The Sarbanes-Oxley Act of the year 2002 or the SOX is an act that was passed in the US by Congress in the year 2002 with the aim of protecting the investors from the risk of fraudulent accounting activities that might be undertaken by corporations. The SOX Axs instituted strict reforms that aimed at preventing fraud in the accounting system and improving financial disclosures by companies ( Fletcher, 2008). It was an Act that was created as a result of the malpractices that was seen in the business world in the early 2000s that involved scandals in big corporations such as WorldCom and Enron Corporation, that negatively affected the confidence of investors in the financial statements. The situation also demanded a review of the regulatory standards. The provisions of the SOX impacted the auditors of public companies and tax practitioners.
How the SOX affected Auditors of Public Companies
The audit procedure involves an independent auditor who asks the staff and management questions to ensure that there is a better understanding of the business, the internal control system, its operations, known error or fraud, and financial reporting. The auditor can also perform analytical procedures on the variances which are expected or unexpected in transaction classes and account balances and then test the documentations that are supporting the variances. In addition, the auditor observes the physical inventory count of the company and also confirms the account receivable accounts.
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The main goal of the SOX is to improve the corporate governance and restore the faith of investors on companies. The Act has affected the auditors of a public company by requiring them to be independent of the business for them to conduct the internal control audit procedures ( Moeller, 2008). In addition, the Act modified the audit standards in the year 2007 by reducing the costs of most of the firms by at least 25% on an annual basis. It also brought new procedures that need to be followed by companies such as requiring them to change their auditors after a specified period of time. Auditors are also expected to avoid doing work for the companies that are regarded to be managed in nature because they will have to audit their own work and thus it will affect their objectivity. The SOX did not only affect the auditors but also the tax practitioners.
How the SOX Affected Tax Practitioners
The Sox is considered to be one of the most significant reforms in the public financial reporting in the United States. It affected the poor compliance and tax calculations processes that were seen in companies. It led to the introduction of Section 404 of the SOX which resulted in challenges on a number of skill sets that was required from tax practitioners. Many companies had underestimated the amount of tax knowledge that was required to sufficiently comply and address the SOX. Therefore, they faced significant issues that related to the technical skills and resources which they had. Tax practitioners were especially expected to be able to handle the commonest problems for companies after the implementation of the SOX which was the inability to get “usable data” for the purpose of reporting tax. Tax practitioners are also expected to focus on tax controls and reporting and must be able to collect, manage, and analyze tax data that is of high-quality in short order. It is worth noting that untimely or inaccurate data can result in various results that are unsatisfactory thus leading to inaccurate financial reporting, poor planning, and imperfect tax compliance.
Conclusion
The SOX has become one of the most vital Acts in the United States that ensures transparency in the financial statements. The Act has had an effect on the auditors such as requiring them to be independent and tax practitioners in terms of requiring them to have additional skill sets to be able to comply with section 404. These efforts aim at ensuring the financial statements are true and reliable.
References
Fletcher, W. H., & Plette, T. N. (2008). The Sarbanes-Oxley Act: Implementation, significance, and impact . New York: Nova Science Publishers.
Moeller, R. R. (2008). Sarbanes-Oxley internal controls: Effective Auditing with AS5, CobiT, and ITIL . Hoboken, NJ: John Wiley & Sons.
