public and private sectors, internal auditing and auditor’s work has remained to be unexplored. This is largely influenced by the fact that most organizations do not share their auditors work openly and their work remain to be confidential as their contractual agreement. (Roussy, 2015)

Auditors’ Conflicts and how they cope with them

With the secretiveness of auditors’ roles and responsibilities, there has been a conflict of duties being performed by auditors varying from one firm to another. This conflict of roles and responsibilities greatly influences the behavior of auditors on how they deliver their services and their audit reporting’s too. With the conflict of roles, auditors tend to adopt survival tactics based on the situations they face and based on organizational political situation, power relations between the management and public administration outlook they observe. With all these in mind, most auditors tend look at roles conflict as part of their work. (Roussy, 2015)

Internal auditors face three kinds of conflicts of roles and responsibilities; inter-sender, this takes place when managers giving instructions are in conflict thus requesting for different outcomes. Then we have, intra-sender, this comes up when the management expects two different outcomes from the auditors reports, which may not be able to be achieved at the same time and thirdly we have, inter-role conflict, takes place when assigned a task by the management that is linked with another task objective of the same auditor. Such conflicts have been found out to give rise to unethical practices by the internal auditors. These conflicts are caused by IAF’s dual reporting system contained in the legal framework, the vagueness of ethical norms of the internal auditors and the conflicting audit and advisory activities performed by internal auditors. (Roussy, 2015)

According to Hall in (Roussy, 2015), there are three ways of resolving auditors conflicts which include; negotiation, internalization and resignation. By negotiation, auditors openly discuss and seek possible solutions and reach a consensus to challenges facing the auditors committee. By internalization, here auditors work on their attitudes and skills and always plan and strategize their service delivery in a manner that they achieve all targets set. The auditor takes time to reflect and plan before implementing their tasks to perfectionism. Finally, by resignation, here the auditors try planning, consulting and executing and fail to achieve set objectives; they end up throwing in the towel. Here the auditors feel very uneasy and uncomfortable carrying out what they have been asked to do.

Organizational risks are supposed to be taken care of by internal auditors as they audit the firm and propose new ideas that mitigate current risks facing the organization. This therefore gives the internal auditors’ leeway to proactive way of avoiding conflicts rather than being reactive. (Roussy, 2015)

 

Audit Reforms and the Profession State

PCAOB has had its fair share of critical challenges since it’s’ launch. Majorly being the expectations gap between investors and other users of financial statements. Each of them would like to gain different knowledge from the auditors’ report. According to Roussy (2015), there has also been the challenge of the most suitable practice and reporting customary of audit reports. Moreover, more questions have been raised on how to make financial reporting and auditing more pertinent and constructive in the contemporary business milieu. There has been a general feeling by the auditors that they are not independent. Auditors tend to feel that they are somehow vulnerable to senior management and the audit committee. Several theoretical studies and discussions have been taking place, and generally, they tend to dismiss the case that power influences overall auditing report and auditors’ professionalism.

In 2007, the U.S Treasury Department, formulated an Advisory Committee on Auditing Profession (ACAP) to examine the then current status and the future state of auditing and give recommendations. The issued report was in October 2008, with a key focus on three key areas and slightly more than 30 proposals to improve the performance and longevity of the public corporation auditing occupation. The three major areas include; Human Capital (focus – accounting education), Structure and Finances of the Firm (focus – audit quality, transparency, communication and governance), and Competition and Concentration (focus – market competition and public companies).

 

Auditor independence

In December 2013, The PCAOB conducted a meeting that aimed at improving transparency, independence and quality of auditing reports by publicly naming and linking partner’s audit and reputation. This was important because auditors’ quality is based on unearthing a breach and reporting the breach independently, without fear or favor. If auditors’ independence is compromised, then there is higher probability of the audit report being compromised too.

Several researches have been conducted and four main factors have been identified as threats to auditors’ independence. They include; terms of contract of the auditor, non-audit services, client significance, and client association with the auditors. Auditors are always pushed towards maintaining major clients and those clients that purchase more profitable non-audit services, which highly compromises auditing. When there is long service delivery by audit firms, this creates commonness, which hastily threatens auditing independence and quality. (Tepalagul, 2015)

According to (Tepalagul, 2015) the above mentioned factors have been researched widely and assessed to note the impact of auditor independence on quality: Terms of Contract of the Auditor; long term contracts and tenure has been linked with improved auditing quality and independence; while short term has been associated with lower audit quality.

Non-Audit Services (NAS); recent studies and researches tend to note that public declaration of NAS fees automatically reduces NAS purchases. This has been emphasized and brought to book that NAS generally lead to better audit quality.

Client’s Significance; there has been little evidence shown linked to clients’ affecting auditors independence. However, auditors tend to be more conservative towards major clients of the firms being audited. Rotational change of auditors provides tangible and positive solution this concern leading to independent reports from audit firms. This also can be eliminated by the organization having an independent internal audit committee; which minimizes contact between auditor and the client.

Client Association with the Auditors; mixed results have been obtained from different researches and studies conducted. A number of studies have implicated directly and indirectly how auditors and client affiliation affect auditors’ independence and quality of the audit. At the same time, other studies find out the out the opposite.

 

Effectiveness of Corporate Governance with Respect on Financial Reporting

Previous performed research avails evidence that strong corporate governance was regularly associated with improved financial reporting and auditing with minimal fraud cases, fewer restatements amid lower levels of earnings and management. It was worth noting that, recent researches and studies show that better fiscal reporting is co-related to improved recurrent audit committee summits and greater fiscal proficiency. However, after the Sarbanes-Oxley, audit committee members observe that they take a vibrant role in monitoring the financial reporting process. Furthermore, by their membership, they have required financial knowledge and skills meet more often and ask snooping questions to the management.

Auditors Experience with Corporate Governance

There is limited documented evidence linking auditor’s experience with corporate governance, however, the management control system and governance structure and philosophy affects auditor’s pre-planning and planning judgments. Cohen (2010), used archived data to find out how significant effect of earnings, risk manipulation and billing rates that heightened corporate governance risk. It is found out that authoritative guidance on resolution of a proposed audit adjustment is higher in the absence of an effective audit committee than its presence.

Corporate Governance and the Audit Process

In the recent past, there has been a greater shift and change in the corporate governance and the audit process. There is more involvement from planning to execution. The role and importance of corporate governance vary from firm to firm. Governance is important in every engagement, however the magnitude varies.

Interaction with Audit Committee

The audit committees have been empowered to oversee financial reporting, the audit process and internal controls. This has brought about the growth and development of firms due to professionalized and qualified audit committees, which are independent and have power to confront the management on financial issues. They have the main objective of discussing accounting and auditing issues, audit plans and results of the audit and other mandated issues. Noteworthy, some corporations feel that audit committees aren’t sufficiently engaged in helping resolve disagreements between the auditor and the management.

The positive impact of the post SOX Act has been on the audit committee role in overseeing controls. Audit meetings have moved from being passive to active with time. The interactions have changed in the past few years. The whistleblower protection for those who file allegations of fraud and other financial matters with the audit committee, exercised by an employee has always been guaranteed.

The Future of Auditing

Since the enactment of Sarbanes-Oxley Act and the slow motion in which reforms and changes take time to be implemented, it is ideal to evaluate the present state of financial auditing and reporting. Necessary steps ought to be taken towards addressing the present risks and attempt to prevent future breakdown of systems due to audit failures. An evaluation of the impact and effectiveness of the PCAOB’s oversight programs should be updated.

The future of auditing should be looked at now; this is to help eliminate possible future collapse of the system that would put the public company financial auditing and reporting under pressure. The thought and hope is that the current system should be able to address such crises when it arises and hopeful too that it is stable enough to withstand such pressures.

The Sarbanes-Oxley Act aimed at dealing with challenges in auditing profession such as auditor autonomy and skepticism, limited auditor detection of financial reporting fraud and mishandling of financial information due to poor in-house controls. The big question is whether these factors have been made reduced or whether the management teams have positioned themselves in the right place towards preventing future crises.

Auditing independence should be aimed at being achieved. This can mainly be achieved through maintaining high performance culture in the areas of quality auditing, independence of the auditor, firm oversight and constant vigilance. All stakeholders in the system to keep in touch with the current market trends and changes and at the same time keep an eye on the changes taking place, which should always be shared and coordinated among other partners to ensure that evolving technology, globalization and ever-changing financial market factors are all in one basket of growing auditing.

 

Need to Study, Monitor, Systemic Forces and Risks

The Sarbanes-Oxley Act was set up to give dependability of corporate fiscal reporting and revelations under the securities laws. This regulation was meant to cushion investors from malpractice reporting by the auditors. This calls for continued studies, research, broad monitoring of the systemic forces and risks to prevent future crisis from happening and at the same time providing a solution to the unforeseen challenges in the auditing profession. To top up, research helps show progress, continuity and future risks so amendments can be effected at an initial stage, thus maintaining a steadfast growth of financial reporting and auditing.

Conclusion

What has acted as a foundation of the subject matter, ‘Auditing after Sarbanes-Oxley’? Since history is bound to repeat itself, it is of great value auditors to keep researching and studying the incidences that led to the formation and enactment of SOX. This empowers the auditors as a profession on understanding the post SOX and its implementation to providing reliability of corporate fiscal reporting and revelations under the securities laws. Investors have been cushioned from malpractice reporting by the auditors.

Auditors’ independence and the quality of auditing have improved with time and will continue to improve despite the changing times in business. The post SOX was a significant direction towards reducing the occurrence of malpractices witnessed in auditing from reoccurring and upstaging for auditor independence. Auditor independence should be upheld for an improvement and a better future in auditing as a profession.

The future of auditing may come under pressure again as a result of business cycles and other digital developments. Auditors have to stand up for the profession and the regulatory body, constantly ask and engage for positive growth of auditing, observing the core values of safeguarding the public interest and investor protection, at the same time auditing remains independent. Where there are faults, one must ensure proper actions, amendments and adjustments are implemented in due time.

All stakeholders in the auditing field need to watch out for any warning signs and counter with suitable measures to uphold integrity and the public trust. Failure in any of the above mentioned, and it will result in a threat to the whole auditing system, affecting negatively the capital markets and the general economic stature.

 

References

Church, B. K., Jenkins, J. G., McCracken, S. A., Roush, P. B., & Stanley, J. D. (2015). Auditor Independence in Fact: Research, Regulatory, and Practice Implications Drawn from Experimental and Archival Research. Accounting Horizons, 29(1), 217-238.

Cohen, J., Krishnamoorthy, G., & Wright, A. (2010). Corporate Governance in the Post-Sarbanes-Oxley Era: Auditors’ Experiences. Contemporary Accounting Research, 27(3), 751-786.

Franzel, J. M. (2014). A Decade after Sarbanes-Oxley: The Need for Ongoing Vigilance, Monitoring, and Research. Accounting Horizons, 28(4), 917-930.

Gregoriou, G. N., & Ali, P. (2013). International corporate governance after sarbanes-oxley. Hoboken, NJ: Wiley.

Roussy, M. (2015). Welcome to the Day-to-Day of Internal Auditors: How Do They Cope with Conflicts?. Auditing: A Journal Of Practice & Theory, 34(2), 237-264.

Santanu, M., Hakjoon, S., & Joon Sun, Y. (2015). The Effect of Auditing Standard No. 5 on Audit Report Lags. Accounting Horizons, 29(3), 507-527.

Tepalagul, N., & Lin, L. (2015). Auditor Independence and Audit Quality: A Literature Review. Journal Of Accounting, Auditing & Finance, 30(1), 101-121.

Weatherford, D., & Ruppert, M. P. (2015). “Auditing and Monitoring” — Revisiting Definitions. Journal of Health Care Compliance, 17(4), 21-51.