Auditing and Its Regulators: Reforms after Enron

Publication Date: February 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Business

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Abstract:

Accounting problems at Enron, WorldCom, and other companies have raised important questions about the audits of corporate financial statements. These audits are performed by independent accountants who are certified public accountants (CPAs); they are supposed to be carried out in accordance with generally accepted auditing standards (GAAS), rules which have a carefully defined technical meaning. The U.S. Securities and Exchange Commission requires audited financial statements when public companies register to sell new securities and annually thereafter.

Auditor assurances about company financial statements remove a barrier to the efficient use of capital and offer some protection to third party investors. However, the recent accounting scandals and numerous revisions of previously-issued financial statements have eroded public confidence in auditing. While auditors are regulated by both governmental agencies and professional organizations, many question whether this oversight has been adequate.

In response to these problems, the 107th Congress enacted the Sarbanes-Oxley Act of 2002 (P.L. 107-204), which the President signed on July 30, 2002. Among other things, the Act creates a new oversight board for auditors, prohibits auditing firms from providing certain consulting work for audit clients, and requires rotation of audit partners at least every 5 years. It also imposes new requirements on corporate boards and executives and increases governmental oversight and criminal penalties.