In auditing firms, there is the need to control the conduct of activities and this brings the issue of coming up with the constitutional acts of the company. Such acts are the provision or the emergency of the Sarbanes Oxley Act (2002) or SOX. This act has caused great upheaval among most public companies and their independent accounts contrary to what it was expected to do. The act was supposed to help in Internal Control over Financial Reporting.
However, there were some misunderstandings or misconceptions as to whether the company is effective in its objectives and its duties. There was a two-year inspection on the company and a group of samples was taken to indicate the type of companies that may be bringing the Sarbanes-Oxley Act as being ineffective. To assess this, there are some factors that should be considered such as the data used, the audit fee, and the effect of the company size. These are important to know whether the firm is viable. (Bedard C J et al)
Out of the companies that filed their audition in fiscal years 2004 and 2005, about 14.6% and 9.5% had reported material weaknesses in ICFR. This is a clear indication that the compliance of the company was somehow not of a good stand. There is the audit theory. Though it may be viewed as being very abstract, it largely believes or looks at the professional aspect of the business firms and companies. This indicates also that there is a possibility that the professionals that are working in an organization are not competent enough. We find that in the case of the Sarbanes-Oxley Act. From the data from the audit analytics, it makes it look almost incompetent in their duties.
This means that companies have to get into hiring outside auditors so that they can prove or have the best of the results from the audit. This adds an extra cost to the company expenses so that it can give the results as required by the SOX Act. (Bedard C J et al)
This also goes with the size of the company and the audit fee. Those companies that are still very new would not give a very good material reporting weakness. This is attributed to the fact that they may be considered to lack a good resource to remediate material weakness, they may have started late and this may make it difficult to go by the balance sheet date or the company may decide that the remediation might be cost-ineffective. These companies may be pushed so hard by the SOX as it may require them to meet the section 404 compliance date and the author may not be aware of the research topics to address this topic.
The Act is quite stressful to the companies especially the small companies as sometimes the audit fee is proportional to the extent of the company’s reporting material weakness. This means that those small companies will have to spend more on this as they have more reporting weaknesses. Also, auditors of these companies which are weak on these grounds charge audit fees due to increased work to reduce audit risk to target levels. Auditors’ fees vary with the risk derived from ICFR weakness. However, there are chances that the overall SOX section 404 compliance cost decline after the initial setup year. However, it depends on the client’s ICFR. The prices or the charge goes on with the type of complexity of the company. (Bedard C J et al)
However, SOX can not be said to have only disadvantages. It also has some advantages as it ensures that the companies move in the right direction. For example, in the SOX section, 404 on material weakness requires that the report be accompanied by a restatement. And we find that most of the companies are opting for this method of issuing a restatement. This means that since they had done their internal audit, they have to correct the mistake that was there and the new statement has the correction. This means that due to this act, most companies are correcting their past mistakes to be on the right track. (Bedard C J et al)
SOX in its implementation also requires the company to have a public discloser of the ICFR weakness. This makes the company try to prevent as much weakness as possible. With the change in the auditors, research shows that there is an increase in the report material weakness. This is because of the change in the company-auditor relationship. This makes most of the companies like to stick to their auditors and this has resulted from the strict rules from the SOX act. (Bedard C J et al)
All in all, SOX can be said to have a number of advantages or rather benefits. It has resulted in a number of potential benefits such as reducing the overall monitoring cost to the firms. It has also resulted in increased management time to deal with other business plans to grow the business as no time will be wasted dealing with avoidable crises. SOX can be said to have benefits both to the U.S financial market and the society as a whole and it should not be undermined. It is high time that the small companies engage themselves in the activities of this Act. (Bedard C J et al)
Reference
Bedard C J et al, Sarbanes Oxley Section 404 & Internal Controls. 15th Oct. 2007 Investor Village. 2008. Web.