INTRODUCTION
In response to the several financial fraud cases in the early 2000s, the US Government enacted the Sarbanes-Oxley Act (SOX). SOX requires certification from senior management that the financial statements are free of fraud and material misstatement. Due to the stricter requirements, independent auditors have an increased responsibility to detect financial fraud. In order to successfully ensure an organization’s financial statements are free of fraud and material misstatement, both the independent auditor and senior management should utilize a forensic accountant.
SARBANES-OXLEY & AUDITING/FORENSIC ACCOUNTING
SOX was enacted in July 2002 to address the concerns regarding the accuracy of financial statements in an attempt to re-establish investor confidence. SOX impacted the auditing profession by changing the status quo. SOX is considered by many to be the most significant legislation affecting accounting since the 1933 and 1934 Securities Acts (Arens & Elder, 2006). SOX impacted the auditing profession by changing the status quo.. However, there were also implied effects on the forensic accounting profession as well.
There are four major components of SOX that had impacts on both the auditing and forensic accounting fields. The principal and financial executive officers must certify that the financial statements have been reviewed and are free from fraud or material misstatement. If this certification is falsified, both officers may face civil or criminal penalties. In addition, every public company must annually issue and file with the Securities and Exchange Commission a management report concerning the effectiveness of the company’s internal control over financial reporting (Golzer, 2015). In addition, SOX requires external auditors to audit these internal controls and express an opinion on their effectiveness alongside management’s assessment and certification. This represents the first time that independent auditors are required to formally audit the internal controls over financial reporting and report publicly on the results of that audit, since before SOX, auditors only performed tests of controls in a limited scope, primarily in planning the audit (Gupta et al, n.d). In addition, an auditing oversight board was established, Public Company Accounting Oversight Board (PCAOB). SOX granted the PCAOB authority to adopt auditing and related attestation standards, quality control standards, and ethics standards to be used by registered public accounting firms as required by SOX, the rules of the Commission, or as may be necessary or appropriate in the public interest or for the protection of investors (Nolder & Palmrose, 2018). SOX also implemented a framework of rules of regulations that accounting firms must adhere to including work paper retention policies, second partner review of audit reports and firms are not allowed to provide non-audit services to clients. Due to all the new and revised regulations facing auditing firms, an independent auditor needs to utilize all the available tools in order to ensure the financial statements are free of fraud or material misstatement.
INDEPENDENT AUDITOR vs. FORENSIC ACCOUNTANT
As mentioned before, an independent auditor must utilize all the available tools in performing an audit. It is advantageous to include a forensic accountant as part of the team. However, the roles and expectations of the independent auditor and forensic accountant are quite different. Before SOX the primary role of the auditor was to express an opinion on the fairness in which the financial statements represent the financial position; however detecting fraud has become an area of concern for auditors since there is an increased responsibility to detect fraud and material misstatement. Although, The U.S. Statement on Auditing Standard (SAS) No. 99 specified requirements for auditors to detect fraud within the financial statements, fraud is often difficult to detect, depending on the employee’s ability and knowledge of how to hide the deception. Traditionally, independent auditors are CPAs and licensed through the AICPA. In addition, many independent auditors do not have the proper experience and working knowledge of how to detect fraud because they do not have sufficient training to do so (Christenson, et al, 2005). However, forensic accountants are usually Certified Fraud Examiners (CFEs) and obtain skilled training to detect, prevent and investigate several types of fraudulent activity. The CFE must have the experience and working knowledge of fraud detection to obtain this recognition. This experience and working knowledge of fraud detection are what make the forensic accountant an essential tool for the independent auditor and upper management (Christenson, et al, 2005).
IMPORTANCE OF FORENSIC ACCOUNTANT IN SOX COMPLIANCE
A forensic accountant can provide invaluable and critical support in SOX compliance to both the company being audited and the independent auditor. A forensic accountant can promote SOX compliance by performing fraud investigations, design and performing fraud-detection program or developing fraud prevention policies. When fraud is suspected, an organization can rely on a forensic accountant. Because they are adept in the characteristics of common schemes, signs of fraud, and effective methods to utilize in unearthing fraud, these professionals are ideally suited to assist an entity (Colbert, 2004). In addition, a forensic accountant can design a fraud prevention program in combination with an organization’s internal control system. Forensic accountants can also be invaluable to aiding senior management in setting the “tone at the top” by revising or updating the organization’s ethics policy.
Forensic accountants can also be a critical part of the independent auditing team. Auditors can rely on forensic accountants to provide special assistance in performing the independent examination of the financial statements. For example, auditors usually do not conduct in depth analysis to determine the accuracy of the financial statements due to financial and time restraints. However, a forensic accountant possesses strong quantitative skills in researching numbers and qualitative skills including being able to determine how internal controls can be compromised (Christenson, et al, 2005). With the technological and accounting knowledge, a forensic accountant can conduct analysis through large data sets of financial transactions. In addition, SAS 99 expands upon the procedures an auditor can perform to detect fraud in the financial statement and also emphasizes the criticality of exercising professional skepticism throughout the audit. The auditor must maintain a questioning mind and critically assess the responses from the reporting entity’s management and other evidence examined to determine the risk or existence of fraudulent misstatements (Colbert, 2004).
Conclusion
Sarbanes Oxley Act reformed both the auditing field and organization’s financial reporting with greater rules and regulations. While a forensic accountant and independent auditor roles and responsibitlies are quite different, they both have a common goal of ensuring the financial statements are free of fraud and material misstatement. Forensic accountants can provide a vast array of skills and knowledge to both an organization and an independent audit firm in order to comply with the Sarbanes- Oxley Act.