As we acknowledge the 10th anniversary of the Sarbanes-Oxley Act, we are once again in a period of re-examination of the role, relevance and reliability of financial audits in protecting investors and the public interest. This seems to be, in part, a reaction to the financial crisis of the past few years.
To lend some historical perspective to the current situation, nearly 80 years ago, federal securities acts provided the profession with the independent audit function. During the next 40 years, the profession worked on fulfilling the trusted attestation function over the financial reporting for securities issuers. There were some bumps and many adjustments along the way.
Fast-forward to the 1970s, and there were a series of unexpected failures of large public companies that raised serious questions about corporate accountability and whether auditors were living up to the expectations of the investing public. And then during the 1980s and early 1990s, the country faced a full-blown savings and loan and banking crisis, which once again called into question the integrity of financial reporting and auditing.
Then in the late 1990s and into 2002, we had deja vu all over again when a massive number of financial reporting and auditing failures caused yet another failure of confidence in the integrity of the financial markets.
To restore investor confidence and to improve the independence and quality of audits, Congress overwhelmingly passed the Sarbanes-Oxley Act of 2002. In addition to corporate responsibility and other reforms, the act established the Public Company Accounting Oversight Board, ending more than a century of self-regulation by the public accounting profession.
Many stakeholders and members of the profession have told the PCAOB that they believe auditor independence and audit quality have been strengthened since the passage of the act. Given the fundamental changes that have been implemented as a result of the act and the various studies that have been done, it seems reasonable to conclude that conditions have indeed improved.
Yet based on what we've learned through the history of the profession, we can never let down our guard on these issues. We must remain mindful that the fundamental qualities of auditor independence, objectivity, and high-quality, reliable assurance are what provide value in what the profession does. And we must take the actions necessary to guard and preserve those qualities well into the future.
Jeanette Franzel is a board member of the PCAOB.
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