Chapter 25 – The Perfect Storm

Synopsis

Eleven congressional committees held hearings in early 2002 investigating various dimensions of Enron’s collapse. Representative Michael Oxley (R, Ohio) drafted a bill containing modest reforms to the public accounting profession. Senator Paul Sarbanes (D, Maryland) drafted a bill containing more substantive changes. Within three weeks of WorldCom announcing its record-breaking earnings restatement, the U.S. Senate passed Sarbanes’s bill by a vote of 97 to 0. The Sarbanes-Oxley Act of 2002 strengthened whistleblower protections and limited the consulting services accounting firms may provide to their audit clients. It required auditors of large public companies to issue a separate report evaluating the strength of the client’s internal accounting controls. Perhaps most importantly, S-Ox created the Public Company Accounting Oversight Board (PCAOB) and endowed it with authority to write auditing standards and perform annual inspections of accounting firms to make sure the standards are being followed.

Discussion Questions

  1. Why did Assistant Attorney General Michael Chertoff decide to charge Arthur Andersen with obstruction of justice? According to prosecutors, what was Andersen’s motive for obstructing justice?
  2. Describe the provisions of the Sarbanes-Oxley Act of 2002 intended to enhance auditor independence.
  3. Describe the responsibilities of the PCAOB.
  4. What does Section 404 of the Sarbanes-Oxley Act of 2002 require auditors and company executives to do?
  5. Describe the major requirements of SAS No. 99.
  6. What effect did the Sarbanes-Oxley Act of 2002 have on public accounting firms’ audit and nonaudit revenues?

Additional Resources

Baptist Foundation of Arizona. The CBS newsmagazine “60 Minutes” discusses Arthur Andersen’s failure to find accounting fraud at Baptist Foundation of Arizona (14:29 minutes).

Frontline: Bigger Than Enron. The PBS television series “Frontline” discusses alleged flaws in the U.S. financial reporting system (55:54 minutes).

Sarbanes-Oxley: The Impact 15 Years Later. Cindy Fornelli, Executive Director of the Center for Audit Quality, discusses the long-term effects of S-Ox (9:05 minutes).