Expense Items in Accounting

Significant Audit Failures and the Sarbanes-Oxley Act

Over the years, significant audit failures have been experienced by different companies involving the world largest ones such as Enron, Tyco, and WorldCom. Consequently, Arthur Anderson seized to exist due to the bad reputation. Missteps have posed severe concerns about the quality of auditing. To curb the occurrence of potential audit failures, Sarbanes-Oxley was enacted in 2002 to ensure that the standards of accounting oversight were enhanced and well-regulated.

Enhancing Audit Quality

After the act came into force, significant attention was on the accounting firms in regard to the quality of their audit, their independence of conduct, the assessment of risks and the legal liabilities that accrued. As a result, several studies and researches were carried out by Barragato and others that concluded that there was an increase in the quality of audits due to the Sarbanes- Oxley Act of 2002.

Restrictions on Non-Audit Services

The act prohibits companies from utilizing their accounting firms in acts such as advisory, consultancy, and services revolving around taxes. Enron paid Anderson $ 25million for its audit and $ 27million for consultancy; consequently, Enron became bankrupt. Section 2011 of the Sarbanes act restricts many non-audit services dispensed by audit clients and accounting firms (Pratt, 2016). The law also prohibits actuarial services, bookkeeping, and legal services though it does not entirely prevent consultancy. A company may consider contracting consultancy services from its own staff. It must be objective and devoid of the conflict of interest. The financial services provided must also meet the standards set by the Sarbanes Act.

Avoiding Fraudulent Activities

Enron, through the creation of unique purpose entities, was able to evade taxation and hence ensure maximization of its profits. The special objects created included Jedi and Bob West Treasure. The entities provide that Enron had the freedom to interfere with the currency and, without suspicion, be able to delete the losses from the balance sheet (Knechel, & Salterio, 2016). Accordingly, there was a hike that ensured maximization of profits on the books of accounts while, in the real sense, the company was facing financial damages. Consequently, the Sarbanes Act came to cure such irregularities. A company has to be audited by an independent relevant firm annually, and the report should be presented to the shareholders without any alteration. Any suspicious acts done by the directors or the managers have to be exposed.

Establishing Independence and Quality Control

Independent investigations were processed to ascertain the claims that Arthur Anderson had maintained independence and observed the integrity standards in an audit, receiving $52 Million. The audit firm was found to have been unprofessional in its inspection. Therefore, the Sarbanes Act established the Public Company Accounting Oversight Board that is bestowed with the responsibility of setting the standards of independence, ethics, auditing and quality control that firms have to adhere to. Besides, the body also inspects the quality of audit firms’ work.

The Importance of Quality Audit

Regarding the audit by Anderson, it is considered to be of poor quality. It failed to notice and report many irregularities and fraudulent activities by the Enron’s directors. Auditors are expected to provide the quality audit to evade litigation, ensure the client’s satisfaction and reputation. The Sarbanes- Oxley Act provides the standard that an audit must meet. In conclusion, to avoid fraudulent activities by the directors and the management, a company must ensure that it contracts auditing services from an independent audit firm. Bookkeeping and the management of all accounts’ books must follow the standards established by the Sarbanes Act.

References

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.