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Keywords Auditing, Audit committees, Fatigue, Auditing standards
Abstract The highly publicized accounting scandals of the recent past seriously damaged the credibility of the accounting profession. In an effort to restore public confidence in the capital markets, the US Congress passed the Sarbanes-Oxky Act of 2002. A central theme of this new law is the attempted reduction of major audit failure by stricter governmental regulation of the accounting profession and the creation of the Public Company Accounting Oversight Board. This paper discusses the likely effectiveness of the Sarbanes-Oxky Act in the reduction of major audit failures. Four root causes of audit failure are identified, and issues not addressed by the Sarbanes-Oxky Act that may have audit failure implications are discussed. Recommendations for improvements that potentially further reduce the likelihood of audit failure are presented.
Introduction
The collapse of Enron in 2001 and the subsequent discovery that its auditor, Arthur Andersen, had shredded audit documents after notification of a securities and Exchange Commission (sec) investigation of Enron sent shock waves through the financial markets. Exacerbating this situation was the revelation that besides Andersen's $25 million audit fee, Andersen earned another $27 million from Enron that year for consulting, thus raising questions about conflict of interest. The legal and regulatory community also noted that many CPA firms were regularly performing significant consulting services for their audit clients. For example, Disney's audit fee for 2001 was a mere $8.7 million compared to the $32 million Disney paid PricewaterhouseCoopers for consulting services. These revelations brought the accounting profession under the scrutiny of Congress and the sec. The scrutiny increased after apparent audit failures were reported at Worldcom, Adelphia, Xerox, and Global Crossing. Lawmakers believe that the accounting profession has failed to regulate itself in a manner that promotes confidence in the published financial statements of public corporations.
In June 2002 Congress passed the Sarbanes-Oxley Act (SOX), creating the Public Company Accounting Oversight Board (PCAOB) and prescribing new requirements and restrictions for auditors of publicly traded companies (Congress of the United States of America, 2002). The SOX intends for the sec (via the PCAOB) to police the accounting profession's audits of publicly traded companies, thereby restoring some lost confidence in corporate America. The restoration of investor confidence, however, will ultimately...