Question

In their Principles of Financial Accounting class, Batini has been studying the Sarbanes-Oxley Act. Which of the following is not a key component of the act?

O Accounting firms are prohibited from providing many types of non-audit and consulting services to the companies they audit.
O A public corporation must change its lead auditing firm every seven to ten years, depending on the size of the corporation.
O Auditors or accountants must maintain financial documents and audit work papers for usually five to seven years, depending on the type of document.
O The Securities and Exchange Commission (SEC) is required to establish a full-time, five-member public company accounting oversight board.

Answer 1

The incorrect statement about the Sarbanes-Oxley Act is that Oa public corporation must change its lead auditing firm every seven to ten years; this is not a requirement of the act. Instead, the act focuses on maintaining auditor independence, retaining financial documents, and establishing the PCAOB for audit oversight.

Step-by-step explanation:

In response to the student's inquiry regarding the Sarbanes-Oxley Act and its key components, it's important to clarify that one of the listed options is not an actual requirement of the act. The assertion that a public corporation must change its lead auditing firm every seven to ten years is incorrect. This specific rotation requirement does not exist within the Sarbanes-Oxley Act. The act did bring about significant changes, including:

• Prohibiting accounting firms from providing many types of non-audit and consulting services to the companies they audit in order to maintain auditor independence.
• Requiring auditors or accountants to maintain financial documents and audit work papers for a period of time, generally five to seven years.
• Mandating the establishment of the Public Company Accounting Oversight Board (PCAOB) by the Securities and Exchange Commission (SEC) to oversee the audits of public companies.

The Sarbanes-Oxley Act was enacted as a reaction to major corporate and accounting scandals to enhance corporate governance and increase the reliability of financial reporting for public corporations.