Final answer:
The American Institute of Certified Public Accountants was responsible for establishing auditing standards before the enactment of the Sarbanes-Oxley Act. The Act created the Public Company Accounting Oversight Board to oversee auditing standards, in response to major accounting scandals, with an aim to protect investors and increase transparency in financial reporting. c) American Institute of Certified Public Accountants
Step-by-step explanation:
Prior to the passage of the Sarbanes-Oxley Act in 2002, the responsibility for establishing auditing standards fell to the American Institute of Certified Public Accountants (AICPA). The AICPA is a professional organization of Certified Public Accountants (CPAs) in the United States, which had set ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state, and local governments. It also developed and graded the Uniform CPA Examination. However, due to several high-profile corporate scandals, like those involving Enron, Tyco International, and WorldCom, there was a widespread demand for enhanced standards and regulation.
The Sarbanes-Oxley Act was a legislative response to these corporate scandals. It was designed to increase confidence in financial reports provided by public corporations and to protect investors from accounting fraud. This Act led to the creation of the Public Company Accounting Oversight Board (PCAOB), which took over the role of setting auditing standards for public companies. The move was rooted in the belief that the independence and rigor of auditing processes needed to be strengthened to provide investors with more reliable and transparent financial information from the firms in which they invested.
By shifting the authority to set standards from a professional association to a governmental body, Sarbanes-Oxley aimed to put in place a system that could better detect and prevent fraudulent activities and misrepresentations in financial statements. This development marked a significant change in the regulation of financial reporting and brought to light the importance of corporate governance and transparency.