Page 67 - Encyclopedia of Business and Finance

eobf_A 7/5/06 2:54 PM Page 44

Auditing

operations of the Board and the staff of the Board. unlawful for a CPA firm to provide any nonaudit service
(http://www.aicpa.org/info/sarbanes_oxley_ to an audit client,
summary.htm)
including: (1) bookkeeping or other services
In essence, this section of SOX provides for govern-
ment regulation of the audit profession and it represents related to the accounting records or financial
statements of the audit client; (2) financial infor-
one of most dramatic changes mandated by the new law.
mation systems design and implementation; (3)
Other changes mandated by SOX have significantly appraisal or valuation services, fairness opinions,
affected external auditors. For example, Section 404 of or contribution-in-kind reports; (4) actuarial serv-
SOX mandates that all publicly traded companies include ices; (5) internal audit outsourcing services; (6)
in their annual report an assessment made by manage- management functions or human resources; (7)
broker or dealer, investment adviser, or invest-
ment about the effectiveness of their internal controls and
ment banking services; (8) legal services and
procedures for financial reporting purposes. SOX also expert services unrelated to the audit; (9) any
requires that the company’s independent auditors attest to other service that the Board determines, by regu-
and report on management’s evaluation of their internal
lation, is impermissible. (http://www.aicpa.org/
controls and procedures. info/sarbanes_oxley_summary.htm)
Section 302 of SOX mandates that the chief execu-
tive officer (CEO) and chief financial officer (CFO) of
GENERALLY ACCEPTED AUDITING
each publicly traded company prepare a statement to cer-
STANDARDS
tify the “appropriateness of the financial statements and
External auditors must follow generally accepted auditing
disclosures contained in the periodic report, and that standards (GAAS) when performing financial statement
those financial statements and disclosures fairly present, in
audits. These ten broad standards include three general
all material respects, the operations and financial condi-
requirements for the individual CPA, three standards for
tion of the issuer” (http://www.aicpa.org/info/sarbanes_
fieldwork, and four reporting standards. Authoritative
oxley_summary.htm). If CEOs or CFOs knowingly and guidance regarding the application of these ten general
intentionally violate Section 302, they can be held crimi- standards is provided in Statements on Auditing Stan-
nally liable. And, under Title IX of SOX, the penalty for dards, which are issued by the AICPA’s Auditing Stan-
filing false financial statements with the SEC “for willful dards Board.
and knowing violations” are “a fine of not more than
The general standards require CPAs to be proficient
$5,000,000 and/or imprisonment of up to 20 years”
in accounting and auditing, to be independent from their
(http://www.aicpa.org/info/sarbanes_oxley_summary.
clients, and to exercise due professional care. Before
htm). For external auditors, this section of SOX has dra-
accepting an audit client, auditors must determine if they
matically increased the attention being focused on the
will be able to provide the necessary services on a timely
financial statement reporting process.
basis and must have no financial or managerial relation-
ship with the company whose financial statements are
CPA FIRMS being audited.
Audited financial statements submitted to the SEC or to The fieldwork standards address what is required
other stakeholders are audited by CPAs. These CPAs prac- when actually performing the audit work. The auditor
tice in public accounting firms, many of which are must plan the engagement and supervise assistants. The
referred to as professional services firms. The largest firms auditor must obtain an understanding of the company’s
are commonly referred to as “The Big Four.” These four internal controls. The auditor must obtain sufficient com-
firms are: Deloitte & Touche, Ernst & Young, KPMG, petent evidence to support the financial statement asser-
and PricewaterhouseCoopers. These companies, and tions.
many other public accounting firms, typically operate as The reporting standards set requirements for the
limited liability partnerships (LLPs) and thus carry the auditor’s report. The report must explicitly refer to GAAP
LLP designation in their names. In addition to account- and must state an opinion on the financial statements as a
ing and auditing services, many CPA firms offer tax and whole. If there has been a change in accounting principles
consulting services. These consulting services include sys- used by the company or inadequate disclosure of signifi-
tems design, litigation support, pension and benefits con- cant information, the auditor’s report should address
sulting, and financial planning. those issues.
To ensure independence, CPA firms are not allowed For audits of publicly traded companies, the external
to complete most consulting services for their publicly auditor must also follow the auditing standards issued by
traded audit clients. Under Section 201 of SOX, it is the PCAOB. The first standard essentially adopts GAAS

44 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION