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Hi Tina. Thanks so much for starting our discussion this week!You brought up a great point about independence. In order for anaudit opinion to be reliable, it must be issued by an “independent”accounting firm. The increased independence requirement of SOX tookaway huge amounts of revenue from the public accounting firms.However, I think most of them have probably been able to make upmost of those lost revenues through the additional work they dorelated to SOX compliance. Prior to SOX, many public accountingfirms were earning more money from their audit clients doingconsulting work than they were earning for the audit fees (ArthurAndersen and Enron are a great example of this!). When the auditorsare doing consulting work, it can create somewhat of a gray linebetween the auditors and management. It also makes it extremelydifficult (if not impossible) for the auditor to remain objective.Subsequent to SOX, the audit firms had to stop performing theseconsulting services for their audit clients (or relinquish theirduties as the auditor for that company). They can do one or theother, but not both. Class, do you think it's possible for anauditor to be completely independent from their client? Why or whynot?

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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Required: After reading the Bye, Bye SOX? Article comment on the issue of small business compliance with Section 404 of SOX

Bye, Bye, SOX?
The Sarbanes-Oxley Act (SOX) SOX compliance has been extended
may be declawed by upcoming four times, but they won’t need to
U.S. Congress and comply at all if the Garrett-Adler
Supreme Court decisions. amendment makes it to the Senate
The House of Representatives floor as a standalone bill.
recently voted to approve the SOX also established the
Garrett-Adler amendment, which PCAOB to oversee and regulate
would exempt small companies audit firms. PCAOB operates under
from SOX Section 404 provisions, the supervision of the Securities
while the Supreme Court is considering and Exchange Commission (SEC),
the constitutionality of the which also appoints PCAOB members.
Public Company Accounting Oversight It is funded by fees charged to
Board (PCAOB). audited firms. When it was established,
These developments may have Congress wanted the board
long-term implications for SOX, the to be separate, with its own funding
2002 legislation passed in the wake stream, and outside normal civil
of the Enron, WorldCom, and Tyco service laws so it could attract
scandals. The outcomes may also highly qualified specialists. PCAOB
have implications for records managers, members’ salaries are more than
information technology specialists, $500,000 and are reviewed by the
and compliance officers SEC.
who devise and implement company Pro-business advocates, represented
controls. by the Free Enterprise
Section 404 of SOX requires Fund, argue that the PCAOB’s governance
company auditors to attest to the structure is unconstitutional
soundness of the firm’s internal because it is an independent
controls and financial statements. agency that does not allow for the
Internal controls may include anything president to appoint members. Additionally,
from transaction approval authorizations because only the president
to records retention can remove SEC commissioners
programs. This provision is widely for cause, and because
blamed for an increase in auditors’ the SEC can only remove PCAOB
fees, as well as increased expenditures members for cause, some court
to ensure that proper internal members believe this is a formerly
controls are in place. unrecognized limit of the president’s
Small firms – those with powers that may contradict
less than $75 million in the constitution.
market capitalization The Supreme Court will take up
– have protested that the issue soon, and some legal experts
compliance with SOX 404 would believe that SOX could be
cost them a disproportionate share abolished completely if the court
of their earnings. The complaint is rules the PCAOB unconstitutional.
supported by an independent study
conducted at Pennsylvania State
University, which showed that
firms just over the $75 million
mark paid nearly $700,000 more in
audit fees and had average earnings
of negative $1.4 million in 2004

1–28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Client’s management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditors’ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditors’ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the client’s operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a company’s policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a company’s internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a company’s legal department.

GIVEN:

ENRON Scandal Issues:

Auditing and Accounting Issues

Creates a new oversight board to regulate independent auditors of publicly traded companies – a private sector entity operating under the oversight of the Securities and Exchange Commission;

Raises standards of auditor independence by prohibiting auditors from providing certain consulting services to their audit clients and requiring preapproval by the client’s board of directors for other non audit services;

Requires top corporate management and audit committees to assume more direct responsibility for the accuracy of financial statements;

Enhances disclosure requirements for certain transactions, such as stock sales by corporate insiders, transactions with unconsolidated subsidiaries, and other significant events that may require “real-time” disclosure;

Directs the SEC to adopt rules to prevent conflicts of interest that affect the objectivity of stock analysts;

Authorizes $776 million for the SEC in FY 2003 (versus $469 million in the Administration’s budget request) and requires the SEC to review corporate financial reports more frequently; and

Establishes and/or increases criminal penalties for a variety of offenses related to securities fraud, including misleading an auditor, mail and wire fraud, and destruction of records.

Pension Issues

Like many companies, Enron sponsors a retirement plan – a “401(k)” – for its employees to which they can contribute a portion of their pay on a tax-deferred basis. As of December 31, 2000, 62% of the assets held in the corporation’s 401(k) retirement plan consisted of Enron stock. Many individual Enron employees held even larger percentages of Enron stock in their 401(k) accounts. Shares of Enron, which in January 2001 traded for more than $80/share, were worth less than 70 cents in January 2002. Many employees’ retirement accounts were wiped out. The losses suffered by participants in the Enron Corporation’s 401(k) plan have prompted questions about the laws and regulations that govern these plans.CRS-5

Securities Analyst Issues

Securities analysts employed by investment banks provide research and make “buy,”“sell,” or “hold” recommendations. These recommendations are widely circulated and are relied upon by many public investors. Analyst support was crucial to Enron because it required constant infusions of funds from the financial markets. On November 29,2001, after Enron’s stock had fallen 99% from its high, and after rating agencies had downgraded its debt to “junk bond” status, only two of 11 major firm analysts rated itsstock a “sell.” Was analyst objectivity – towards Enron and other firms – compromised by pressure to avoid alienating investment banking clients?

Banking Issues

One part of the fallout from Enron's demise involves its relations with banks. Prominent banking companies, notably Citigroup and J.P. Morgan Chase, were involved in both the investment banking (securities) and the commercial banking (lending and deposit) businesses with Enron, and have suffered from Enron's collapse. The two activities had been separated by the 1933 Glass-Steagall Act, until P.L. 106-102 (the Gramm-Leach-Bliley Act) allowed their recombination. Observers have begun to question whether that 1999 repeal of Glass-Steagall en courage conflicts of interest and unsafe bank lending in support of the investment banking business with Enron.

QUESTION: what laws (official names) are involved throughout this scandal? (through a business law standpoint)

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