Sarbanes-Oxely Act of 2002 Improved Audit Quality and Corporate Governance: Ernst& Young

Wednesday, July 11, 2012 Print Email

A report issued by Ernst& Young stated that the Sarbanes-Oxely (SOX) Act of 2002 has given additional strength to corporate governance and enhanced the quality of audit in the last ten years.

The report on the SOX act marks the tenth anniversary of the legislation, which was issued ten years ago in response to a series of accounting related scandals in companies including WorldCom, Tyco and Enron, in addition to the end of Big Five Auditing organization Arthur Anderson. Designed to improve the financial reporting reliability and enhance the quality of audit, SOX took the responsibility for external auditor relationship from corporate management and gave it to committees created for independent auditing, which was accountable to shareholders.

Even though some parts of the legislation, for example ‘Section 404’, have not been favored, most of the issues have been settled and addressed via a number of legislative and regulatory actions. On the whole, the report from Ernst& Young clarifies that SOX has offered a number of benefits to the United States capital markets and investors. The report cited studies conducted by many of the groups which indicated improvement in both corporate governance and audit quality in the last ten years.

The quality of audit has been enhanced by strongly aligning shareholders of the public company and auditors, audit oversight committees, audit authorities who work independently. As per the audit committee survey report conducted by the Center for Audit quality in the year 2008, ninety per cent of the members of the audit committee who were asked to participate in the survey mentioned that they find it easy to work with the auditors who work independently.

SOX also pointed out that the audit quality has also shown improvements owing to the inspections carried out by PCAOB as well as standard setting. By 31st December 2011, over two thousand audit organizations from over eighty countries had registered their names with PCAOB. In the year 2011, PCAOB had carried out inspections of around two hundred and thirteen audit organizations registered with them and had also initiated an inspection program for dealers-broker in the interim.

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