Accounting - No gain without a lot of pain.

(From Financial Director)

Byline: Peter Williams, chartered accountant and freelance journalist.

Few would disagree that an effective functioning of capital markets is essential to our economic well-being. And capital markets only work well if they are protected by a sound financial reporting infrastructure.

Good financial reporting is built on four pillars: accounting standards that are consistent, comprehensive and based on principles which enable financial reports to reflect underlying economic reality; effective corporate governance; auditing that assures a sceptical world that the figures placed in the public arena are more or less correct; and an enforcement or oversight mechanism that ensures the first three happen most of the time.

At the time of the big corporate scandals in the US, it seemed that all those pillars were in need of repointing. The response from US legislative process was the Sarbanes-Oxley Act, which opened up the possibility of improving the financial reporting environment.

Sarbanes-Oxley brought about the most significant change in US securities laws and in accountancy since the enactment of the Securities Exchange Act of 1934. According to one commentator: "It has allowed investors to out a wall between the corporate and accounting scandals of the past several years and the future."

The Enron scandal marked the end of self-regulation of the accountancy profession in the US. The Public Company Accounting Oversight Board (PCAOB) inspects, investigates, disciplines and sets standards for auditors of US public companies. This has had two consequences for worldwide financial reporting. First, the independent judgement of PCAOB over auditing seems to be simultaneously driving up standards within the profession and increasing confidence among investors about the reliability of reported numbers. Second, Sarbanes-Oxley has altered the relationship companies and their auditor committees have with external auditors.