Sarbanes Oxley (SOX) is the law passed
in the wake of recent corporate scandals Enron and Worldcom.
These companies fudged their financial statements and the
auditors went along with them. Enron is gone and Worldcom
has changed its name to MCI. Executives of these companies
have been accused of criminal misconduct. Arthur Andersen
(the auditor) is out of business. Most people think that SOX
applies to public companies only, but this is not exactly true.
Public companies are now required to do certain things that
donít apply to private and nonprofit companies, but the
standards set for auditors apply to all auditors for all
their audit clients.
The problem: Arthur Andersen lost its
independence. Andersenís non-audit work for Enron exceeded
its audit work by millions of dollars. Andersen compromised its
responsibility to shareholders in order to keep the millions
of dollars in consulting fees it was receiving from its
clients. This has put the light on auditor independence for
Auditors are not permitted to:
- Make management decisions
- Prepare journal entries
- Prepare source documents
- Make investment decisions
- Hire or terminate employees
- Represent the client before banks
or other financial statement users
- Do anything that they will have to
This applies to all a firmís audit
clients, not just SEC clients. The rules are the same. Often
CPAs would help its clients with these things. No more.
Clients are required to do more themselves.
The problem is that often organizations
with small accounting staffs do not have the time or the
talent to do all these things. Focus Accounting Solutions