Accounting educators' perceptions of the Sarbanes-Oxley Act of 2002 and their role in preparing students for a challenging profession.

James, Marianne L.

ABSTRACT

Concerns over the effects of financial reporting scandals involving large corporations and public accounting firms have led to the creation of the Sarbanes-Oxley Act of 2002 (SOA). The purpose of this Act is to preserve and enhance the integrity of financial reporting and auditing, and protect financial statement users.

This study investigates accounting educators' perceptions of key provisions of the SOA and their effects on financial statement and audit quality, as well as accounting educators' role in preparing their students for a challenging and changing profession.

The study finds that the majority of the 74 accounting faculty completing a mailed questionnaire perceive that non-audit services (NAS) should be prohibited, that the certification requirement is appropriate, and that audit and financial statement quality will improve. Surprisingly, educators who had prior experience with a global accounting firm are as likely to perceive that NAS should be prohibited, as are those who did not have such prior experience. The majority also approve of the composition of the Public Company Accounting Oversight Board, but some perceive its scope as too extensive. The majority have already implemented class discussions of the SOA, and recommend integrating business and professional ethics, and current issues and rules in class discussions.

These findings are important because accounting educators play a very significant role in preparing students for a changing and challenging profession, and their perceptions will influence the extent, manner, and nature of class discussions of the SOA.

INTRODUCTION

Financial reporting scandals involving large, once-prestigious public companies, such as ENRON and WorldCom have impaired financial statement users' confidence in the integrity and usefulness of financial statements. The Sarbanes-Oxley Act of 2002 (SOA) was created and signed into law by President Bush on July 30, 2002 to help improve financial reporting, preserve the integrity of financial statements and audits, and restore investors' and other users' confidence.

Key provisions of the SOA designed to accomplish these goals are a) enhanced regulation of auditing by the newly created Public Company Accounting Oversight Board (PCAOB), b) the prohibition of certain non-audit services (NAS) for audit clients, and c) required certification of financial reports by chief financial and executive officers (CFOs, CEOs) of public companies.

The success of the SOA in achieving the goals set by lawmakers is uncertain and depends on effective enforcement and compliance. Compliance requires knowledge and understanding of the often complex provisions of the SOA by current and future accounting professionals. Accounting educators are at the forefront of helping students learn the requirements and understand the effects of the SOA, and in helping students prepare for a challenging and changing profession. Accounting educators' perceptions regarding the SOA are important as they will tend to influence the extent, nature, and content of in-class discussions of the SOA.

The purpose of this study is to investigate accounting educators' perceptions of (a) key provisions of the SOA, (b) the effect of the provisions on financial statement and audit quality, and audit pricing, (c) factors affected educator' perceptions (e.g., prior global accounting experience), and (d) accounting educators' role in helping students prepare for a challenging and changing career.

The study finds that the majority of the 74 accounting faculty completing a mailed questionnaire, support prohibiting the NAS banned by the SOA and believe that this will improve both factual and perceived audit quality. The support for prohibiting NAS is highest with respect to management functions. Surprisingly, prior working experience in large public accounting firms does not appear to significantly influence the faculty's perceptions. Specifically, faculty with prior experience working for a large global accounting firm are as likely to perceive that NAS should be prohibited, as are those who did not have such prior experience.

Accounting faculty are more likely to perceive that it is necessary to prohibit the NAS disallowed by the SOA (i.e., bookkeeping, management, financial information systems, appraisal, actuarial, internal audit, broker/dealer, and legal NAS), than tax related services.

The majority of the faculty also perceive that the CEO/CFO certification requirement is necessary and that it will lead to improved financial statement quality. The majority also perceive that the PCAOB's composition is appropriate, but is divided concerning the appropriateness of its scope.

Those who perceive that prohibiting NAS will improve perceived audit quality are more likely to support prohibiting financial information systems design and implementation. Those who perceive that it will improve factual audit quality are more likely to support prohibiting financial information systems design and implementation and tax services.

The majority of the faculty report that they have already implemented discussions of the SOA in their accounting classes, and recommend integrating business and professional ethics, and current issues and rules in class discussions.

Findings from this study are important because support from educators is very significant to the ultimate success of the SOA in helping improve financial reporting and auditing, and restoring financial statement users' confidence.

REVIEW OF THE LITERATURE

On July 30, 2002, President Bush signed the SOA into law, which is the result of combined efforts by members of the U.S. Congress and representatives of regulatory agencies. The SOA was created in response to significant and highly publicized financial reporting scandals involving large public companies (e.g., ENRON, WorldCom), which have shaken financial statement users' confidence in the integrity and usefulness of financial reporting and auditing, and resulted in tremendous losses to investors, including employee stockholders. The stated purposes of the SOA is "To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes." (H.R. 3763, 2002).

Enhancing reliability is not a new objective. More than two decades ago, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Concepts No. 2 (SFAC 2), which identifies reliability together with relevance as the key qualitative characteristics of useful financial accounting information (FASB, 1980). SFAC 2, which is an integral part of FASB's conceptual framework also identifies verifiability, neutrality, and representational faithfulness as necessary ingredients of reliability. In a recent statement, Mr. John M. Foster, who completed his ten-year tenure as a FASB member on June 30, 2003, emphasizes that neutral financial reporting was and continues to be one of the most important issues for the FASB. He also stresses the importance of neutrality to U.S. capital markets and points out that U.S. capital markets can allocate resources efficiently, only if "creditable, reliable and neutral financial information" (Foster, 2003) is available.

Financial statement auditors play a key role in helping preserve the quality of financial reporting. An unqualified auditor opinion enhances the credibility of financial statements. The value of the audit depends on the integrity and independence of the auditor. Independence, both in fact and appearance, are required and influence the perceptions of financial statement users. Regrettably, some of the recent financial reporting scandals (e.g., ENRON) suggest significant audit failures, and have contributed to the decline in investors' confidence. In fact, according to a New Jersey Gallup poll, accountants' public approval rating has declined from a high rating of 39 in 2001 to 0 in 2002, and has recovered only recently to a rating of 31 (Telberg, 2003).

Key Provisions of the SOA

The provisions of the SOA, which are organized in eleven titles each with many sections, affect public accountants, public companies and their executives and accountants, financial statement analysts, attorneys, and ultimately financial statement users. Violations of the SOA, which also enhances legal penalties for financial statement fraud, are considered violations of the SEC Act of 1934 (H.R. 3763, 2002, a3b1). The following paragraphs briefly discuss the key provisions of the SOA that are pertinent to this study.

Title I of the SOA stipulates the creation of the Public Company Accounting Oversight Board (PCAOB), and specifies the Board's composition, scope, duties, and authority. The PCAOB consists of five member--two certified public accountants and three non-CPAs. (H.R. 3763, 2002, Section 101). Its mission is "... to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports." (PCAOB, 2003). Mr. William J. McDonough, former president of the Federal Reserve Bank of New York serves as Chair of the PCAOB effective June 11, 2003 (SEC, 2003a).

One of the key provisions affecting public accounting firms is the requirement that U.S. and non-U.S. public accounting firms who audit U.S. companies must register with the PCAOB (HR 3763, 2003, 102). In addition, the SOA grants the PCAOB the authority to set auditing standards, a role which until recently was performed by the American Institute of Certified Public Accountants (AICPA). It appears that the PCAOB intends to exert its authority as auditing standard setter. In a recent letter to the AICPA, the PCAOB emphasizes its sole authority to promulgate auditing standards (SEC, 2003a). In addition, the PCAOB will conduct reviews of public accounting firms, which until recently were made by peer firms within the profession (HR 3763, 2003, 103).

Title II of the SOA focuses on auditor independence. One of the key provisions affecting public accounting firms and their audit clients is the restriction of NAS for audit clients. This restriction is not surprising. Even during the 1970s, Congress considered restricting the types of NAS that could be provided to audit clients (SEC, 2000c, Note 70). At that time, NAS did not represent a significant part of large public accounting firms' revenues, and restrictions were not mandated. However, for the past two decades, NAS have proliferated and increased in importance, particularly to large public accounting firms. Between 1982 and 1988, NAS increased annually by about 3.8% (Read and Tomczyk, 1992). Research by Beck et al. (1988) suggests that incremental economic bonding occurs between auditors and auditees when auditors perform NAS for their audit clients. During the 1990s, public accounting firms continued to expand and diversify their offering of NAS, adding services such as employee benefit consulting, litigation support, and internal auditing to their already existing NAS offering of tax services and management information systems consulting. As NAS proliferated, concern over its effects on auditors' independence intensified, but again did not lead to the prohibition of such services. By the year 2000, only about 30 percent of the largest public accounting firms' revenues were derived from audit fees (Levitt, 2000a). Former Federal Reserve Board Chair Paul Volker expresses his concerns regarding the effect of NAS on auditors' independence. He states, "The perception is there because there is a real conflict of interest." (Volker, SEC, 2000b). Despite mounting criticism, the majority of auditors did not perceive a problem. For example, a study on internal audit outsourcing, which proliferated in the 1990s and early 2000s finds that 86% of partners from large public accounting firms responding to a survey perceive that performing the internal audit function for audit clients is acceptable (James, 2001).

During 2000, under the direction of Chair Arthur Levitt, the SEC issued an auditor independence proposal that would have prohibited audit firms from providing certain NAS for their audit clients. The proposal met with considerable opposition and generated over 3,000 comment letters sent to the SEC. Among those who sharply objected were several of the Big 5 accounting firms. The final rule, which was issued on November 21, 2000 (SEC, 2000c), represents a compromise that restricts but does not prohibit these services.

In several of the recent large-scale financial reporting scandals, some degree of audit failure occurred. In most cases, the public accounting firms also performed NAS for those audit clients. Nearly two years later, after the largest corporate bankruptcy in U.S. history and the demise of one of the premier public accounting firms, the SOA prohibits virtually the same NAS as the original SEC proposal did.

Specifically, Section 201 of the SOA prohibits public accounting firms from providing the following NAS for SEC reporting audit clients:

"(1) bookkeeping or other services related to the accounting records or financial statements of the audit clients;

(2) financial information systems design and implementations;

(3) appraisal or valuation services fairness opinions or contribution-in-kind reports;

(4) actuarial services;

(5) internal audit outsourcing services;

(6) management functions or human resources;

(7) broker or dealer investment advisor or investment banking services;

(8) legal services and expert services unrelated to the audit; and

(9) any other service that the Board determines by regulation is impermissible." (H.R.3763, 2002, 201).

Initially, even tax services, which together with auditing were the services traditionally provided by public accounting firms, were considered for inclusion in this list of prohibited NAS. However, the SOA permits public accounting firms to continue providing tax services for audit clients if they are pre-approved by a corporation's audit committee. Similarly, all other NAS not specifically prohibited, must be approved by the audit committee prior to performance (H.R. 3763, 2002, 202).

Another key provision of the SOA is the requirement that the CEOs and CFOs of SEC reporting companies must certify their quarterly and annual reports. Specifically, Section 302 of Title III, requires that CEOs and CFOs certify that they have reviewed the reports, that the reports contain no untrue statements or omissions of material facts, and that the information fairly presents the underlying economic events. (H.R. 3763, 2002, 302).

Effects of the SOA

The ultimate effectiveness of this new law, which affects U.S. and even some non-U.S. accountants, corporations and executives, attorneys, and financial statement users, is uncertain. Enforcement and compliance are essential for its success. However, some of the provisions are complex and may require interpretation. For example, the rules regarding loans to company executives was said to be so broadly written that 25 attorneys composed an interpretation of the rules. Other rules, such as those relating to financial measures, also are perceived as too difficult to understand. (Solomon, 2003).

Unintended consequences may occur. For example, some attribute the current year reduction in capital raised by foreign firms in U.S. markets to the firms' uncertainty regarding the jurisdiction of the SOA to their ventures (Karmin, 2003). Some critics question whether the SOA will improve actual corporate governance and assert that some of the issues, such as executive compensation have not been addressed (Hymowitz & Lublin, 2003).

Even Rep. Michael G. Oxley and Sen. Paul Sarbanes, after whom the SOA is named, express concern about some of the effects of the new law (Solomon, 2003). Both express concern over the increasing consolidation and concentration within the audit profession, and Sen. Sarbanes voices concern about the potential unintended effect of companies' increased risk aversion. Other critics express uncertainty of whether the SOA will in fact improve corporate governance (Hymowitz & Lublin, 2003). Robert Elliott, former head of the AICPA, reportedly referred to the results of the SOA as the "the criminalization of [corporate] risk taking." (Schroeder, 2003).

Audit prices may also be affected by the changes in law. For years, concern has been raised that audit services may be underpriced and to some degree subsidized by NAS. For example, in 2002, the SEC charged one of the largest public accounting firms with attempting to obtain consulting contracts by offering lower audit fees (Schroeder & Paltro, 2003). Some indications of increases in audit fees already exist. One survey by an auditing consulting firm finds that for companies with minimum sales of $3 billion, external audit fees had tripled during 2003 (Schroeder, 2003). While other fees, such as those for director and executive insurance and attorney fees also are expected to increase, audit fees are expected to increase most significantly (Schroeder, 2003).

While the SOA applies specifically to public SEC registrants, the law also appears to positively affect smaller non-public firms. A recent article in the Wall Street Journal (Murray, 2003) cites a study by Robert Half Management involving 1,400 CFOs of private U.S. companies. The study finds that 58% of the CFOs report that their company has taken or plans to take steps to better control accounting practices, that 44% have reviewed or changed current accounting practices, and that 36% have created or expanded their company's internal audit function.

The SOA also affects professional organizations, particularly the AICPA. The role of the AICPA is changing, not only as auditing standard setter, but also its role in promulgating some GAAP. Until recently, the AICPA issued Statements of Opinion (SOP) and industry specific standards, which became part of Generally Accepted Accounting Principles (GAAP). However, in his speech before the Financial Executive Institute, Robert Herz, Chair of the FASB states, "... while the AICPA may choose to continue to issue industry accounting and auditing guides by way of implementation guidance, it would cease issuing Statements of Position that create new GAAP" (Herz, FASB, 2002).

Accounting Educators' Role

The accounting profession and corporate governance are changing. Accounting professionals must understand the provisions and implications of the SOA and know how to comply with them, in order to meet the challenges brought forth by these changes. Accounting educators play an important role in helping future professionals disseminate and understand the requirements and helping them prepare for their challenging careers. They can be powerful role models, motivating future professionals to contribute to the success of the SOA--to preserve the integrity of financial reporting and auditing, and restore public confidence in financial reporting.

RESEARCH QUESTIONS AND HYPOTHESIS DEVELOPMENT

Accounting educators' perceptions regarding the SOA, and its effects on the accounting profession, corporations, and others tend to influence the extent, manner, and nature of class discussions. Thus, accounting educators' perceptions play an important role. Knowledge of their perceptions, and factors that may influence those perceptions will help assess and address the challenges and issues that lie ahead.

The following research questions were posed to investigate accounting educators' perceptions regarding the SOA and their role in preparing students for a challenging profession:

1. Do accounting educators support the requirements of the SOA to:

a. prohibit bookkeeping financial information systems appraisal actuarial internal audit management and human resources broker or dealer investment and banking legal and expert NAS?

b. continue to permit tax services that are pre-approved by the audit committee?

c. require that CFOs and CEOs certify their financial reports?

2. Do accounting educators perceive that the provisions of the SOA will:

a. improve factual audit quality?

b. improve perceived audit quality?

c. improve the quality of financial statements?

d. increase decrease or keep audit prices unchanged?

3. Do accounting educators agree with the PCAOB's composition its scope and duties?

4. Does prior working experience in a large global public accounting firm influence their perceptions?

5. Have accounting educators implemented discussions of the SOA in their classes? What type of discussions?

6. What changes do accounting educators recommend?

Accounting faculty frequently have prior work experience in public accounting and may have worked at one of the large global firms that audit the vast majority of SEC registered companies. In fact, some accounting faculty may even have held the position of partner of one of the largest global firms, prior to becoming a faculty member.

In the past, large public accounting firms have resisted restrictions in the type of service that they can perform for their audit clients. For example, when in July 2000 the SEC proposed a new auditor independence rule, which would have prohibited virtually the same NAS as the SOA, the global public accounting firms strongly opposed the proposed rules. The modifications to the proposed rule (SEC, 2000a, 2000c) that restricted but did not prohibit NAS for audit clients were consistent with some of the global accounting firms' comment to the SEC. The proliferation of NAS and the increasing economic importance of NAS to public accounting firms provide further evidence of (1) audit firms' willingness to accept NAS and (2) their resistance to NAS restrictions. For example, in 2000, only about 30 percent of the largest public accounting firms' revenues were derived from audit fees (SEC, 2000a), the remainder was earned from NAS fees. Thus, accounting faculty's past experiences with large global public accounting firms may influence their current perceptions regarding NAS. Thus H1 is:

H1: Accounting faculty who have experience working in big global public accounting firms are less likely to perceive prohibiting NAS as necessary, than those who have not worked in big global public accounting firms.

Accounting educators generally are aware of the controversy surrounding NAS. They also know that tax services traditionally are accepted, fairly non-controversial NAS. Accounting faculty, who generally are knowledgeable about past and current issues in the accounting profession may be more likely to perceive it as necessary to prohibit NAS that have in the past generated significant concern and are now prohibited by the SOA, than to prohibit tax services. Thus, hypothesis H2 is:

H2: Accounting faculty are more likely to perceive it as necessary to prohibit bookkeeping financial information systems appraisal actuarial internal audit management broker and legal NAS than they do tax planning and compliance services.

Accounting faculty are more likely to support the prohibition of NAS if they expect improvement in audit quality. Factual, as well as perceived audit quality are important in restoring investors' confidence in the audit and financial reporting process. Thus, hypothesis H3a and H3b are:

H3a: Accounting faculty who perceive that prohibiting NAS will improve factual audit quality are more likely to support prohibiting NAS, than those who do not perceive an improvement in factual audit quality.

H3b: Accounting faculty who perceive that prohibiting NAS will improve perceived audit quality are more likely to support prohibiting NAS, than those who do not perceive an improvement in perceived audit quality.

RESEARCH METHODOLOGY

A questionnaire was developed and mailed to 250 accounting faculty teaching at U.S. universities and colleges approximately one year after the SOA was passed. The sample was chosen from the 2002-2003 edition of the Accounting Faculty Directory (Hasselback, 2002) utilizing systematic random sampling. Two mailings resulted in 74 usable responses, representing a 30% response rate. The questionnaire was reviewed by several accounting faculty for validity, and minor changes were made in response to their comments prior to mailing. The questionnaire consists of 24 questions, some with multiple parts. One multi-part question addresses NAS and asks whether it is necessary to prohibit these services. Included are all the services prohibited by the SOA, as well as tax compliance and planning, which is currently permitted. Possible responses to these questions are "yes" and "no."

Several questions address their perceptions regarding factual and perceived audit quality, and their expectations regarding trends in future audit fees. Possible responses are "yes," and "no," and "increase," "decrease," "not significantly change." Several questions address the scope and composition of the PCAOB, and the requirement for U.S. and foreign audit firms to register with the PCAOB. Possible responses to these questions are "yes," and "no," "more extensive," "less extensive," and open-ended responses. One multi-part question deals with the AICPA's changing role as accounting standard setter. The possible responses to this are "yes," "no," and open-ended. Several questions address the faculty's implementation of the SOA in their classes, and their recommendations regarding changes that accounting educators should make to prepare their students for these changes. The possible responses to these questions are "yes," "no," and open-ended. Finally, some of the questions were demographics-type questions. A copy of the questionnaire is shown in the appendix.

The data is evaluated utilizing the non-parametric chi-squared test. Hypothesis H1, H3a and H3b are tested utilizing one-way Analysis of Variance (ANOVA). Hypothesis H2 is tested using the non-parametric Wilcoxen signed rank test and the paired sample t-test. Tests for correlations are made utilizing Pearson correlation tests.

Demographics of Study Participants

The participants are asked to indicate their current academic rank, and 33% indicate that they hold the rank of assistant, 39% the rank of associate, 27% the rank of full professor, and 1% the rank of part-time professors. The participants have taught an average of 16 years, and have spent an average of nine years at their current university. Seventy-three percent indicate that they are teaching at public universities, while 27% are teaching at private universities. The study participants represent all major geographic regions. Ninety-six percent hold a Ph.D., and 70% a CPA license. Forty-four percent are members of the AICPA, and 49% have prior experience working in a large global public accounting firm.

RESULTS

Descriptive statistics are summarized I Table 1.

NAS

As expected, the majority of the accounting faculty responding to the survey perceive it as necessary to prohibit accounting firms from performing the NAS prohibited by the SOA. The percentage of faculty that perceive prohibiting NAS as necessary range between 55% and 91% depending on the type of NAS. The highest percentage is associated with management functions and human resources (91%), broker, dealer, investment advisement and banking services (87%), and internal audit services (80%); the lowest percentage (55%) is associated with actuarial and valuation services. Chi-squared tests show that the percentage of those perceiving it necessary to prohibit internal audit services, management functions and human resources, broker, dealer, investment advisement and banking services is significantly higher than 50% (p < .01), and the percentage of those perceiving it necessary to prohibit legal and expert services is marginally significantly higher than 50% (p = .05). While the percentages of participants who perceive that it is necessary to prohibit bookkeeping, information systems design and implementation, appraisal, and actuarial services are greater than 50%, chi-squared tests show that these results are not significantly different from randomly expected (i.e., 50%) results.

Only 24% of the participants believe that tax planning services and 14% that tax compliance services should be prohibited. Chi-squared tests suggest that significantly less than 50% of the participants perceive that these services need to be prohibited.

The majority of the accounting faculty responding to the survey perceive that prohibiting NAS will improve factual and perceived audit quality. Sixty-three percent perceive that actual audit quality will increase, while 91% feel that perceived audit quality will increase. Wilcoxen signed rank tests and paired sample t-tests show that the difference between 91% and 63% is highly significant (p <.01). This suggests, that the faculty expect that prohibiting NAS will have a greater positive effect on the perceived quality of audits, than on the factual quality. The majority (91%) of the faculty responding to the survey believe that audit prices will increase, rather than stay unchanged or decrease.

PCAOB Composition, Scope, and Requirements

Sixty-nine percent of the faculty agreed with the composition and 58% with the scope and duties of the PCAOB. Chi-square test shows that the percentage of faculty agreeing with the PCAOB's composition is statistically significant, while the percentage of those agreeing with its scope is not. The faculty who do not agree with the current composition of the PCAOB, which consists of two CPAs and three non-CPAs, tend to prefer a higher proportion of CPA representatives. Seventy-one percent of those who do not perceive the PCAOB's scope and duties as optimal, feel that it its scope should be less extensive. Sixty percent of the faculty feel that the AICPA should continue to promulgate some GAAP.

The majority of the faculty feel that it is appropriate to require that U.S. public accounting firms (94%) and foreign public accounting firms (96%) who audit U.S. companies register with the PCAOB.

Financial Statement Quality

Ninety-five percent of the faculty perceive that it is appropriate to require that CEOs and CFOs of public companies certify their companies' financial statements, and 80% perceive that this requirement will improve financial statement quality. Chi-squared tests show that these percentages are highly significant (p <.01).

Hypothesis H1 tests whether accounting faculty who have experience working in large global public accounting firms are less likely to perceive prohibiting NAS as necessary, than those who have not worked in global public accounting firms.

Of the faculty who had prior experience with a global accounting firm, 60% perceive that bookkeeping should be prohibited, 59% perceive that information systems consulting design and implementation should be prohibited, 63% perceive that appraisal and valuation services should be prohibited, 49% perceive that actuarial services should be prohibited, 80% perceive that internal auditing should be prohibited, 89% perceive that management services should be prohibited, 89% perceive that broker-type services should be prohibited, and 69% perceive that legal and expert services should be prohibited.

Of the faculty who did not have prior experience with a global firm, 63% perceive that bookkeeping should be prohibited, 57% perceive that information systems design and implementation should be prohibited, 57% perceive that appraisal and valuation services should be prohibited, 63% perceive that actuarial services should be prohibited, 83% perceive that internal auditing should be prohibited, 92 % perceive that management services should be prohibited, 86% perceive that broker type services should be prohibited, and 64% perceive that legal and expert services should be prohibited.

One-way ANOVA does not show any significant relationship between faculty's prior experience in global accounting firms and their perceptions regarding the NAS that are prohibited by the new law. Thus faculty who have prior experience with global accounting firms tend to be as likely to agree that the NAS prohibited by the SOA should be prohibited as are faculty who do not have such prior experience.

Currently, the SOA still permits that accountants perform tax planning and compliance services for audit clients, provided that the auditee's audit committee authorizes the service. Seventeen percent of the faculty who had prior experience with a global accounting firm perceive that tax planning should be prohibited, while 9% perceived that tax compliance should be prohibited. Twenty-nine percent of the faculty who did not have prior experience with a global accounting firm, perceive that tax planning should be prohibited and 17% perceive that tax compliance services should be prohibited. One-way ANOVA does not show any significant relationship between faculty's prior experience in large global accounting firms and their perceptions regarding NAS that is permitted by the new law.

Overall, the mean number of NAS that faculty with global accounting firm experience felt should be prohibited was 5.6, while the mean number of NAS prohibited by the faculty without prior global firm experience was 5.9. The difference between 5.6 and 5.9 is not statistically significant. Thus, hypothesis H1 is not supported by the findings.

Hypothesis H2 tests whether accounting faculty are more likely to perceive that bookkeeping, financial information systems design and implementation, appraisal and valuation, actuarial, internal audit, management and human resources, broker type services, legal and expert services (i.e., the non-traditional NAS) should be prohibited, rather than tax planning and compliance services, which are still permitted under the SOA. While 55% to 91% of the faculty perceive that these non-traditional NAS should be prohibited, only 24% perceive that tax planning and 14% that tax compliance services should be prohibited. Wilcoxen signed ranks tests show that the faculty's mean perceptions regarding all the non-traditional NAS significantly differ from their mean perceptions regarding tax planning and compliance services (p <.01). Thus, hypothesis H2 is supported by the findings, and accounting faculty are more likely to perceive that bookkeeping, financial information systems design and implementation, appraisal, actuarial, internal audit, management and human resources, broker type services, legal and expert NAS should be prohibited for audit clients, than tax compliance and tax planning services.

Hypothesis H3a tests whether accounting faculty who expect that prohibiting NAS will improve factual audit quality are more likely to support prohibiting NAS, than those who do not expect an improvement in factual audit quality. Hypothesis H3b tests whether accounting faculty who expect that prohibiting NAS will improve perceived audit quality are more likely to support prohibiting NAS, than those who do not expect an improvement in perceived audit quality. One-way ANOVA suggests that accounting faculty who perceive an improvement in factual audit quality are more likely to support prohibiting information systems design and implementation, tax planning, and tax compliance services for audit clients than those who do not perceive such improvement (p<.05). In addition, faculty who perceive an improvement in perceived audit quality are more likely to support prohibiting information systems design services (p<.01). Thus, H3a and H3b are partially supported by the findings.

Further analysis shows that the faculty perceive that a mean 5.8 of the ten NAS, which includes tax services, should be prohibited. Correlation analysis shows positive relationships between the total number of NAS that faculty feel should be prohibited and a) audit quality, b) audit price, c) agreement with the scope of the PCAOB, and d) the financial statement certification requirement, and a negative relationship between the number of NAS and perceiving that the AICPA should continue to promulgate some GAAP. These findings further suggest that accounting educators support the SOA.

Educators' Role In Preparing Students

Sixty-seven percent of the faculty participating in this study report that they have already implemented discussions of the SOA in their accounting classes. Chi-squared tests show that this percentage is significant (p-value < .05). The discussions include the reasons that brought about the SOA, the provisions of the SOA, impact on accountants, auditors, and corporations, the benefits and challenges of the SOA, ethics, historical perspectives of NAS and their impact on independence, and the opportunities and challenges facing the accounting profession.

The faculty were asked to indicate what changes accounting educators should make to prepare their students for the changes affecting the profession. The following is a list of the most frequently made recommendations: More emphasis on financial statements and financial statement analysis More emphasis on ethical issues Provide simulations of public accounting environmental situations Interdisciplinary approach to teaching and integrate curriculum and research More technology integrated into accounting Discuss expectation gap Be familiar with SOA and other SEC rules Make accounting theory, ethics, and auditing required courses Emphasize professional scepticism More emphasis on concepts, less on rules Emphasize the importance of substantive testing. Educators must stay current on professional developments and discuss current events and issues in class.

CONCLUSIONS

This study investigates the perceptions of accounting educators regarding key provisions of the SOA and their role in preparing students for a changing profession. The majority of the 74 faculty who completed a mailed questionnaire support prohibiting non-tax NAS, agree with the composition of the PCAOB, support the requirement for U.S. and foreign firms to register with the PCAOB, support the CEO and CFO certification requirement, and expect it to improve financial reporting. The majority also perceive that factual audit quality, perceived audit quality, and audit fees will increase. Somewhat surprisingly, prior working experience with large global public accounting firms does not appear to influence the faculty's perceptions. This finding further tends to suggest that faculty's support for the new law is strong and may not be significantly influenced by their prior work experience. Interestingly, prohibiting tax planning and compliance is associated with a perception of improved factual, but not perceived audit quality.

The majority of the faculty already have implemented in-class discussions of the SOA, and suggest that ethics, public accounting simulations, understanding of the SOA provisions, current knowledge of issues, and professional scepticism are very important in helping accounting educators prepare their students for a challenging profession.

Limitations

Some non-response bias may exist. A somewhat higher percentage of the faculty who responded to the second mailing of the survey perceive that internal audit, broker or dealer, and legal services should be prohibited, and a somewhat lower percentage perceive that management and tax compliance services should be prohibited, than those who responded to the first mailing.

Furthermore, since the sample was selected from the 2002-2003 edition of the Accounting Faculty Directory, information about the perceptions of faculty who are not listed in this directory (e.g., new faculty, those teaching at schools with two-year programs) could not be captured.

As the provisions of the SOA continue to be implemented and continue to affect corporations, auditors, accountants, and other professionals, the perceptions of accounting educators again should be investigated to assess their continued support of the SOA.

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Marianne L. James, California State University, Los Angeles RESULTS Descriptive statistics are summarized in Table 1. Table 1: Accounting Educators' Perceptions Question Mean % Standard No. on Answering Deviation Questionnaire Question "Yes" (in %) Prohibit NAS: 1a Bookkeeping services 62 49 1b Financial information systems 58 50 design and implementation 1c Appraisal and valuation 59 50 services 1d Actuarial services 55 50 1e Internal audit outsourcing 80 41 1f Management functions or human 91 30 resources 1g Broker or dealer, investment 87 36 advisement & banking 1h Legal and expert services 67 48 1i Tax planning services 24 43 1j Tax compliance services 14 39 Prohibiting NAS: 2a improves factual audit 63 49 quality 2b improves perceived audit 91 30 quality 3 Audit prices will increase 91 30 4 Agree with composition of 69 47 PCAOB 5 Agree with scope and duties of 58 50 PCAOB 6 U.S. public accounting firms 94 24 to register with PCAOB 7 Foreign public accounting 96 19 firms to register with PCAOB 8a CFO and CFO required to 95 19 certify Financial Statements 8b Certification improves 80 41 financial reporting 9 Discuss the SOA in class 67 48 10 AICPA should continue to 60 50 promulgate some GAAP Table 2: Tests of Hypothesis H1 Accounting Educators' Perceptions to Prohibit NAS for Audit Clients p-value-- Association-- Global Mean % Mean % Accounting Firm Global No Global Experience and Firm Firm Perception to NAS Experience Experience Prohibit NAS Bookkeeping services 60 63 0.72 Financial information 59 57 0.38 systems design and implementation Appraisal and valuation 63 57 0.71 services Actuarial services 49 63 0.16 Internal audit outsourcing 80 83 0.79 Management functions or 89 92 0.38 human resources Broker or dealer, invest. 89 86 0.12 advise & banking Legal and expert services 69 64 0.85 Tax planning services 17 29 0.20 Tax compliance services 9 17 0.39 * significant at p < 0.05 ** significant at p <0.01 Table 3: Tests of Hypothesis H2 Differences in Perceptions--Non-Prohibited and SOA-Prohibited NAS Differences between Tax planning & compliance and: p-values Bookkeeping 0.00 ** Financial information systems 0.00 ** Appraisal & valuation 0.00 ** Actuarial 0.00 ** Internal audit 0.00 ** Management functions 0.00 ** Broker, dealer, investment 0.00 ** Legal & expert 0.00 ** * significant at p < 0.05 ** significant at p < 0.01 Table 4: Test of Hypothesis H3a and H3b Accounting Educators' Perceptions Regarding Audit Quality and NAS H3a Association between perception of improved p-values factual audit quality and that NAS should be prohibited: Bookkeeping 0.37 Financial information systems 0.02 * Appraisal & valuation 0.16 Actuarial 0.97 Internal audit 0.54 Management functions 0.28 Broker, dealer, investment 0.43 Legal & expert 0.30 Tax planning 0.02 * Tax compliance 0.01 * H3b Association between perception of improved perceived audit quality and that NAS should be prohibited: Bookkeeping 0.34 Financial information systems 0.00 ** Appraisal & valuation 0.09 Actuarial 0.50 Internal audit 0.27 Management functions 0.46 Broker, dealer, investment 0.75 Legal & expert 0.87 Tax planning 0.85 Tax compliance 0.89 * significant at p < 0.05 ** significant at p < 0.01 APPENDIX Financial Reporting Questionnaire Please answer all questions based on your own perceptions and/or experiences. Your responses will, of course, be completely anonymous and utilized only in the form of an anonymous summary as a basis for statistical analysis. Thank you very much for your participation. 1. Do you feel that it is necessary to prohibit accounting firms from performing the following services for audit clients? Prohibit a. bookkeeping services --Yes --No b. financial information systems design and --Yes --No implementation c. appraisal or valuation services --Yes --No d. actuarial services --Yes --No e. internal audit outsourcing --Yes --No f. management functions or human resources --Yes --No g. broker or dealer, investment advisement and --Yes --No banking services h. legal and expert services --Yes --No i. tax planning services --Yes --No j. tax compliance services --Yes --No 2. Do you believe that prohibiting non-audits will improve (a) factual audit quality? --Yes --No (b) perceived audit quality? --Yes --No 3. Do you think that audit prices will-increase --decrease --not significantly change? 4. The Public Company Accounting Oversight Board (Board) consists of two CPAs and three non-CPAs. Do you agree with the composition of this board? --Yes --No If you do not agree, what would you change?-- 5. Do you think that the scope and duties of the Board are optimal? --Yes --No If no, do you think that its duties should be --more extensive? --less extensive? Different in scope? Please specify-- 6. Do you think that it is appropriate to require that U.S. public accounting firms register with the Board? --Yes --No 7. Do you think that it is appropriate to require that foreign public accounting firms who audit U.S. companies register with the Board? --Yes --No 8a. Do you think that it is appropriate to require that the CEO and CFO of a public company be required to certify their financial statements? --Yes --No 8b. Do you believe that this requirement will improve the quality of financial reporting? --Yes --No 9. Have you implemented or are currently implementing discussions of the provisions of the Sarbanes-Oxley Act in your classes. --Yes --No If yes, please specify the classes-- What type of discussions do you introduce?-- 10. Do you believe that the AICPA should continue to promulgate some GAAP (e.g., industry specific standards)? --Yes --No Why, or why not?-- 11. What is your academic rank? --Assistant Professor --Associate Professor --Full Professor --Other (Please specify)-- 12. Are you currently tenured? --Yes --No 13a. What type of doctoral degree do you hold? --Ph.D. --EdD --D.B.A. --Other. Please specify-- 13b. What year did you earn your doctoral degree?-- 14. How many years have you been teaching--Years 15a. How long have you been at your current institution? --Years 15b. Do you teach at a --public or --private university? 16. In what geographic region is your university located? --Mid-Atlantic --Midwest --Northeast --Southeast --Southwest --Northwest 17. What are your research interests? Please specify 18. What is your gender? --Male --Female 19. Please indicate any professional licenses or certifications that you hold:-- 20. Have you in the past held any of the following positions? --external auditor --internal auditor --financial systems consultant --tax preparer or consultant --CFO of a public company --CEO of a public company --controller of a public company --governmental auditor--