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Accounting & The Regulatory Environment
The accounting scandals of companies such as Enron, WorldCom and AIG have exposed
the acts of the company’s executives to defraud their investors and the public out of the money
they have invested in those companies. In light of those scandals, the United States Government
has put in place initiatives that will ensure corporate integrity for the protection of investors. The
Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation that was
created by Congress as a result of the Sarbanes Oxley Act of 2002 to oversee the audits of public
companies as a way to protect investors and the public from inaccurate audit reports (Public
Company Accounting Oversight Board, 2016).
An important regulation put in place by the creation of PCAOB are the rules to improve
transparency in disclosing the name of the auditing firm as approved by the Securities Exchange
Commission (SEC). This piece of regulation is a result of the conflict of interest that was at the
root of the Enron financial disaster. In the case of Enron, the accounting firm of Author Andersen
worked as both “Enron’s outside auditor, certifying its financial statements, and as its internal
auditor, making sure Enron had the right systems to keep its book and working to detect fraud
and irregularities” (Kahn, 2002, p. 88). The conflict of interest is largely the cause of the
downfall of both Enron and Arthur Andersen.
To combat the actions of non-transparency, Southwest Airlines discloses in their annual
report an auditor’s report from Ernst & Young, LLP. In the auditor’s report, Ernst & Young, LLP
discloses that the financial reports filled in accordance of the PCAOB are free of misleading
information that would defraud investors of confidence in Southwest Airlines year ending
balances. The audits are conducted to provide assurance that the estimates made by Southwest
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Airlines managers fall in line with the financial statements the company submits in compliance
with the submittal standards of the PCAOB and the SEC (Southwest Airlines, 2015).
The effect compliance with submitting financial reports from independent auditors has on
companies such as Southwest Airlines is that it instills confidence with investors that the
business practices are put in place as a way to ensure that the company is not defrauding the
public and its investors. Top level executives and managers that devote time to regulatory issues
can develop value from the process by using the data from the financial statements as a guide to
the types of products and services their consumers respond to and make better business decisions
based on the results from previous year’s data (Garrison, Noreen, & Brewer, 2015)
It is clear from the auditor’s report in the latest version of Southwest Airlines Annual
