Academic journal article Academy of Accounting and Financial Studies Journal

The Impact and Effect of the Sarbanes Oxley Act on the Internal Audit Profession: Chief Audit Executives' Perspectives

Academic journal article Academy of Accounting and Financial Studies Journal

The Impact and Effect of the Sarbanes Oxley Act on the Internal Audit Profession: Chief Audit Executives' Perspectives

Article excerpt

ABSTRACT

The Sarbanes Oxley Act of 2002 (specifically Section 404) requires management to assess the effectiveness of internal financial controls and instructs auditors to report on whether the controls are adequate or have material weaknesses. The Sarbanes Oxley Act ("SOX") has increased the focus on internal audit departments as a key partner in assisting management and the board of directors (especially audit committees) in fulfilling their corporate governance activities. Using a questionnaire, we conducted a study of chief audit executives (CAEs) within the insurance industry to obtain their perspectives on the impact and effect of SOX on their departments and profession. We were primarily interested in their involvement in the initial implementation and ongoing SOX compliance efforts, and any change in their departments' missions. We were also interested in the CAEs opinions on the role of internal audit in the future especially in light of SOX.

We received feedback from 35 (35.4 percent) CAEs representing organizations and audit departments of various sizes. The results showed that most internal audit departments were impacted by SOX in that they allocated significant resources to assist management in the initial Section 404 compliance efforts. The CAEs expected to expend similar efforts on future compliance efforts. Some departments also increased their mission to include corporate governance activities such as reviewing the company's ethics and business conduct and legal and regulatory compliance; areas not previously included in audit plans. CAEs could not fully articulate the future role of internal audit and no clear vision was provided. Responses received included expecting the function to remain unchanged, assisting management and the board of directors in corporate governance activities, and becoming more involved in enterprise risk management efforts.

Clearly internal audit departments were impacted by SOX and their missions continue to change to address emerging risks in the organization. However, the future role of internal audit was not clear perhaps because organizations continue to adjust to the new regulation. We recommend that researchers continue to focus on understanding changes in the internal audit function within organizations and its continuing evolution in response to SOX and other regulations.

INTRODUCTION

The Sarbanes Oxley Act of 2002 ("the Act" or "SOX") was enacted into law by the United States Congress because of a number of corporate failures which questioned the value of the financial statement audit. SOX apply to all Securities and Exchange registrants (i.e., public companies) and their external auditors. The key sections of the law includes requirements for (a) the establishment of the Public Company Accounting Oversight Board or PCAOB, (b) Auditor Independence, (c) Corporate Responsibility, and (d) Enhanced Financial Disclosures.

The enhanced financial disclosures as noted in Section 404 of the Act requires companies to vouch for accounting controls over financial reporting and disclosure weaknesses to shareholders. More specifically, Section 404 requires management to assess the effectiveness of internal financial controls and instructs auditors to report on whether the controls are adequate or have material weaknesses (Swartz, 2005). This is achieved through mandatory reports on internal control by management and independent auditors (Lin & Wu, 2006). Most businesses believe that the costs associated with complying with section 404 are too high (O'Brien, 2006). However, 79% of financial executives included in one survey reported that complying with the Act has strengthened their internal controls (Swartz, 2005)

The Act has increased the focus on internal audit departments as a key partner in assisting management and the board of directors (especially audit committees) to fulfill their corporate governance activities. …

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