Individual Research Paper
The Sarbanes Oxley Act of 2002 and the PCAOB are both organizations that hold corporations accountable for producing reliable and useful financial statements. These organizations play an influential role in the preparation of financial statements and ensure that the reporting is accurate and timely. A study of these organizations must first begin with an understanding of why they are necessary and how they affect the financial well-being of a company. The Sarbanes Oxley Act of 2002 and the PCAOB have established rules and guidelines for how companies should issue financial statements and maintain internal controls. The purpose of these organizations, the guidelines that they established, and the methods by which they are upheld enable companies and individuals to prepare financial statements that most accurately reflect their current financial status. As controversies and debates rage, it is important to grasp the different issues that often arise through the establishment of these organizations, and how these issues should be examined from a Biblical Worldview.
The Sarbanes Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was passed by Congress in the 2002 with the intentions of protecting investors from the possibility of fraudulent accounting. According to the organization, "All publicly-traded companies in the United States, including all wholly-owned subsidiaries, and all publicly-traded non-US companies doing in business in the US are effected by the Sarbanes-Oxley Act. In addition, private companies that are preparing for their initial public offering (IPO) also need to comply with certain provisions of Sarbanes-Oxley" (Sarbanes Oxley, n.d.). The act created strict reforms to be followed by corporations in order to prevent accounting fraud and improve disclosure. The act was created as a result of the accounting scandals like Enron, Tyco, and WorldCom in the early years of 2000. These scams caused employees in the financial business to reevaluate their current methods and demanded the need for overhaul regulatory standards. The main benefit of the Sarbanes Oxley Act is that it exists to create a standard of transparency that is to be upheld in an organization. The Sarbanes Oxley Act also exists to establish internal controls, prevent fraud, and maintain trust between a corporation and its shareholders. This act was also created to institute a system of uniformity in accounting across all corporations.
Additionally, the Sarbanes-Oxley Act of 2002 is in place to set up a system of internal controls within a company. The accountability plays an influential role in the accuracy of financial statements. No matter what current system is in place, it is important for the accountants to have established internal controls throughout the entire process. According to an AICPA article, 69% of investors and 74% of business decision makers feel that "CPAs have a unique perspective that is valuable when making business and financial decisions, even when those decisions are not directly related to accounting. In terms of attributes ascribed to CPAs, they are most associated with integrity, competence, and objectivity" (American Institute of Certified Public Accountants (AICPA) , 2008).
To ensure companies are adequately adopting reliable internal control procedures, Section 404 of the Sarbanes-Oxley Act was enacted to evaluate the current internal control structure within an accounting firm. According to Section 404, "Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures" (Sarbanes & Oxley, 2002).
There is nothing about fraudulent behavior that aligns itself with a Christian worldview. The participants of theft scandals act with knowledge of the illegality and immorality of what they are orchestrating. Deception of the public, taking advantage of those in lower positions of power, lying to the federal government, effectively stealing from investors – these are all actions forbidden in scripture. The Lord condemns immoral behavior and rewards those who abide by His law. The Bible tells us in 1 Timothy 6:9 "But those who desire to be rich fall into temptation, into a snare, into many senseless and harmful desires that plunge people into ruin and destruction." Additionally, Proverbs 28:18 (ESV) reads "Whoever walks in integrity will be delivered, but he who is crooked in his ways will suddenly fall." In the case of many scandals, there are few who take the moral walk of integrity and most fell in some manner because of it.
The PCAOB
One of the most important aspects of the Sarbanes-Oxley Act of 2002 has been the creation of the PCAOB. The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies.
The PCAOB has established a set of guidelines regarding the audits of public companies, including the rules related to internal controls. It is clearly stated in Auditing Standard 5 that "Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes" (PCAOB, 2010). Additionally, the PCAOB has articulated guidelines that are relevant to Accounting Information Systems. PCAOB has established that "an auditor should obtain an understanding of how the company uses information technology ("IT") and how IT affects the financial statements" (PCAOB, 2004).
In addition to inspecting particular audit engagements, the PCAOB also is also required by the Act to "evaluate the sufficiency of the quality control system" (Sarbanes-Oxley Act, Section 104(d)(2)) of each firm inspected. The PCAOB goes on to explain that the auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship. According to PCAOB Rule 101, "A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council" (Public Company Accounting Oversight Board (PCAOB), 1988). Lastly, the PCAOB expounds upon attestation engagements, and the proper standards to be upheld during such engagements. Primarily, the organization highlights the independence to be maintained during the process of attestation (PCAOB, 2001).
Furthermore, there is a Biblical standard outlined when discussing the topic of ethics, integrity, and objectivity. According to Proverbs 10:9, "Whoever walks in integrity walks securely, but he who makes his ways crooked will be found out." This applies not only to the integrity of the client, but to the auditor's integrity as well.
Various audit companies are in the process of persuading the PCAOB to adopt a broader and more proactive approach to its current oversight. This type of diminished regulation would not retroactively evaluate audits but would proactively anticipate and prevent audit failures. Additionally, the PCAOB has discussed the possibility of enhancing the intensity of audits, particularly with companies that have an international component to their business. The discussion of potential enhanced restrictions and diminished regulations would allow companies to issue for useful and reliable financial statements.
Accounting Information Systems
It is no secret that the Sarbanes Oxley Act of 2002 and the PCAOB exist because of the onslaught of accounting scandals we experienced at the beginning of the twenty-first century. Companies like Enron, WorldCom, Adelphia, Tyco International, AIG, Bernie Madoff, Lehman Brothers and Waste Management just to name a few. To specifically use a company as an example, Tyco's top executives were charged with civil fraud and theft. Former CEO L. Dennis Kozlowski and CFO Mark H. Swartz along with former General Counsel Mark Belnick were accused of taking low interest or interest free loans from the company. Tyco had a "Key Employee Loan" program designed to pay for employee's moving expenses (Kumaran, 2014). "They were accused of issuing unapproved bonuses to themselves and other key employees. It is alleged that these bonuses acted as de facto loan forgiveness for employees who had borrowed company money or were used to buy the silence of those who suspected the former CEO and CFO of fraud" (Einstein Law Inc., 2006).
The falsification of financial data and documents is unethical because it is lying to manipulate public perception. The criminal activity in this case was carefully coordinated and intentional. The group of accountants and executives who were orchestrating the fraudulent activity would meet to discuss which false entries and accounts could be created to avoid detection by the auditors. Much of the activity took place in various asset accounts and the contractual revenue account, which provided an estimated offset to cover the difference between what patients paid for services and what their insurance companies would cover for various services.
There is nothing about fraudulent behavior that aligns itself with a Christian worldview. The participants of theft scandals act with knowledge of the illegality and immorality of what they are orchestrating. Deception of the public, taking advantage of those in lower positions of power, lying to the federal government, effectively stealing from investors – these are all actions forbidden in scripture. The Lord condemns immoral behavior and rewards those who abide by His law. The Bible tells us in 1 Timothy 6:9 "But those who desire to be rich fall into temptation, into a snare, into many senseless and harmful desires that plunge people into ruin and destruction." Additionally, Proverbs 28:18 (ESV) reads "Whoever walks in integrity will be delivered, but he who is crooked in his ways will suddenly fall." In the case of many scandals, there are few who take the moral walk of integrity and most fell in some manner because of it.
Although the Sarbanes Oxley Act of 2002 and the PCAOB hold CPAs much more accountable than before, research has also shown that an individual's behavior is af¬fected by his or her personal values. While there has been considerable research of the ethical behavior of business professionals and business students, until the year 2000 there was limited research of the personal values of public accountants. A survey conducted by Michael Akers was administered to audit and tax professionals at each of the Big Six public account¬ing firms in Milwaukee, Wisconsin. The results show there was considerable uniformity in the rankings of most important and least important value types. The most important value type ranked in the survey was benevolence (Akers, 2000). This goes to demonstrate that although upholding morals and ethics is an important issue discussed in the Code of Professional Conduct, it is also a trait previously embedded in the personal values of many people.
Conclusion
Because of these two regulatory bodies, the strict rules and regulation outlined in both the Sarbanes Oxley Act of 2002 and the Public Company Accounting Oversight Board help make the profession of auditing more autonomous and valuable. When researching the standards established by various governing bodies, it is important to not only maintain a high level of humility, but also uphold our highest degree of integrity and objectivity as CPAs. Additionally, we can learn through biblical teaching on God's involvement in the realm of business, and how various doctrines and scriptures will affect our careers as accountants. As Christians, it is imperative that we recognize how God's word is still relevant in every potential career, and how it should affect our everyday lives.