Introduction
The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 enacted on July 30, 2002 in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine System and WorldCom. This scandal, which cost investors billions of dollars when the share prices of the affected companies collapsed, shook public confidence in the nation’s securities markets.
The legislation establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. It does not apply to privately held companies. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement ruling on requirements to comply with the new law. Debate continues over the perceived benefits and costs of SOX. Supporters contend that the legislation was necessary and has played a useful role in restoring public confidence in the nation’s capital markets by, among other things, strengthening corporate accounting controls.
The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors or public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhance financial disclosure.
Internal Auditor
Internal auditing is a profession and activity involved in helping organization achieve their stated objectives. It does this by utilizing a systematic methodology for analyzing business processes, procedures and activities with the goal of highlighting organizational problem and recommending solutions. Professional called internal auditors are employed by organizations to perform the internal auditing activity.
The scope of internal auditing within an organization is broad and my involve topics such as the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets, and compliance with laws and regulations. Internal auditing frequently involves measuring compliance with the entity’s policies and procedures. However, internal auditors are not responsible for the execution of company activities; advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety off higher educational and professional backgrounds.
An External Auditor
An external auditor is an audit professional who performs an audit on the financial statements of a company, government, individual, or any other legal entity or organization, and who is independent of the entity being audited. Users of these entities’ financial information, such as investors, government agencies, and the general public rely on the external auditor to present an unbiased and independent evaluation on such entities. They are distinguished from internal auditors for two main reasons: (1) the internal auditor’s primary responsibility is appraising an entity’s risk management strategy and practices, management control frameworks and governance processes, and (2) they do not express an opinion on the entity’s financial statements. Besides providing audit services, external auditors also provide different other kind of services. Most common of them are reviews of financial statements and compilation. In review auditors are generally required to tick and tie numbers to general ledger and make inquiries of management. In compilation auditors are required to take a look at financial statement to make sure they are free of obvious misstatements and errors.
The primary role of external auditors is to express an opinion on whether an entity’s financial statements are free of material misstatements. Some people confuse auditors with people who detect fraud but auditors have nothing to do with fraud detection exclusively. Auditors just want to make sure that company’s financial statements are true and fair representation of its actual position. If they come across any fraud related information, it is their responsibility to bring it to the management’s attention and consider withdrawing from the engagement if management does not take appropriate actions. Normally, external auditors review the entity’s information control procedures when assessing its overall internal controls. They must also investigate any material issues raised by inquiries from professional or regulatory authorities, such as the local taxing authority. For public companies listed on stock exchanges in the United States, the Sarbanes- Oxley (SOX) has imposed stringent requirements on external auditors in their evaluation of internal controls and financial reporting.
The independence of external auditors is crucial to a correct and thorough appraisal of an entity’s financial controls and statements. Any relationship between the external auditors and the entity, other than retention for the audit itself, must be disclosed in the external auditor’s reports. These rules also prohibit the auditor from owning a stake in public clients and severely limit the types of non-audit services they can provide.
Job Outlook
Labor Department reported that Employment of accountants and auditors is expected to grow by 18 percent between 2006 and 2016, which is faster than the average for all occupations. This occupation will have a very large number of new jobs arise, almost 226,000 over the projections decade. An increase in the number of businesses, changing financial laws, and corporate governance regulations, and increased accountability for protecting an organization’s stakeholders will drive growth.
As the economy grows, the number of business establishments will increase, requiring more accountants and auditors to set up books, prepare taxes, and provide management advice. As these businesses grow, the volume and complexity of information reviewed by accountants and auditors regarding costs, expenditures, taxes, and internal controls will expand as well. The globalization of business also has led to more demand for accounting expertise and services related to international trade and accounting rules and international mergers and acquisitions.
An increased need for accountants and auditors also will arise from changes in legislation related to taxes, financial reporting standards, business investments, mergers, and other financial events. As a result of accounting scandals at several large corporations, Congress passed the Sarbanes-Oxley Act of 2002 in an effort to curb corporate accounting fraud. This legislation requires public companies to maintain well-functioning internal controls to ensure the accuracy and reliability of their financial reporting. It also holds the company’s chief executive personally responsible for falsely reporting financial information.
These changes are expected to lead to increased scrutiny of company finances and accounting procedures and should create opportunities for accountants and auditors, particularly CPAs, to audit financial records more thoroughly. Management accountants and internal auditors increasingly will also be needed to discover and eliminate fraud before audits, and ensure that important processes and procedures are documented accurately and thoroughly. Also, efforts to make government agencies more efficient and accountable will increase demand for government accountants.
Increased focus on and numbers of financial crimes such as embezzlement, bribery, and securities fraud will increase the demand for forensic accountants to detect illegal financial activity by individuals, companies, and organized crime rings. Computer technology has made these crimes easier to commit, and they are on the rise. At the same time, the development of new computer software and electronic surveillance technology has made tracking down financial criminals easier, thus increasing the ease, and likelihood of, discovery. As success rates of investigations grow, demand for forensic accountants will increase.
The changing role of accountants and auditors also will spur job growth, although this will be slower than in the past because of changes in the law. Federal legislation now prohibits accountants from providing many types of management and consulting services to clients whose books they audit. However, accountants will still be able to advise clients that are not publicly traded companies and those they do not audit.
Also, the increasing popularity of tax preparation firms and computer software will shift accountants away from tax preparation. As computer programs continue to simplify some accounting-related tasks, clerical staff will increasingly handle many routine calculations.
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