Finance Ethics Case

Full Answer Section

    Overview of the Public Accounting Industry: Prior to SOX, the public accounting industry lacked strong regulatory oversight. Conflicts of interest were common, with firms providing both auditing and consulting services to the same clients. This created a disincentive for auditors to identify and report potential accounting problems. SOX implemented significant reforms, including:

• Creation of the Public Company Accounting Oversight Board (PCAOB):An independent board tasked with overseeing the audits of public companies.
• Auditor Independence:Restrictions on the non-audit services accounting firms can provide to audit clients.
• Corporate Governance:Increased board of director responsibility for financial reporting.
• Increased Penalties:Harsher criminal and civil penalties for accounting fraud.

Public Sentiment: In the wake of major corporate scandals like Enron and WorldCom, public trust in corporations and the financial system plummeted. SOX was intended to restore public confidence in the integrity of financial reporting. While public opinion is complex, studies suggest a general perception that SOX has improved the reliability of financial statements. Regulatory Framework: SOX significantly strengthened the regulatory framework for public companies and accounting firms. The PCAOB has established auditing standards and conducted inspections, leading to a more rigorous auditing process. However, concerns have been raised about the costs of compliance, particularly for smaller companies. Additionally, some argue that SOX has fostered a culture of "check-the-box" compliance that may not always address the root causes of accounting fraud. Recommendation: The Center for American Progress recommends that SOX be continued with modifications. SOX has played a crucial role in restoring public trust in financial markets and improving the quality of financial reporting. However, there is room for improvement:

• Cost Reduction for Smaller Companies:Explore ways to streamline compliance requirements for smaller public companies without compromising audit quality.
• Focus on Outcomes:Shift the focus from rigid compliance to a risk-based approach that prioritizes the identification and prevention of fraud.
• Review of PCAOB Effectiveness:Conduct a periodic review of the PCAOB's effectiveness in achieving its objectives.

Conclusion: SOX has been a necessary and successful response to corporate scandals. However, the regulatory environment should adapt to address concerns about compliance burdens and evolve with changing risks. Through targeted modifications, SOX can continue to ensure the integrity of financial reporting and maintain public trust in the American economy. Additional Considerations: This report reflects the perspective of the Center for American Progress, a center-left think tank. Other think tanks, such as the Heritage Foundation, may have different perspectives on the effectiveness of SOX and the need for modifications. Further Research:

• The economic impact of SOX on the public accounting industry.
• The effectiveness of the PCAOB in enforcing auditing standards.
• The impact of SOX on international competitiveness of U.S. companies.

By conducting further research on these topics, policymakers can make informed decisions about the future of SOX.  

Sample Answer

     

Analysis of the Sarbanes-Oxley Act: Continued Relevance or Time for Revision?

Think Tank: Center for American Progress (CAP)

Introduction:

The Sarbanes-Oxley Act (SOX) of 2002 was a landmark piece of legislation enacted in response to a wave of corporate accounting scandals that eroded public trust in financial markets. This report, prepared by the Center for American Progress (CAP), analyzes the impact of SOX on the public accounting industry, public sentiment, and the regulatory framework. Based on this analysis, the report concludes with a recommendation on the future of SOX.