A run in of corporate fraud in the early 2000’s with such companies as Enron, World Com and Tyco deeply influenced public awareness. New regulations were developed. Corporate fraud was being seriously investigated. These scandals actually opened new opportunities for accountants in such areas as forensic accounting. A CPA’s expert knowledge of accounting and finance; combined with investigational techniques and law made it a perfect union for examining criminal financial transactions. Forensic accountants help with interpreting whether activities are illegal in such areas as; financial statement fraud, money laundering, embezzlement, bankruptcies, contract disputes, insurance claims, and securities fraud. They work with lawyers, law enforcement personnel and can also be an expert witness during a trial (Accountants and Auditors, n.d; Kruglinski, 2009).
The added use of information technology has increased the existence of computer crimes such as; identity theft, e-mail phishing, computer hacking, software piracy, purposefully spreading computer viruses, stealing computer files and data, e-commerce sales scams and the list goes on and on. The job market is open to CPA’s who meet the AICPA’s qualifications to become Certified in Financial Forensics (CFF) for a career in fraud prevention. Also the Association of Certified Fraud Examiners offers Certified Fraud Examiner (CFE) credentials. Forensic accounting services are very much needed and in high demand (Kruglinski, 2009).
The Sarbanes-Oxley Act of 2002: Internal Controls, Internal and External Auditors
Since the Stock Market Crash of 1929 there has not been a piece of legislation written that changed the culture and the operations of publicly held companies until October of 2002 when Congress passed the Sarbanes-Oxley Act also known as “SOX.” The law was passed in an effort to stop corporate accounting fraud and consider the shareholders best interest first (McNamara, 2006).
Since the enactment, publicly held companies were required to uphold strict internal controls. The CEO and the CFO were now personally responsible for reporting financial information. Instantly there was a demand to ensure accuracy in business systems. They were required to have internal controls for operating practices, policies and procedures written and communicated. In order to accomplish this task, management accountants and internal auditors would be needed. This created new challenges for CPAs (McNamara, 2006; Accountant and Auditors, n.d.).
An importance was placed on audits of financial controls. CPA’s began assisting the executive officers to ensure the financial reports where ready to be audited. The Act prohibits accountants from managing and consulting clients whose books they were auditing. As a result, the company had to hire two separate accounting firms. The internal auditor was hired to make certain the company was in compliance with corporate policies and government regulations. These internal auditors could actually design internal controls and evaluate the effectiveness and efficiency of the company’s computer systems. By documenting and testing internal controls on real-time data they could ensure the company’s reliability of financial reporting (Accountant and Auditors, n.d.; Kruglinski, 2009).
The external auditor was hired to conduct an audit which is an examination of the company’s accounting information and financial statements. The auditor is to compile a report which is a formal statement of the auditor’s opinion as to whether or not the financial statements present fairly in conformity with generally accepted accounting principles (GAAP). This report is something that shareholders and the board of directors, investors, authorities and institutions rely on to be certain that the statements are prepared and reported properly. Under Sarbanes-Oxley a report on the company’s internal controls is also required or combined with the audit report (Accountant and Auditors, n.d; Gibson, 2007, p.52-53).
According to Section 404 of the Sarbanes-Oxley Act, “It emphasizes the importance of internal control and makes management responsible for internal controls” (Gibson, 2007, p.52). The external auditor refers to, The Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the, “Standard for evaluating the effectiveness of the internal control systems” (Gibson, 2007, p.51). This piece of legislation was passed as a result of the accounting sandals to try and restore ethical business practices and public confidence in large corporations (McNamara, 2006).