SOX, PCAOB, and Financial Reporting Quality Analysis

The Sarbanes-Oxley Act and Accounting Quality

The Sarbanes-Oxley (SOX) Act was created with the intent of improving the quality of accounting, the reliability of financial statements for investors, and providing oversight to accounting professionals through the creation of a new federal agency, the Public Company Accounting Oversight Board (PCAOB). SOX has been successful and is comprehensively credited for strengthening several areas. One of these areas encompasses CFO and CEO responsibility and accountability regarding all financial disclosures and associated controls. A second aspect involves increased competence and commitment on the part of corporate audit committees. Overall, SOX has been quite effective and successful in increasing focus and emphasis on a strong ethical organizational culture in companies (Verschoor, 2012).

One of the positive impacts of the SOX Act is that it caused a decline in the number of financial restatements made by companies. In addition, the Act has also brought about a major decrease in securities class actions filed in the past few years, which implies that companies have exercised much greater caution (Harwood and Simmons, 2012). Furthermore, the Sarbanes-Oxley Act is widely regarded as a success when one considers the benefits that accompany compliance. Financial data reported today is therefore more accurate and reliable than it was prior to the Act's passage.

PCAOB and Federal Regulation of Public Accounting

The Public Company Accounting Oversight Board (PCAOB) was established to oversee the audits of public corporations' conformance with the Sarbanes-Oxley Act. The PCAOB was formed to safeguard not only investors but also the general public by ensuring audits are both accurate and independent (PCAOB, 2016). There is strong reason to support the federal regulation of the accounting profession, as it has led to a significant decline in financial scandals.

The PCAOB has had a positive impact on the profession. In particular, the PCAOB has issued several general reports, practice guidelines for staff, and other public documentation that shed light on a variety of outcomes arising in the course of inspections of public companies. In response to these findings, various regulators have taken enforcement actions with respect to violations of these standards and their associated laws and regulations (Franzel, 2014). The inability of the profession to self-regulate made this external oversight both necessary and justified.

Financial Restatements and Public Trust

When a company resorts to repeated financial restatements, it has an adverse impact on public trust; the public tends to view such actions as a form of cover-up or malicious conduct. Various actions can be undertaken to minimize negative impressions. One approach is to provide clear statements that substantiate the nature of the issue, offering explanations to analysts, which aids better reception by the public. Another action is communicating openly from the outset, as this provides more information and leads consumers to assume that the problems are less widespread.

A further action is for executive managers to accept responsibility, since a failure to do so is likely to erode public trust even further. A company should also undertake corporate governance measures. In particular, the firm should demonstrate not only its dedication to corporate governance but also its capacity to take appropriate and fitting action. Such measures curtail fears that the company will act with malevolent intent going forward. In addition, diligently abiding by policies and regulations following a restatement helps a company rebuild trust, seemingly because the market once again becomes more confident that future incidents of misconduct will be avoided (Walker, 2009).