Two things make negligent misrepresentation a particularly dangerous legal theory of liability for use against an accountant. Public accounting firms often pass these fees on to their clients in order to remain profitable. It was passed by large majorities in both Congress and the Senate and covers and sets new performance standards for boards of directors and managers of companies and accounting mechanisms of all publicly traded companies in America. This is true even though the auditor may not have identified any significant deficiencies or material weaknesses in internal controls. They need to teach students to understand the economic costs and benefits of making business decisions.
In my testimony today, I thought it would be helpful to provide my perspectives on the financial crisis, a brief description of our current regulatory environment and, more specifically, some thoughts on what an audit is and its role in our system of investor protection. Many of the audit failures that lead to the enactment of the Sarbanes-Oxley Act can be viewed as the result of auditors losing sight of those obligations to the public and defining their role as selling services, rather than controlling the gate through which companies can access the securities markets. Fewer Accounting Services Public accounting firms must limit the amount of accounting services they offer to one client. But there were market participants and others who should have been among the first to recognize credit and liquidity risk within highly-regulated financial institutions but did not. Section 806 increases the maximum sentence for securities fraud to 25 years in prison.
In addition, although no system of internal controls can detect every instance of fraud, good internal controls may help companies deter fraudulent financial or accounting practices or detect them earlier and perhaps minimize their adverse effects. Frequently these entities have less extensive documentation of their control processes. One of the toughest challenges facing the Commission has been finding, recovering, preserving and, when appropriate, returning funds to injured investors. These scandals brought down the public confidence in auditing and accounting firms. Most important is that the plaintiff must prove that the accountant or other defendant acted with scienter. Covered in the eleven titles are additional corporate board responsibilities, auditing requirements and criminal penalties. Thousands of people lost their jobs, investments, pensions, and the general public lost confidence in the public company financial reporting.
However, it does have some perverse consequences. What is the Auditing Environment Today? While the white papers did not break new ground or establish new accounting or auditing standards, they had the effect of highlighting the valuation issues i. The Sarbanes-Oxley Act changes management's responsibility for financial reporting significantly. A key focus of our effort will be identifying the information most needed by investors including early warnings about business risks and who can best provide that information. It created more white-collar type penalties for auditors and directors. It is named after the two sponsors, U. I applaud you for recognizing that the role of the audit and the auditor is important.
Those kinds of environments have been historically at high risk for a train wreck. In some cases the non-audit fees exceeded the audit fees. These Senators were Paul Sarbanes and Michael Oxley. For businesses, following these seemingly innocuous provisions will be costly and time-consuming. Because the universe of plaintiffs is so large, and liability is presumed, Section 11 of the 1933 Act presents enormous potential liability to accountants. So while investors benefit, they also may find that the companies they are invested in are better managed. I have enclosed a report on the importance of understanding definitions and common terms as well as the changes made.
The same is true for testing by third parties or internal auditors. Accountant responsibility increase The first effect of Sarbanes-Oxley Act is a creation of additional responsibility to the accountants. Injured workers were left without funds to pay for medical care or wage loss. And, as with that Act, second thoughts would later emerge. This is a funding source independent of accounting firms or their professional association.
A second edition was released in October 2003. The use of the Sarbanes- Oxley Act, no matter how large or small your organization is, must be followed. Large companies may have to put together enough documentation to fill 20 three-ring binder notebooks. In these cases, under the existing Fair Funds provision, we do not have authority to use the civil penalty to compensate injured investors. The textbook includes material on Sarbanes-Oxley and the creation of the Public Company Accounting Oversight Board.
With pro forma accounting a company can inflate its earnings by applying accounting rules that it thinks are relevant. There have been other contributing forces as well. The Sarbanes Oxley Act also brought about considerable changes to the financial reporting and auditing practices of public companies. How will the marketplace interpret this? In this regard, a number of commentators have suggested that costs in the second and subsequent years will decrease substantially. With Sarbanes-Oxley now in full force, some in the business community are expressing their doubts about its effectiveness.