American Institute of Certified Public Accountants (AICPA) Practice Exam

What does the Sarbanes-Oxley Act of 2002 state regarding auditing services?

1. It prohibits auditing for any company

2. It prohibits auditing for a year after hiring specific executives

3. It allows for unlimited auditing services

4. It requires annual audits for all public companies

The correct answer is: It prohibits auditing for a year after hiring specific executives

The Sarbanes-Oxley Act of 2002 includes provisions that aim to enhance the accuracy of financial reporting and the independence of auditors. One significant aspect of the Act is its restriction on the provision of auditing services to companies where certain executives have been employed. Specifically, the Act prohibits an auditing firm from providing audit services to a public company for a year following the hiring of its CEO, CFO, or any significant financial officer from that auditing company. This measure is designed to prevent conflicts of interest and promote the integrity of the audit process by ensuring that there is a clear barrier between the auditors and those in charge of the company’s financial statements. The other answer choices do not accurately reflect the provisions of the Sarbanes-Oxley Act. For instance, the Act does not outright prohibit auditing services for any company, nor does it provide for unlimited auditing services or require annual audits for all public companies without exception. Thus, the specific restrictions around the time frame post-employment of key executives by auditing firms are well-defined and are part of the accountability measures instituted by the Act to enhance corporate governance and the credibility of financial reports.