Auditors and Regulatory Oversight

Auditors and Regulatory Oversight
   Auditors and Regulatory Oversight

Auditors and Regulatory Oversight

Order Instructions:

Auditors and Regulatory Oversight

The Securities and Exchange Commission (SEC) regulates public companies. The SEC has found that some of these companies have violated GAAP by using creative accounting practices to mislead investors and creditors regarding the health of their company.
Use the Internet or Library to research a recent accounting scandal within the last five (5) years where the SEC accused public companies of accounting irregularities.
Write a three to four (3-4) page paper in which you:

1.Analyze the audit report that the CPA firm issued. Ascertain the legal liability to third parties who relied on financial statements under both common and federal securities laws. Justify your response.

2.Speculate on which statement of generally acceptable auditing standards (GAAS) that the company violated in performing the audit.

3.Compare the responsibility of both management and the auditor for financial reporting, and give your opinion as to which party should have the greater burden. Defend your position.

4.Analyze the sanctions available under SOX, and recommend the key action(s) that the PCAOB should take in order to hold management or the audit firm accountable for the accounting irregularities. Provide a rationale for your response.

5.Use at least three (3) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

•Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

•Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:
•Analyze the required generally accepted auditing standards, professional ethics, and legal liability of the auditor.
•Assess how the Sarbanes-Oxley Act has affected auditing.
•Evaluate an audit report.
•Evaluate objectives for conducting audits, and compare management’s and auditors’ responsibilities.
•Use technology and information resources to research issues in auditing.
•Write clearly and concisely about auditing using proper writing mechanics.


Efficacy in oversight of audit reports is very fundamental in ensuring that there is integrity in financial reporting. Acceptable auditing standards are very key to any auditing firm or individual auditors. This research aims at critically analyzing these standards, legal liability of parties’ involved and general professional ethics that needs to be upheld by auditors. However, for the past few years many cases of sub-optimal procedures and oversight framework processes have been witnessed. Most of the accounting firms have been involved in unscrupulous practices with some committing harder to detect financial frauds (Wines, 2010). According to Wall Street however, measures by Securities and Exchange Commission (SEC) to step up their accounting fraud policing has witnessed the unveiling of Accounting Quality Model which has enabled such frauds to be sniffed out.

In August, 2014 Wall Street journal reported allegations accounting misconduct by CVS Caremark Corp. that boosted reported revenue in 2009. This is further backed by the United States Securities and Exchange Commission; Form 10-K Item 3 (8) on legal proceedings where CVS received subpoenas and requests on information regarding the same allegations. In the audit report, prospectus supplements for 1billion US dollars offering was not well disclosed in the fiscal year that ended December 31, 2008. This was not further described in forms 10Q or 8K that were subsequently filed by CVS. It is noted that CVS lost several Pharmacy Benefits Manager (PBM) contracts that was significant for 2010 that would have resulted in a 125% net loss in revenue during that season which was not indicated or disclosed in their report. These key findings show clearly that CVS misled investors (third parties) on their expectations towards financial results of the PBM segment. According to release by the centers for Medicare and Medicaid Services, CVS fared very poorly for the bidding process in Medicare Part D which according to the release the company stood to loose as much as $101 million earnings before taxes and interest.

In failing to disclose the true status of the company, CVS contravened SEC rule 10b-5 that “prohibits making of any untrue statement of a material fact or omitting to state a material necessary in making the statements made. In light of the circumstances under which they were made, and not misleading in connection with the buying or selling of any security.” CVS was solely responsible in submitting corrective disclosure in which it had to relate to the matter either as misrepresentation on omission (Business, 2013). CVS had violated generally acceptable accounting standards, by failing to precisely disclosing material trends, trace of misstatements in their report and changing calculation methodologies which had significant change in directional trends. To an a big extend, auditors carried the biggest responsibility by further alluding the retention rate of PBM as 92% as opposed to actual 88% which they had knowingly changed the way retention rate was calculated thereby omitting $1.7 billion expected revenue loss from being unsuccessful in Medicare part D bidding (Business, 2013). The company suffered a big blow when it was sanctioned and requested to pay $20 million to settle the allegations. Management was also culpable but on only before enacting Sarbanes Oxley Act when recruitment, assessment and independence of an auditor was determined by the management. Since then Audit committees have been tasked with oversight of quality and integrity of financial statements of a given company.

These forms of malpractices are the basis in which Sarbanes-Oxley Act became mandated with harsh regulations to increase auditor’s liability (Deng, 2012). This outlines measures that ought to be taken to make corporations organizations to have more usefulness and reliability in their financial disclosures. Since investors significantly rely on an auditor as a mechanism in which the firm can credibly communicate a company’s value, there’s a great need to build on that trust. SOX has took this to the next level when they ushered in Public Company Accounting Oversight Board (PCAOB) which has strengthened corporate governance. Through PCAOB, SOX sets the required standards, Conducts inspections and enforces disciplinary measures against unruly auditors. PCAOB has the utmost power to impose hefty fines to individual auditors or auditing firms, revokes registration licenses prohibits association with other audit firms (Deng, 2012). However, there is still a lot to be done in regards to enforcing discipline in management.

While most companies absolve themselves from responsibility when such cases of anomalies occurs, it should be noted that it is always their primary responsibility to protect the investors’ interest. As was the case of CVS Caremark Corp. who claimed that it was public knowledge that the loss of their three major customers could not have caused the share price drop. This was true though they failed to own up to as why they lost the three customers (Business Report, 2013). In deed the more reason why PCAOB needs to strengthen their enforcement capabilities targeting the management and governance of concerned corporations. Measures such as Chief Executives of companies having to certify financial reports before being circulated to the public are good in accounting practice. Ensuring that auditors are not given misleading information in the first is also another vital concern for most auditors (Deng, 2012).

Regulatory oversight of all auditing firms and individual auditors should always be carried in a manner that is both fair and professionally acceptable. In recent years unintended consequences of Sarbanes Oxley Act have to some extend witnessed a collapse in investments. It is therefore paramount to a have a balance between Capital markets, auditors’ liability and investments.


Business Torts Reporter (2013). Securities Litigation and Fraud. Database: Business Source Complete. 25 (9) 250-254.

Caskey, J. & Hanlon, M. (2013). Divident Policy at Firms Accused of Accounting Fraud. Contemporary Accounting Research. 30 (2) 818-850

Deng, M, Melumad, N & Shibano, T. (2012). Auditors’ Liability, Investments, and Capital Markets: A Potential Unintended Consequences of the Sarbanes-Oxley Act. Journal of Accounting Research. 50 (5) 1179-1216

Wines, L. G, & Houghton, K.A. (2010). Anomalies in the Oversight of Australian Auditors. Australian Accounting Review. 20 (2) 83-95

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