The Effect Of Sarbanes Oxley On Auditors

2666 words - 11 pages

Journal of Finance and Accountancy

The Effect of the Sarbanes-Oxley Act on Auditors’ Audit
Performance
Tae G. Ryu
Metropolitan State College of Denver
Barbara Uliss
Metropolitan State College of Denver
Chul-Young Roh
East Tennessee State University
ABSTRACT
The issue of audit reporting for financially distressed firms continues to be of interest to the
public and to legislators. Previous studies have consistently shown that auditors fail to issue
going-concern opinions to more than half of bankrupt firms one year prior to bankruptcy.
The Enron and Arthur Andersen failures in late 2001 and early 2002, respectively, led to
the enactment of the Sarbanes-Oxley Act (SOX) in July ...view middle of the document...

For example, the act greatly altered the regulatory regime of auditing by shifting the
oversight of audit firms from the private-sector American Institute of Certified Public Accountants
to the quasi-governmental Public Company Accounting Oversight Board. Also, insurance- and
other liability-related costs increased significantly in the post-SOX period. For these reasons, it is
expected that auditors have changed their views on issuing audit opinions since the enactment of
the SOX.
In 1988, the AICPA issued Statement on Auditing Standards (SAS) No. 59, The Auditor’s
Consideration of an Entity’s Ability to Continue in Existence. The main purpose of this statement
was to bridge an expectation gap between what financial statement users believe auditors are
responsible for and what auditors believe their responsibilities are. The auditor’s responsibility to
assess and report on the ability of an entity to continue as a going concern was significantly
increased by the issuance of SAS No. 59. As part of every engagement, the auditor must consider
whether there is substantial doubt about the entity’s ability to continue operations for a reasonable
period of time not to exceed one year from the date of the financial statements. Under SAS No. 59,
the auditor first evaluates various types of evidence to determine the nature and significance of any
of the client’s financial problems. For all significant problems, auditors must seek evidence about
any mitigating factors, such as management plan to overcome the problems. If, after considering
the mitigating factors, the auditor still has substantial doubt about the entity’s ability to continue as
a going concern, the auditor must include an explanatory paragraph in the standard audit report.
Under SAS No. 34, The Auditor’s Consideration When a Question Arises About an
Entity’s Ability to Continue in Existence, issued in 1981, in which an entity’s continuation was
usually assumed, substantial doubt alone did not require going-concern qualification. Instead,
substantial doubt about continued existence led auditors to evaluate the recoverability of assets and
the amount and classification of liabilities. The audit report was to be qualified if uncertainty about
assets and liabilities existed. Under SAS No. 59, however, substantial doubt is now sufficient to
require an explanatory paragraph in the audit report—even when asset recoverability and liability
amounts and classification are not in question. Thus, SAS No. 59 expands the auditor’s traditional
role in reporting on the entity’s ability to continue in existence beyond the effect on assets and
liabilities (Ellingsen, Pany, & Fagan, 1989).
Auditors are responsible for assessing the effects of going-concern uncertainties for a
period of approximately one year. Hence, auditors may not avoid lawsuits if their clients go
bankrupt with allegedly little or no warning from audit reports issued within a year of bankruptcy.
In contrast,...

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