How Provisions of Sarbanes-Oxley Act have affected Ethics and Independence of Auditors - Essay Example

How Provisions of Sarbanes-Oxley Act have affected Ethics and Independence of Auditors Introduction In contemporary financial practice, regulatory policies are indispensable in minimizing fraudulent activities. Financial practice always attract various scandals including the famous Enron case and therefore, stringent regulatory measures are imperative in ensuring fair accounting practice. The aforementioned need for financial regulations resulted into enactment of Sarbanes Oxley Act in 2002 to oversee financial practices amongst auditors and public organizations. Of central importance is the focus of Sarbanes Oxley Act in 2002 in influencing auditors’ ethical standards and independence. Sarbanes Oxley Act in 2002 enacted to monitor fraudulent financial practices, have improved auditors independence and promoted ethical financial practice including accountability and transparency. Besides, the act have increase public members and investors’ confidence in auditors and public companies through provisions of accountable financial reports. However, it is imperative to understand that Sarbanes Oxley Act 2002 have decreased auditors and companies independence by requiring them to operate in a more honest manner. The paper explores how section (s) 404, 204, and 302 of Sarbanes Oxley Act in 2002 have affected auditors in financial practice based on ethical and independence considerations. Section 204: Auditor independence Section 204 of SOX act requires auditors to report to audit committees on a timely basis concerning specific information relating to professional practice. The section’s provisions requires auditors to provide information regarding imperative accounting policies adopted by the registrant (The US Sarbanes-Oxley Act of 2002, 2009). Besides, the audit committee requires auditors to ensure indication of alternative accounting treatments inherently discussed with the management. Moreover, the auditors should provide potential ramifications of employing the aforementioned alternatives besides availing written communications advanced by the auditor to management. It is imperative that section 204 regarding auditor independence have greatly affected auditors’ relationship with audit committee. The rules outlined by section 204 are indispensable in strengthening the relationship between the auditor and audit committee. A strengthened relation between auditor and audit committee is imperative in influencing the former’s professional conduct and ethical behavior. Besides regulating auditors’ professional practice, the audit committee through board members established by SOX ensures that auditors’ activities remains independent without influence from corrupt parties. It evident that SOX have greatly influenced professional conduct of auditors by strengthening the core values of financial practice including ethics and independency (Marjorie, 2009). Section 302: Corporate Responsibility In auditing practice, corporate responsibility observance is essential in promoting ethical financial practice. Corporate responsibility regulations outlined inn section 302 conforms to those of section 204 in instilling organizations ethical behaviors. Section 302 requires chief executives and managers of various companies to comply with various provisions of SOX, 2002 in providing relevant financial reports to financial auditors. Section 302 ensures that the companies provide honest financial reports with no untrue statements or omissions whatsoever (Cohen, Krishnamoorthy, & Wright, 2010). The provisions requirements have greatly affected auditors’ professional conduct by giving them easier work in conducting their duties. In addition, section 304 have positively affected auditors by enhancing their transparency and accountability mainly due to the honest financial reports that they obtain from companies. It is imperative to understand that the honest financial statements provided by companies directly reflects on auditors reports. Consequently, investors and the entire public receive transparent reports. Transparency of both auditors and audited companies promotes public and investors’ confidence in local companies and conduct of audits. Improved public confidence directly affects auditors by promoting their independence non-interference from interested parties. Section 404 (b)-Internal control Provisions of section 204 have resulted into increased independence of auditors in financial practice. The provisions ensures that different public companies provides honest reports without untrue financial statements. In addition, the provision ensures that companies to do not interfere with auditors activities while examining financial records. Decreased interference of public companies on financial practices have greatly improved auditors professional ethical conduct and independence. Currently, financial auditors operates in accountable and transparent manner cognizant with provisions of Sarbanes-Oxley Act (Kros & Nadler, 2010). However, Section 404 provisions concerning requirements for establishment of control structures, procedures, and assessments jeopardizes the independency of financial auditors. In addition, the requirements of section 404 (a) of Sarbanes-Oxley Act concerning assessment of effectiveness of internal control procedures and structures amongst accounting firms ensures that financial auditors maintain professional ethics. Consequently, financial auditors operates in transparency, honesty, and accountability to ensure that they do not violate the outlined provisions of section 404. It is apparent that section 404 of Sarbanes-Oxley Act (SOX) greatly affects financial auditors’ professional independence and ethical conduct. Provisions of the section compromises independency of auditors and requires them to act in transparency and accountability when submitting financial reports based on internally outlined control procedures and structures. However, it is imperative that section 404 of SOX has greatly reduced corporate fraud cases in financial accounting within the public. The provisions of the section have remained successful in ensuring re-establishment of investor assurance due to increased professionalism and reduced potential scandals in financial practices (Bhamornsiri, Guinn & Schroeder, 2009). Conclusion In conclusion, enactment of Sarbanes-Oxley Act in 2002 resulted into reduction in scandals in financial practice. Besides, efficient implementation of the act contributed to promotion of financial auditors’ professional conduct and independence. In addition, public companies improved on their abilities to provide honest financial reports to various auditors. Most specifically, section 404 promoted auditors professional conduct and companies’ transparency by ensuring reporting of transparent and accountable financial reports. Moreover, section 204 of Sarbanes-Oxley Act remained imperative in influencing professional relationship between auditors and audit committees. Section 304 of Sarbanes-Oxley Act greatly influenced auditors’ corporate responsibility and realization of their central importance in affecting investment. Financial auditors have operated professional by observing ethical principles of honesty, accountability, and transparency since enactment of Sarbanes-Oxley Act in 2002. Moreover, auditors’ independence in professional practice have greatly increased especially due to reduced influence from corrupt parties who aim at creating financial scandals. However, Sarbanes-Oxley Act have also compromised auditors independence especially from members of the public, auditing committees, and investors. The act requires auditors to remain transparent accountable to the public and investors of their activities and audit reports with the aim of reducing fraud cases. References Bhamornsiri, S., Guinn, R., & Schroeder, R. (2009). International Implications of the Cost of Compliance with the External Audit Requirements of Section 404 of Sarbanes–Oxley. International Advances in Economic Research, 15(1), 17-29. doi:10.1007/s11294-008-9178-3 Cohen, J., Krishnamoorthy, G., & Wright, A. (2010). Corporate Governance in the Post-Sarbanes-Oxley Era: Auditors' Experiences. Contemporary Accounting Research, 27(3), 751-786. doi:10.1111/j.1911-3846.2010.01026.x Kros, J. F., & Nadler, S. S. (2010). The Impact of Sarbanes-Oxley on Off-Balance Sheet Supply Chain Activities. Journal of Business Logistics, 31(1), 63-77. Marjorie, C. (2009). Business Perspectives and Current Developments With Respect to the Sarbanes-Oxley Act. Journal of Leadership, Accountability & Ethics, 7(3), 11-28. The US Sarbanes-Oxley Act of 2002. (2009). International Financial Law Review, 45-58. Business Source Complete. Web. 15 Nov. 2014. Read More