The Sarbanes-Oxley Act

As the rapid growth of capital market, investors have been increasingly relying on auditors to examine the accountability of financial information prepared by management. Auditors are expected to determine if the financial statement is fairly presented. In order to do so, auditors need to detect the material misstatements. Misstatement can be classified into three groups: fraud, errors and illegal acts. Fraud is intentional misstatement while errors are unintentional. Illegal acts can be intentional or unintentional. They are the misstatements that violate laws or governmental regulations (Messier, Glover and Prawitt 2014, 26). In recent years, the increasing number of fraud scandals has weakened investors’ confidence in the capital market.

99, Congress took steps in response to big fraud scandals and passed the Sarbanes-Oxley Act (SOX) in 2002 to restore public confidence in accounting profession. The intention of the new legislation is to “improve the audit effectiveness and the credibility of financial reporting” (Ernst & Young 2012). Generally, the Act focus on strengthening corporate governance, enhancing auditor independence and management accountability for financial disclosures and accuracy. Under Sarbanes-Oxley Act, auditors are prohibited to provide non-audit services for audited firms. In addition, Section 404 of the Act requires auditors to evaluate and issue an opinion regarding the effectiveness of the internal control over financial reporting of the audited firm. The act also requires auditors the audit committee, consisted of independent members, to engage and oversee the external auditors. The implementation of these rules has led to great improvements in audit

First it ensures independence of external auditors. Many believe that providing non-auditing services for audited clients may make auditors reluctant to question too much about their clients when they should have. The prohibition of many non-audit services makes auditors focus on their core business, auditing. It also helps auditors to be independent and objective. The second way is that it enhances the quality of the audit. Through the effective oversight, audit committee can objectively evaluate auditors’ performance and contribute to the reliability of financial reporting. Finally, the Act helps to increase the reliability of the financial information. When auditors evaluate the firm’s internal control system, they will gain a better understating regarding the strengths and weaknesses regarding the client’s financial reporting system. Auditing the effective internal control system will not only help to reduce the scope of audit work but also ensures that the financial statements are