Forensic Accounting and Sarbanes Oxley Act 2002 - Essay Example

The Sarbanes Oxley Act 2002 and the standard set out by its governing board PCAOB are examined for making ground for forensic accounting.

As the U.S. corporate sector reporting is plagued with a continuum of frauds and deliberate accounting errors and manipulation and most of these cases are pending in the courts for due decisions. The need for forensic accounting becomes undoubtedly at its peak as accountants and lawyers seek supportive evidence which is rather factual rather than opinion based. The legal proceedings have become lengthy and complex as businesses and transactions are becoming complicated with too much information in terms of the ways they are carried out and information related to them is dispersed and difficult to gather. Forensic accountants or lawyers need to be competent and knowledgeable to identify weaknesses in the reporting system and prepare factual documentation regarding an issue or a transaction that is being challenged in court.

The role of companies' audit committees and external auditors is challenged by plaintiffs including regulatory bodies, stakeholders, creditors, and the general public in fraud cases. The outcome of this severe criticism was the introduction of the SOX 2002. The SOX requires auditors to carry out their audit engagement responsibilities by the ‘auditing and related professional standards laid out by PCAOB (PCAOB, 2004).

Companies hire forensic accountants not only to provide litigation support but also to help them in managing their internal reporting. Auditors are now required to audit management’s assertion on the effectiveness of internal controls over financial reporting (PCAOB, 2007). Information systems are an integral part of internal reporting and data should be made accessible to auditors who need to carry out tests to assure the effectiveness of the system and the completeness of information managed and generated. Additionally, auditors should acquire written confirmation representation of control tests and their outcomes from the management as evidence (PCAOB, 2007).

From this, it could be derived that audit documentation is very important which is the ‘written record of the basis for the auditor's conclusions that provides the support for the auditor's representations, whether those representations are contained in the auditor's report or otherwise’ (PCAOB, 2008). These documents could later be referred to by forensic accountants to suggest any material misstatement or any other issues which could be contagious in the company’s reporting. Thus, the role of the auditor to identify any continuation of material misstatements and weaknesses set by PCAOB’s Auditing Standard no. 4 is crucially important and could help in tracing back evidence required by forensic accounting.

In various cases, top management is blamed for manipulating corporate accounts by changing the accounting treatment of transactions or seeking false opportunities available due to loops in accounting standards. Forensic accountants or auditors should evaluate whether financial statements are prepared with consistency and whether adequate disclosure is made in particular to correction about previously reported material misstatements and also change in accounting treatment (PCAOB, 2008). Read More