Auditory failures have been experienced over the years among world largest companies such as Enron, Tyco and worldcom. This has consequently affected the reputation of this companies leading to the non-existence of some such as Arthur Anderson. Auditing failures has posed serious concerns about the quality of audits and possible measures to curb its occurrence have been enacted. In 2002, Sarbanes-oxley enacted to ensure that standards of oversight of accounting was enhanced and well regulated. Significant attention was given to the quality of audit from accounting firms after the enactment of the Act. Attention was also given to assessment of risks and legal liabilities accrued as well as how independent they conducted themselves. This in turn led to more studies and researches from Barragato and others that concluded that there was an increase in the quality of audits due to the Sarbanes- Oxley Act of 2002.
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.
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.
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.
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.
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.