（2008）The Sarbanes-Oxley Act and the Production Efficiency of Public Accounting Firms.pdfVIP

Chapter 10 The Sarbanes-Oxley Act and the Production Efficiency of Public Accounting Firms H. Chang, H.L. Choy, W.W. Cooper, and M.-H. Lina Introduction In response to a series of corporate and accounting frauds at high-profile companies such as Enron, WorldCom, Global Crossing, etc, President Bush signed the Sarbanes- Oxley Act (SOX) into law on July 30, 2002. The Act represents the most significant reform of the securities laws since passage of the Securities Act in 1933. One of the primary objectives of the Act is to improve the independence of auditors and the qual- ity of audit services. For instance, the Act prohibits public accounting firms from providing certain non-audit services that can potentially compromise their independ- ence. It also requires these audit firms to attest to their clients’ assessment of the effectiveness of internal control systems in their audit reports, and sets up a new pri- vate regulatory board, the Public Company Accounting Oversight Board (PCAOB), to oversee and investigate the audits and auditors of public companies. Over the last seven decades, the requirement that all publicly traded compa- nies have an annual audit of financial statements by an independent CPA has probably been the single biggest contributor to public accounting firm revenues. Historically, the second largest contributor to public accounting firm revenues has been the complexity of the Internal Revenue Code. However, the sector that has provided the greatest growth in public accounting firm revenues in recent years is management advisory services (MAS) or consulting. The increased complexity of the globally competitive economy and continuing developments in the infor- mation technology intensive business environment both spurred growth in the consulting area and this enabled the “Big 5” accounting firms to post double-digit annual revenue growth rates during the mid-1990s.1