Sarbanes-Oxley – Wanna Know What I Really Think?

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Dear Ms. McKenna,
As a student in a French Business School, I am currently writing a paper on the impact of the Sarbanes Oxley act on the quality of external audits. While surfing on the Internet to do research on this topic, I [found your] website Re: The Auditors. 

I read many entries that contain very interesting issues on that particular topic.

As I want to show that SOx may have arguable implications for external auditors, I though that your expertise on the subject could add great value to my paper. That is why I would be very grateful if you could fill the attached questionnaire, which would provide my paper with a valuable insight from a specialist.

Many thanks in advance for your time and consideration.

Best regards,

[Most Likely A Very Smart and Beautiful French Female Graduate Student (VSBFFGS)]

Objective of the paper: Finding out whether the Sarbanes-Oxley Act (SOX) improved the quality of external audits
1. Impact of SOX on audit works

VSBFFGS: Since SOX was enacted, the required work of external auditors has been extended and theoretically thus improved (especially sections 103 and 404).

What do you think about this additional workload for external auditors? 

FM: The external auditors have had to do more to meet the requirements of the internal controls assessment, but they have also done additional work because they are afraid of the liability connected with a failure or incorrect assessment. In many cases, clients thought it was way too much work and cost too much. The effort has moderated as clients have learned how to do more preparation and testing themselves. But the auditors can add or subtract work and fees as they please due to their power over the final opinion. 

VSBFFGS: Which of these additional works do you think are improving the quality of audits? Which of them do you think are more a waste of time? Do you think other works should have been required by the law? 

FM: The additional work may not be improving the quality of the audit, but Sarbanes-Oxley forced companies to be better aware of internal controls and risk. Many companies did not have good policies, procedures and documentation, had no concept of internal controls or risk and were not actively managing risk and controls. Additional benefits for companies will come when there is increased attention on the role of information technology. Better managed companies make better audits.

VSBFFGS: Generally, do you think that SOX new requirements make auditors more able to cover the risks of material misstatements in the audited company? 
FM: No. Only thoughtful, knowledgeable auditing performed by people of integrity that understand that their client is the shareholder group, not the management, will prevent material misstatements from being included in published financial statements. Sarbanes-Oxley helps management prevent material misstatements from occurring in the first place. If the auditor finds the misstatement during the audit it is too late… 

2. Impact of SOX on auditor’s independence

VSBFFGS: SOX was also designed to improve the independence of external auditors notably with rules concerning separation of audit and ancillary services, fees and partner rotation.

Separation of audit and ancillary services (section 201): do you think SOX’s requirements are necessary to assure independence?

FM: Yes.

VSBFFGS: Fees: according to you, does a client generating a great turnover is more likely to have his accounts certified?

FM: Yes.

VSBFFGS: Partner rotation (sections 203 and 207): do you think a long-length relationship between a partner and a client can create a conflict of interest?

FM: Yes.

VSBFFGS: On the contrary, do you think this long-length relationship can help the partner grow expertise on the case?

FM: The firm should gain expertise. You are lost if all the experience and expertise is invested in the partner, since they don’t generally spend any time doing hands-on work anyway. When they make decisions, they are entirely dependent on the quality of information that comes up to them via all the layers of their staff. Better quality begins with the lowest level of staff.

3. Impact of SOX on the regulation of the profession

VSBFFGS: Another aspect of SOX is the regulatory framework imposed to audit firms by the Public Company Accounting Oversight Board (PCAOB).

According to you, what are the advantages of regulations imposed by an external regulatory body rather than by the profession itself?

FM: Objectivity, independence, ability to consult additional experts, and additional perspectives can be considered such as those of the clients, industry, attorneys, etc.

VSBFFGS: What is your opinion on the rules set by the PCAOB (section 103)?

FM: Not enough and not detailed enough. They are highly dependent on the firms’ own quality programs, but the programs are inconsistent between firms and inconsistent between locations within their  ” global networks.”

VSBFFGS: How do you view the intensification of the quality reviews required by SOX (sections 103 and 104)?

FM: I view them very favorably.

VSBFFGS: In your mind, is the hardening of sanctions to auditors justified?

FM: Yes

2 replies
  1. Anonymous
    Anonymous says:

    Wonder how the French businesses and accounting firms feel about their joint audit requirement.

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