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Sarbanes-Oxley Act

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The Sarbanes-Oxley Act is legislation put forth by the United States Congress to ensure

the protection of the general public and shareholders from fraudulent practices and accounting

errors in the enterprise, as well as improvement on the accuracy of disclosures of corporates. The

Exchange Commission (SEC) and U.S. Securities administer the act, which and publishes rules

on requirements and sets deadlines for compliance. The Act of Sarbanes-Oxley was enacted in

response to a movement of high-profile scandals regarding finance that happened in the 2000s at

companies including Tyco, Enron, and WorldCom, that rattled investor confidence. The act,

drafted by U.S. Congressmen Michael Oxley and Paul Sarbanes, was aimed at improving

accountability and corporate governance. At the moment, all companies that are public must

comply with SOX.

Regarding ethical components, there is corporate responsibility in financial planning.

Section 302 of SOX specifies that financial officers and principal executives certify the review of

quarterly or annual report findings, and find the statements within to be free and accurate of

errors (Young, 2016). Those officers must also certify that they understand their responsibility

for monitoring and creating internal controls inside the organization, and have evaluated the

effectiveness of those controls within 90 days before the report is issued. About internal control

over financial reporting, more responsibility for economic accuracy in post-SOX years has been

assumed by the audit committee. Rather than the CEO, the Audit Committee now chooses the

company's independent auditor.

The Board of Directors puts in the Audit Committee in Post-SOX. This prevents conflict-

of-interest. For instance, in the case of Tyco, Dennis Kozlowski who was the company's CEO

was also on the director’s board as a chairman. Dennis eventually was able to embezzle funds

from the company because he had too

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much power in his hands. In this case, for not taking an active role in the oversight of

financial operations, the Board of Directors was criticized.

The Audit Committee assists with the oversight of financial transactions in Post-SOX.

Also, the Audit Committee's primary responsibilities and duties are to facilitate communication

between the Board of Directors, the management, and the independent auditors, to monitor the

integrity of financial reporting. Companies have had to re-evaluate system processes having to

do with economic data and with information technology to comply with Section 404. They must

ensure data security and integrity of financial data. Internal controls to ensure safety and integrity

must be well-maintained, established and documented (Reed, 2014). Also, employee rights must

be considered to such data. Employees' permissions and rights must not be sufficient to allow

misrepresentation or fraud of financial data. They also have had to ensure that procedures of

accounting are followed efficiently and consistently throughout the organization. Management

has to ensure that they can specify a problem, determine the severity, and communicate the

problem to others as soon as possible to attest to these controls.

Also, Section 402 of the act makes it illegal for any issuer to maintain or extend credit in

a personal loan form to executive officers or directors of the sender. Also, it becomes unlawful

for those officers even to solicit, indirectly or directly, these types of loans. The rule extends to

credit and solicitations acquired at subsidiary companies as well. Regarding code of ethics

requirement, Section 406 of SOX outlines requirements for the code of ethics for financial

officers who are senior. A system of ethics involves the standards which are necessary to

promote compliance with applicable governmental rules and regulations. Any alterations to the

code of ethics which are established must be disclosed promptly to the public via the internet as

an electronic means.

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Real-time disclosure is a critical ethical component as well. In the wake of millions in

unexpected investment and employee losses which are a result of the scandals that necessitated

the Sarbanes-Oxley Act, section 409 is the most comforting to the public in general. Under the

act, any material change in operations or financial condition must be urgently and quickly

disclosed by the issuer in terms that are easy to understand. The Public Company Oversight

Board holds that these disclosures are necessary to investor protection and public interest

(MALESKE, 2012). As for criminal penalties, Section 802 of the SOX imposes up to 20 years

imprisonment and fines for violations of security. Not only to a company’s senior officers, but

penalties also apply to anyone else who knowingly falsifies, destroys, conceals or alters records

with the intention of harming an investigation in any way. Moreover, accountants who violate

the maintenance requirements about audit or review work papers also face fines and up to 10

years imprisonment.

Regarding Whistleblower Protections, under section 806 of the act, employees of

companies which are publicly traded who provide fraud evidence are afforded protection against

discrimination and reprisals. If the Secretary finds the filer is in favor, he may be entitled to

compensatory damages. One complaint that is frequent about SOX concerns the costs of law

compared to its benefits. Mainly the cost of complying with SOX section 404, which deals with

internal controls. Based upon studies conducted after SOX took effect, section 404 costs of

compliance ranged from $4 million to $8 million, and big businesses reportedly spent more than

$10 million each: Ken Small, Octavian Ionici, and Hong Zhu.

The motivation for committing fraud by changing financial information has been

increasing since Sarbanes Oxley-Act was enacted. CFOs' and CEOs' most significant incentive to

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cross the line is maximizing their compensation. As the percentage of pay linked to stock prices

has shot up, that motivation has gotten larger.

Many companies have been feeling pressure to survive as the economy has faced

mounting stress. This pressure may lead to fraudulent behavior to mask decaying operations. The

dollar value of dishonest financial reporting soared in the last decade, despite the implementation

of the Sarbanes-Oxley Act of 2002. One of the factors contributing to these fraudulent cases is

certain governance metrics that are independent of accounting metrics. These include frequent

officer changes, financial filings amendments, boards chaired by the CEO, prevalence of annual

pay vs. incentive pay for the CFO and CEO, a high ratio of CFO and CEO total pay, big volumes

of stock sales by top executives, relative to market capitalization; frequent legal and regulatory

issues.

One suggestion for improving SOX is avoiding conflicts of interest. SOX already

prevents auditing firms from providing consulting services. This is a leap in the right direction

since Arthur Andersen was getting more revenue from consulting than from services. Other

conflicts of interest situations are still in existence (Rappeport, 2015). Example, there is an issue

with the newly created PCAOB. The president did not appoint the five board members. The SEC

does the firing and hiring. This violates the doctrine of power separation. If the PCAOB is going

to be a government arm, then it would be better if the President selected the board members.

Another way to improve SOX involves the rotation of auditors in a five-year term. Although they

could still all be from the same firm, SOX requires the rotation of audit partners. Rotation of the

entire firm would be a better way for rotation.

Protection for Whistleblowers is one area of SOX that has already been improved.

Whistleblowers are provided protection and incentives by the SEC Office of the Whistleblower

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and Consumer Protection Act and the Dodd-Frank Wall Street Reform. Whistleblowers are free

to report anonymous claims. The Dodd-Frank Act expanded whistleblower protection reach

provided by SOX to be inclusive of employees of public companies as well as private subsidiary

employees.

Recently, legislation of whistleblowers has been enhanced. On March 2014, the U.S.

Supreme Court ruled that this whistleblower protection applies not only to employees of

companies that are publicly owned but also to employees of privately held subcontractors and

contractors of businesses that are public. The recent whistle-blowing legislation represents one

battle won in the fight against corporate corruption in America (Kaplan, 2015). SOX revisions

like the one proposed in 2012, Congress was poised to pass legislation that was supposed to

change SOX making it easier for companies that are private to go public are also a way to

improve SOX. The potential bill, which would enable $1 billion or fewer enterprises to comply

with particular SOX regulations after having had their IPO, has rare bipartisan support in a

divided Congress.

Beyond the scope of SOX, there are measures that organizations can implement to

prevent financial statement fraud and abuse. The first is knowing your employees. Behavioral

traits that indicate fraud perpetrators often display fraud intention. Listening and observing

employees can help identify potential risk of fraud. It is essential for management to take time to

get to know their employees and be involved with them. Most likely, an attitude change can clue

you onto a risk. This can reveal issues that need to be addressed as well. For example, if an

employee feels anger at their boss or a lack of appreciation from the business owner, this could

lead them to commit fraud as a way of revenge.

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Any change of attitude should cause you to pay close attention to that employee. This

may not only minimize loss from fraud but can make the organization a better place with proud

employees. Internal controls should be implemented as well. Internal controls are the plans or

programs performed to deter and detect fraud and theft, safeguard your company's assets and

ensure the integrity of its accounting records. Duty segregation is an essential component of

internal control that can reduce the risk of fraud from occurring. Documentation is yet another

internal control that can help in fraud reduction.

In conclusion, discrimination does not present itself to those who are willing to commit

fraud. It can happen in small or large companies across various industries and geographic

locations. Occupational fraud can result in ruined reputations, a huge financial loss and legal

costs that can ultimately lead to the organizational downfall. Having proper procedures in place

can reduce fraudulent activities from the occurrence or minimize losses if a fraud already

occurred. One of the top ways to deter dishonest behavior is making the company policy known

to employees. The cost of fraud prevention is less expensive to a business than the value of the

scam that gets committed.

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Works Cited

Kaplan, J. (2015, October 6). Why Corporate Fraud Is On The Rise. Retrieved from

https://www.forbes.com/: https://www.forbes.com/2010/06/10/corporate-fraud-executive-

compensation-personal-finance-risk-list-2-10-kaplan.html

MALESKE, M. (2012, January 1). 8 ways SOX changed corporate governance.

Retrieved from http://www.insidecounsel.com: http://www.insidecounsel.com/2012/01/01/8-

ways-sox-changed-corporate-governance?slreturn=1505485243

Rappeport, A. (2015, July 22). Financial Fraud a Challenge Despite Sarbox. Retrieved

from http://ww2.cfo.com: http://ww2.cfo.com/risk-compliance/2008/07/report-financial-fraud-a-

challenge-despite-sarbox/

Reed, S. (2014, July 5). SIX STRATEGIES FOR FRAUD PREVENTION IN YOUR

BUSINESS. Retrieved from http://www.cgteam.com: http://www.cgteam.com/blog/six-

strategies-for-fraud-prevention-in-your-business

Young, D. (2016, July 07). Where Financial Reporting Still Falls Short. Retrieved from

hbr.org: https://hbr.org/2016/07/where-financial-reporting-still-falls-short

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