The Complete CPA Reference

CHAPTER 13

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (SOX) was enacted, in part, in response to the accounting scandals of several publicly traded companies. SOX resulted in changes to corporate governance, increased corporate reporting (disclosure), and partial regulation of the accounting profession. This chapter focuses on the impact that SOX has on independent auditors of publicly traded entities.

In general, what are the major provisions of SOX that impact auditors of publicly traded entities?

Major provisions in SOX that impact auditors of publicly traded entities include:

• Stricter rules regarding independence of the auditor
• Partner rotation
• Creation of the Public Company Accounting Oversight Board
• A requirement to attest to, and report on, the effectiveness of internal control over financial reporting (discussed in Chapter 12)

Auditor Independence

What employment situations impair auditor independence?

Under SOX, an auditor will lose independence if an employee of the company being audited was part of the audit engagement team at any time during the cooling-off period. In order for the loss of independence to occur, the employee of the auditee must have had a financial accounting oversight role. Accordingly, prohibited employee positions include the chief executive officer, the chief financial officer, the controller, and the chief accounting officer, as well as any other position in which the individual can impact the preparation or contents of the entity's ...