The recent occurrences of fraud have resulted in two significant events that will greatly impact the accounting profession. The two events are the federal government's enactment of the Sarbanes-Oxley Act, and the AICPA's anti-fraud program, beginning with the issuance of SAS No. 99. These two events will hopefully reduce the incidence of fraud and restore public confidence in the accounting profession.
With recent business failures such as Enron, Global Crossing, WorldCom and many others, the question that continues to be raised is: "Where were the auditors?" This question has brought about drastic action on the part of the federal government in the form of the Sarbanes-Oxley Act, the most significant legislation affecting the accounting profession since the Securities Act of 1933. In addition, the accounting profession itself is implementing several initiatives in order to address the major issue of financial reporting fraud (management fraud).
Restrictions of the Sarbanes-Oxley Act
The Sarbanes-Oxley Act is a major disappointment for the accounting profession, which had self-regulated itself for more than 110 years. That right has now been lost. The Act creates a five-member Public Company Accounting Oversight Board (PCAOB), completely independent of the accounting profession, which is empowered to inspect the auditing operations of public accounting firms that audit publicly held companies. For firms with over 100 audit clients, the inspections will be done on an annual basis. For firms with less than 100 audit clients, the inspections will take place at least every three years. The Board also has the right to impose disciplinary actions for any violations of the Act, the rules of the Board, the Securities and Exchange Commission (SEC), professional standards, or a firm's own quality control policies. These sanctions could range from $100,000 for individual negligent conduct to $15 million for knowing …