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Sarbanes-Oxley act was introduced in 2002 to keep in check the functions of auditors after there scandals involving auditors arose. Some of these scandals included Enron-Arthur Anderson scandal. Traditionally, auditors were viewed as independent and trustworthy professionals who were dedicated to protecting the interests of investors. When such fraudulent activities developed into scandals, it became apparent that there was need to keep the activities of the auditors in check, and hence the inception of this law that has been a matter of controversy since it started its operations. This law has affected the functions of auditors in so many ways, both positively and negatively. The importance of this essay is to offer some of the benefits and shortcomings that have been brought out to auditors as a result of the law.
Cost of compliance
The legislation affects the auditors by first laying a great burden on them since they are now expected to make several certifications and representations offering information on internal controls of public companies. It is important to note that this is not limited to auditors but also to executives of companies. Furthermore, the legislation emphasizes that auditors must review the firmness of operation in the internal controls of the company so that they are in a position to make an accurate report. These are presented as annul reports to the relevant bodies.
There is also the issue that has affected the methods that the auditors have previously used in their functions and can no longer be used now that there is an act that checks it. These methods have been used by the auditors, not for fraudulent deeds, but to enhance the efficiency of their audits. However, one of the impacts on audit process, and auditors, is the cost of compliance. In fact, most of the critics argue that the process it too expensive especially in time consumption in a bid attain the satisfaction and trust expected of the auditors.
The act affects the cost of compliance by first requiring that the companies and their management create a reliable internal financial control. Another way that the act affects auditing is the fact that the management should attest to the reliability of those controls that offer the accuracy of the financial statements. Furthermore, the act also dictates that independent auditors should make attestation of the statements that are made by the management of the companies they are entrusted with auditing. It can be seen from these catches that the intension of the law seems more like ensuring that the weakness and strengths of the specific procedures in the management and processing of statements are created and singled out so that there will not be a misstatement of the financial reports and other financials.
The cost of compliance comes in the fact that the companies will need to go further and incur costs for purchasing IT infrastructure which can enable effective keeping of data and internal financial control system, as indicated by the act. Furthermore, there is also the fact that companies and the company auditors will required to have additional staff who will handle the internal control. It is therefore important to keep in mind the fact that the introduction of the SOX law does not only affect the overhead costs of the company but also the cost of compliance is also quite high for the companies.
Note that the total costs of an organization being a public company in the United States is also quite high as a result of the 2002 SOX law introduction. According to several surveys that have been conducted since the inception of the law, it is evident that there has been a significant increase in compliance costs including auditing fees, directors and insurance, compensation and legal costs. All these costs have come in a bid for companies to comply with the law since the legislation demands that all those individuals holding those positions must be in the light of whatever is taking place in the company. This means that besides increasing the number of staff members to help in maintaining good internal control, there is also the cost that comes to the company through other forms of audit committees, a thing that has not been there initially. However, in as much as these costs have been there and affected the companies negatively due to the reduction of the total revenue, then it is worth keeping in mind the fact that it also has a positive influence on clients and shareholders in companies by boosting their investor confidence, the reliability on the financial reports and statements and reduction on the increase in fraudulent activities.
It is also important to put forward the fact that a report made by the securities and exchange commission of the United States shows that there is now a reduction of the cost of compliance of companies, a fact that is contrary to what is shown by researchers and scholars who have investigated the same issue. However, it is also notable that there are those people that have argued that SOX as a law needs to have an overhaul so that investors could diversify the stock investments and manage failure more effectively which is not possible if companies will be forced to spend so much money complying with the SOX law.
SOX law is good move that has good intensions of ensuring that auditors are ethical in their practice. Unfortunately, it is so costly to organizations and the auditors. This is the greatest shortcoming of the law since companies are businesses that need to reduce their liabilities whereas the law increases it.