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Abstract
The expectation gap continues to exist even after the Sarbanes-Oxley Act. Five suggestions can help the accounting profession narrow this expectation gap. The public trust in auditors' judgments plays an important role in accepting audit functions as value-added services that lend credibility to published financial statements. This trust can be enhanced by CPAs to focus their core values of integrity, objectivity, independence, and competence. The increasing interest in and the demand for improved corporate governance and accountability have created a unique and timely opportunity for accountants and the American Institute of Certified Public Accountants (AICPA) to align their strategic vision with the emerging demands for effective oversight and forensic functions of corporate governance.
Key Words: public trust, investor confidence, forensic accounting, cooking the books, skepticism, expectation gap.
The wave of financial scandals at the turn of the century, primarily caused by corporate malfeasance and fraudulent financial activities, eroded public trust and investor confidence in financial reports and audit services. Congress responded by passing the Sarbanes-Oxley Act (SOX) in July 2002. Several other corporate governance reforms, including the securities and Exchange Commission (sec) rules to implement provisions of SOX, listing standards of national stock exchanges (NYSE, NASDAQ), and best practices by investor activists and professional organizations, were developed with the intent to restore public trust and investor confidence in public financial information.
Although these reforms have improved the quality, reliability, and transparency of financial reports, much more needs to be done to restore public trust and investor confidence in corporate America and its financial reports, even in the post-SOX era. The year 2005 is regarded as the year of financial restatements, as more than 1,1OO public companies restated their previously erroneous financial statements (Glass Lewis & Co., 2006). More than 120 high-profile public companies in the first part of 2006 are under investigation by the Justice Department and sec for the illegal backdating of their executive stock option grants (Turner, 2006). This article explores the importance of forensic accounting, consisting of fraud investigation and litigation services in improving the quality of financial reports and audit efficacy.
Investor Confidence and Public Trust
In the accounting profession, the expectation gap is referred to as the difference between the publics view of what auditors' responsibilities...