Sarbanes-Oxley and the Accounting Profession: Public Interest Implications

Abstract

The US accounting profession was caught up in, and some say responsible for, the whirlwind of accounting and busi- ness scandals that rocked the US markets in 2002. To restore investor confidence in financial information, the Sar- banes-Oxley Act created a new Public Company Accounting Oversight Board with the authority to set standards for auditors of publicly traded companies, thus ending a century of professional regulation of auditing. In this analysis we employ sociological theories of professionalism [1-4] to help understand the implications of the Sarbanes-Oxley legisla- tion for the accounting profession and for the public interest. We explain why professional self-regulation is important for retaining valuable economic franchises. We also explain why the public interest orientation of the profession is im- portant and how government take-over of auditing standards potentially erodes the public accounting profession’s commitment to the public interest. Self-control over professional work, a key characteristic of professional status, is pre-empted by the newly created government oversight body PCAOB. With government takeover of oversight of audit- ing practice, claims to professional status are weakened and professional commitment to and involvement with vital work standards may suffer. In addition, the profession may no longer have incentives to promote the public interest or to innovate and change in response to changing conditions. We also trace events leading up to Sarbanes-Oxley legisla- tion and conclude that underlying problems arising from internal work differentiation as consulting work became more profitable and glamorous and development of a commercially oriented work culture may continue to threaten the pro- fession in the future. Finally, we speculate that the greatest costs may be opportunity costs as the profession no longer has the incentives or ability to innovate and embrace new forms of accountability.