Auditors and Regulatory Oversight

AUDITORS AND REGULATORY OVERSIGHT 5

Auditorsand Regulatory Oversight

TheSarbanes Oxley Act (SOX) describes a United States law, whichprotects investors through enhancing the reliability and accuracy ofcorporate disclosures that are made pursuant in regard to thesecurities laws and other purposes. Primarily, this law resulted froma continuous increase in the accounting scandals, which is usuallyassociated with falsification of the company’s financial statemententries (Fletcher&amp Plette, 2008). Different companies have been engaged in thesescandals, but this paper will focus on the Satyam Scandal.

Problemsin Satyam began in 2008, when Ramalinga Raju (the chairman) announceda bid worth $ 1.6 billion for two Maytas companies. In his move, thechairman claimed that he desired to deploy the resources available inbenefiting the investors. His announcement surprised most investors,leading to their withdrawal. Besides, due to the chairman’s move,the World Bank barred the company from its business for eight yearsbecause of offering bank staff with inappropriate benefits andcharged with bribing the staff and data theft. This resulted in thefalling of share price and the resignation of independent directors.Lastly, in 2009, Ramalinga Raju confessed of being involved in afinancial fraud through the manipulation of accounts by approximately$ 1.47 billion and later resigned as the chairman of the company. Thechairman was engaged in manipulating the accounts of the company byincreasing the number of employees from the actual 40,000 to a falsenumber of 53,000 the chairman withdrew $ 3 million every month forthe purpose of paying non-existing employees (Anjum,2012).

Aweek after the confession of the chairman, Price Waterhouse provideda report that provided an admission that the audit report, it hadprovided concerning the company was wrong since it had been providedon the ground of false statements, which had been offered by themanagement of Satyam. Since different parties had relied on the auditreport provided by the PWC, the CPA firm was liable for the damagesthat the audit report caused to third parties. Therefore, the PWC wasliable to pay for the damages, which it did. The Securities andExchange Commission (SEC) fined the CPA firm a fine of $ 6 millionbecause the firm did not follow auditing standards in performing itsduties associated with auditing the accounts of Satyam (Anjum,2012).

Itis a requirement for audit firms to consider checking the internalcontrols of the company being audited. This ensures that the auditfirms are capable of providing reports that are free from errors. Oneof the issues that the CPA Company violated in performing the auditof Satyam was failure to fully comprehend the internal control of thecompany. In case the audit firm fully understood the internal controlof the company, it could have noted the misrepresentation in thecompany’s financial accounts. Besides, the audit company did notobtain appropriate evidence concerning the financial statementsthrough inquiries, observation, confirmation, and inspection. Thisled to a violation in performing the audit of the company.

Themanagement and the auditor for financial reporting have theresponsibility of ensuring that the information that they provide areaccurate. In case the management does not take the responsibility ofproviding accurate information, there is a likelihood of facing alegal suit for not giving the right information that can be utilizedby different parties in making critical decisions. This is the samefor an auditor since the report of the auditor is also likely to beused in adding the confidence of investors. Therefore, there is aneed of ensuring responsibility in the case of both the managementand the auditor because their lack of showing responsibility canresult to a legal liability. However, their responsibility comparesin that the management is charged with the initial responsibility ofensuring that the financial reports that it provides for audit mustbe accurate. On the other hand, the auditor has a responsibility ofverifying the clarity and accuracy of the financial reports that themanagement provides. In this case, auditors have a greater burden ofensuring that the financial report that reaches the third party areaccurate or presents a true view of the organization being audited.The management has the responsibility of ensuring accuracy, but maychange the actual outlook of the financial reports in order to fittheir organization. However, the auditors are believed to provideindependent reports based on the real financial performance of anorganization. Hence, the auditor has a greater burden compared to themanagement.

ThePCAOB is usually charged with the responsibility of investigating anddisciplining public accounting firms and individuals that areassociated with these firms for noncompliance with the SOX. In casethere are violations, the PCAOB may impose the following sanctionssuspending or revoking a registration, suspending or barring anindividual from associating with a public accounting firm, limitingthe activities of a firm or an individual associated with the firm,and penalizing the firm up to $ 2 million for every violation, up toa maximum value of $ 15 million (Fletcher&amp Plette, 2008). From the case presented, I would haverecommended the PCAOB to penalize the audit firm $ 2 million forevery violation.

References

Anjum,Z. H. (2012).&nbspTheresurgence of Satyam: The global IT giant.

Fletcher,W. H., &amp Plette, T. N. (2008).&nbspTheSarbanes-Oxley Act: Implementation, significance, and impact.New York: Nova Science Publishers.