LOADING

Define Mobile Menu

The history of stock market once experienced a declining trust from investors due to several cases on fake accounting report performed by several leading American companies such as Enron (an energy giant trader) and Global-Crossing and WorldCom (worldwide telecommunication companies).

The declining trust on stock market further drives the authority to develop new system that prevents such mistake while increasing the investors’ confidences. The case of accounting fraud also highlights how fragile the monitoring process of the companies’ financial system is. The situation leads to accountancy scandals that hurt investors, employees, and the industries.

In any accounting fraud, at least there are at least three actors in any accountancy scandals: the first is a company that has a pile of debt that was off balance sheet. The second actors are auditors; they act as consultants that helped the company to write a fake figure of the company’s profit in the book. The third actors are bankers that issued good analyst reports for the company’s financial performance and act as underwriter [1].

Therefore, such scandals at WorldCom, Global-Crossing, and Enron suggests the needs for accounting reforms to prevent any fake figure in the company’s book. In order to provide convenient environment for investment, the U.S. authorities rule out new standard that influence how businesses make financial report, the new standard called Sarbanes-Oxley Act (SOA) [2].

Sarbanes-Oxley Act, named after the two founders; Paul Sarbanes and Michael Oxley, aims at introducing new rules that influence the financial reporting practice and corporate governance. The Act has eleven titles and the most critical parts lie on six sections: 302, 401, 404, 409, 802 and 906 [3]

Sarbanes-Oxley Act (SOA) and 2003 SEC (Securities and Exchange Commission) final rule fundamentally change the way auditing profession does its business. First, there is a fundamental shift in regulating accounting industry – from the primarily self-regulated environment to public regulation approach. Second, a new set of independence rules and regulations affects the accounting profession directly in performing audit engagement. Third, new independent PCAOB (public oversight board) now has the direct authority to watch out audit process, auditing standards, and disciplinary measure on auditors.

The authority of watching audit processes involves several actions. they are registration of public accounting firms that issue audit reports for publicly traded companies, establishment of auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports, inspections of registered public accounting firms, and investigations and disciplinary proceedings and imposing appropriate sanctions on audit firms and auditors [4].

However, the changes in auditor independence required by the SOA and 2003 SEC rule are just a step toward improving the effectiveness financial statement audit. Therefore, the most important aspects of conducting an audit effectiveness and avoid audit failures is not only to create new legislation or regulations but also the professional and mental attitude by independent auditors in serving the interest of investing public.

Therefore, in the absence of good dedication of practicing auditors, it is inevitable to experience another wave of financial statements fraud and audit failures like ones happened at Enron or WorldCom. The resulting auditor’s report should convey a description of economic reality as closely as current communications, economics and accountancy allows.

As Sarbanes Oxley influences method of conducting audit practice, therefore, he Sarbanes-Oxley Act of 2002 is essential rule that all type of organizations (small, medium, and large) must comply with it [5].

The short and long-term effect of implementing Sarbanes Oxley Act is to improve the investors’ confidences on investing their capital on stock market that further will enhance the market liquidity. This condition may happen by diminishing information asymmetry and improving the transparency and reporting of corporate financial information that investors rely on when assessing the performance of the business [6].

In addition, the long-term effect of Sarbanes-Oxley would be on the elimination of personal loans on corporate executives (directors) like happens in the case of Enron when Bernie Ebbers received $400 million. Under such circumstances, Sarbanes-Oxley Act now rules out that corporate executives are responsible for their actions. Since the Act takes into account possible action of accounting fraud, the Act will have long-term effect in preventing another accounting fraud like WorldCom, Global-Crossing, and Enron to occur again [7].

As a supporting tool, information systems support prompt reporting, automated controls, highlighting of exceptions and transparency of financial management processes. For this reason, the board should aware of how business executives use information [8].

While good IT systems do not guarantee that there is violation, at least IT can provide safeguards and help build a culture of attention to information, including its timeliness, accuracy and communication.

Referring to Enron case, since the manipulation involves several documents, stored in digital format, it is obvious that investigators will employ digital-savvy to retrieve such hidden data to obtain any supporting evidence.