More than two years after federal law changed the way accounting firms conduct business, the head of the profession's advocacy says significant challenges remain. The Sarbanes-Oxley Act took effect in April 2003 and has been characterized as the most significant piece of legislation to hit the accounting profession since the Securities Act of 1933.
Barry Melancon, who has served as president and CEO of the New York City-based American Institute of Certified Public Accountants since 1995, said accounting firms are still adjusting to the changes.
"Yes, Sarbanes in the public-company area, is a big deal," he said. "It's a big implementation issue. The firms are working very hard to be responsive to the expectations."
The piece of the legislation that is garnering much of the attention is Section 404, which requires corporations to assess the internal accounting controls they have in place to ensure their financial reporting is accurate and reliable. It also requires accounting firms to vouch for those controls.
To keep pace, larger firms are courting accounting professionals with between three and five years'experience, Melancon said. But mid-size practices are benefiting from Sarbanes-Oxley, too. That's because they are picking up the work their bigger counterparts no longer have time for.
"In evaluating the cost [to public companies] you have to look at the benefit," he said. "The modifications have helped stabilize, and increased the confidence, in the markets."
That confidence eroded after executives at several public companies, including Enron and MCI WorldCom, were accused of inflating earnings to prop up share prices. In the case of Enron, the federal government indicted Chicago-based Arthur Andersen LLP in 2002 on obstruction of justice charges for allegedly shredding documents. The U.S. Supreme Court last month, however, threw out the jury verdict in the Andersen case. The AICPA supported the former accounting firm in court filings, Melancon said.
"I think the Supreme Court decision clearly said that this wasn't right, and the way this conviction was obtained wasn't right," he said. "I think that was a very positive thing for employees. Unfortunately, it doesn't get their jobs or their firm back."
The accounting profession's image suffered following the corporate scandals. But Melancon thinks changes are afoot. The AICPA conducts frequent surveys relating to the accounting field and many show the public's trust in the profession is equal to, or better than, what it was before the Enron debacle, Melancon said.
Moreover, increasing enrollments in college accounting programs show young people are interested in the profession as a career, he said, noting enrollments had dipped the latter half of the 1990s, even before the scandals. Today, accounting is the top major among business students, he added.
Sarbanes-Oxley may have forever changed the way accounting firms conduct audits, but it is doubtful corporate fraud, like crime in general, will ever be totally eliminated, Melancon said. The responsibility to report fraud, he said, rests with all involved, including auditors, audit committees, board directors and company executives.
"The only way as a society to reduce corporate fraud is for every one of those to be more diligent," Melancon said. "Everyone has to do their part. It's got to be everybody's job."