ABSTRACT
Public accountants faced a crisis in the spring of 2002. More than 300 earnings restatements in the United States during 2000 and 2001 revealed just how illusory profits reported during the 1990s had been. Enron’s bankruptcy in December 2001 shattered investors’ confidence, launching a 2,000-point decline in the Dow Jones Industrial Average. Soon after the Justice Department indicted Arthur Andersen for shredding 20 boxes of Enron-related documents, internal auditors uncovered an even more audacious accounting fraud at WorldCom. Certified public accountants, once held in high esteem, fell below politicians and journalists in public opinion polls. By the end of 2002, American financial reporting had been dramatically
transformed. Congress responded to the accounting scandals at Enron and WorldCom by passing the Public Company Accounting Reform and Investor Protection Act, better known as the Sarbanes-Oxley Act of 2002. The legislation limited the nonaudit services accountants could perform for their audit clients and established the Public Company Accounting Oversight Board (PCAOB) to regulate public accounting firms. The AICPA’s Auditing Standards Board hurriedly issued a new auditing standard requiring auditors to perform more procedures specifically designed to detect fraud. The Financial Accounting Standards Board (FASB) tightened accounting rules for special purpose entities, and the Securities and Exchange Commission (SEC) demanded more extensive disclosures of off-balance sheet financing. Accountants in other countries experienced similar changes during the
early 2000s as governments enacted accounting and auditing reforms in response to their own domestic accounting scandals. Canada adopted regulations in 2005 requiring corporate executives to certify their company’s internal controls. Australia’s CLERP 9 legislation mandated audit partner rotation after five years and a two-year “cooling-off” period before auditors can go to work for an audit client. Germany amended its corporate governance code to stiffen penalties for managers and auditors who provide misleading financial information.
