Impact of the Sarbanes-Oxley Act on Accountant Liability

ABSTRACT President Bush signed the Sarbanes-Oxley Act (SOA) into law on July 30, 2002. At that time he said that it brought about "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt". The SOA was passed in response to corporate scandals involving Enron, WorldCom and others. It was intended to restore public confidence in our capital markets. Much of the SOA is directed at corporate and securities industry behavior. But the SOA also raises the regulatory bar far higher for the accounting profession, especially for accounts who audit public companies. The SOA created a new regulatory agency to oversee accountants' work: the Public Company Accounting Oversight Board (PCAOB). The SOA also imposed high ethical standards, including prohibiting conflicts of interest and even potential conflicts of interest. Civil and criminal penalties for violations were increased. The net effect was to substantially increase the legal liability of accountants. Business schools are trying to include SOA materials into their curricula. However, as the AACSB publication BizEd pointed out in August 2005, there is a lack of material that is appropriate for classes in accounting and business law. This paper will help to fill that need. It reviews the origins and current attitudes towards the SOA. To provide context it reviews the law of accountant liability. The paper then examines and assesses those parts of the SOA that impact accountant liability, particularly the new regulatory agency and also accountant independence. A new conceptual framework for regulation is suggested, in which it is seen that the SOA is essentially a form of regulation that seeks to prevent a harmful event from happening, as opposed to merely providing a remedy to those harmed by that event. Finally the SOA will be assessed and its future considered. INTRODUCTION As most readers know, the Sarbanes-Oxley Act (1) (SOA) is the most far-reaching and significant new federal regulatory statute affecting accountants and corporate governance since the Securities Acts of 1933 and 1934. Corporate scandals involving Enron, WorldCom and others had shaken public confidence in American capital markets. Public outrage (2) plus the obvious need for reform led to the passage of the SOA which was signed into law on July 30, 2002. The SOA significantly increased the legal liability of accountants. A new federal regulatory agency, the Public Company Accounting Oversight Board was created to oversee auditors' work, with authority to conduct inspections, create new standards and punish violators. Conflicts of interest were prohibited, and a high wall was erected separating the audit function from consulting and other non-audit functions. Auditors' civil and criminal liability were increased, and additional record-keeping burdens imposed. Audits of public companies became riskier for accountants but also more profitable, reflecting the greater amount of work and risk involved (3). The topic of accountant liability is an important one in accounting and business law classes, especially at the Junior, Senior and Graduate level. The SOA significantly impacted this liability. However, business schools have had difficulty incorporating SOA material into their curricula. As the AACSB publication BizEd recently pointed out (4), every school it surveyed "incorporated at least some SOX (5) material in its courses" but there was a "lack of dedicated material on Sarbanes-Oxley" that was appropriate. Most of what has been written on the SOA deals with corporate compliance and is directed at lawyers and practicing accountants. Very little has been written that directly addresses the SOA's impact on accountant liability that is also appropriate for business and accounting students. The contribution of this paper is to help fill that void. ORIGINS AND ATTITUDES To say that the SOA is controversial is an understatement. …