The Sarbanes-Oxley Act came into play in 2002 following a series of financial scandals. In this case, it was established to discourage corporate fraud (Amadeo, 2019). Its creation set up the PCAOB, a not-for-profit entity aimed at protecting investors. Its adoption has impacted the auditing practice in various ways.
The act has impacted the auditing practice by strengthening the audit committees of public corporations. Audit committees play a considerable part in overseeing the entity’s financial reporting. They comprise selected board members. Before the act was passed, audit committee involvement in overseeing the entity's financial reporting and disclosure processes was ineffective, given that the board members failed to put much effort into their committee duties. They could not face legal liabilities for failing to fulfill their duties. However, the act’s implementation has led to increased effort on the part of the audit committee members, given that they now face increased liability for not paying attention. In this case, the role of audit committees in organizations has been strengthened considerably.
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The act has improved the auditing outcomes given that it charges CEOs with the personal responsibility for errors in accounting audits. The act also prohibits the provision of company loans to such executives (Amadeo, 2019). If the CEO knowingly or intentionally makes a false certification, he can be jailed for a period between ten to twenty years. If the entity is forced to implement a necessary accounting restatement as a result of managerial misconduct, top executives can be forced to forego their perks or bonuses derived from the sale of the entity's stock. If the CEO is sentenced due to a securities law breach, they can be banned from serving a similar role at the public entity. Therefore, CEOs are keen on improving auditing outcomes by minimizing errors to avoid becoming victims of the aforementioned effects. The Christian worldview of fraud also emphasizes the negative effects which can be faced by the perpetrators. According to Proverbs chapter 20 verse 17, bread obtained deceitfully is sweet, but later the individual's mouth will be filled with gravel (Nelson, 2013) . Proverbs chapter 10, verse 2, indicates that treasures obtained through wicked means are not profitable. The worldview also prohibits the individual from engaging in fraudulent activity. Leviticus chapter 19 verse 11 states that the individual shall not steal, neither shall they deal falsely nor lie to one another. In this respect, the Christian worldview provides evidence supporting the Sarbanes-Oxley Act.
The creation of the PCAOB through the act ensures that the work of audit entities are reviewed to ensure proper procedures are used in the auditing practice. The organization registers accounting firms tasked with conducting audits or those wishing to perform them. After the firms are registered, they become subject to its supervisory oversight and are required to use its standards when performing public company audits. A key component of the audit oversight procedure is inspection. Before the organization was created, peer reviews were conducted, and they emphasized compliance with the relevant standards but did not take into account the overall audit environment. The creation of the organization ensured that the audit environment was addressed. The inspections carried out by the organization are risk-oriented and designed to recognize problems at an early phase. They also ensure that firms focus on correcting the problems. In this case, there is a high chance of auditing being conducted smoothly due to the elimination of the problems.
References
Amadeo, K. (2019). 4 ways Sarbanes-Oxley stops corporate fraud . the balance. https://www.thebalance.com/sarbanes-oxley-act-of-2002-3306254 .
Nelson, T. (2013). NKJV, the NKJV Study Bible, eBook: Second edition . Nashville: Thomas Nelson.
