Accounting Fraud, the Investor and the Sarbanes Oxley Act

explanatory Essay
1981 words
1981 words

Accounting Fraud, the Investor and the Sarbanes Oxley Act Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski). When a large company commits accounting fraud and is caught the implication... ... middle of paper ... "Ethics in Auditing." Price Waterhouse Coopers. Guest Speaker. Pullman, WA. 10 Apr. 2008. Gerard, Lange A. "Fraudulent Financial Reporting." Answers.Com. 07 Feb. 2008 . Livingstone, Les. "Fraudulent Financial Reporting." Connexions. 2007. 02 Feb. 2008 . Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156 Rittenberg, Larry, Bradley Schwieger, and Karla Johnstone. Auditing. 6th ed. Mason: Thomas South-Western, 2005. 10-40. Romney, Marshal, and Paul Steinbart. Accounting Information Systmes. 10th ed. Upper Saddle River: Pearson Education, 2006. 193-195. Tate, David W. Accounting and Its Legal Immplications. Burr Ridge: Irwin, 2004. 1-40. Ulinski, Michael. "AN ANALYSIS OF SMALL COMPANY FRAUDS AND." American Society of Behavioral Society. Dept of Business, Pace University. 05 Feb. 2008.

In this essay, the author

  • Explains that the us government amended the sarbanes oxley act of 2002 to mitigate these problems.
  • Explains that when a large company commits accounting fraud and is caught, the implications from their actions are very far reaching.
  • Opines that accounting fraud is not directly affected by the bankruptcies. millions of americans who were heavily invested through their 401(k) retirement plans had to postpone retirement and rethink their investment strategy.
  • Explains how executives can "cook the books" to make a company look more profitable and stable than it actually is.
  • Explains that the sarbanes-oxley act of 2002 was enacted to protect investors by fighting corporate crime and improving corporate governance.
  • Explains that the board of directors in a company must have at least five financially literate members appointed for five-year terms. the audit lead or coordinator partner and reviewing partner must rotate every five years.
  • Explains that the act protects whistleblowers who come forth with incriminating information about activities within their company, especially with the increasing prosecution following sarbanes-oxley.
  • Explains that sarbanes-oxley provides certain blackout periods for stock trading in which officers and directors cannot purchase or sell stock. profits resulting from sales in violation of this are recoverable by the issuer.
  • Explains the sec's control over sarbanes-oxley, including the ability to restrict people from serving on the board of directors if they have a securities fraud issue in their background.
  • Opines that the most challenging area for companies is the saving of all communications and the creation of transparent and auditable systems for recording transactions.
  • Explains that sarbanes-oxley is intended to give the investor back some measure of confidence with the internal accounting practices of the organization.
  • Explains that since the act has been put into place, nothing related to financial reporting is taken for granted. most companies have implemented better corporate governance procedures. audit committees and boards of directors are now more engaged in their responsibilities.
  • Opines that companies are more often identifying and modifying control shortages before misstatements happen on their financial statements.
  • Explains that companies will be forced to put into place systems and processes to track and save correspondence. they will often need to start new or serious changes on their it accounting systems to meet the standards for sarbanes oxley.
  • Opines that training employees on new systems, processes, and procedures is expensive and should be larger up front. they can use their trained employees to train new employees in future years.
  • Explains that applying sarbanes-oxley compliance in an organization will take a significant amount of time for involved employees. documenting processes will only need to be modified down the road.
  • Opines that organizations must be prepared for the controls that will be given up to their systems when following sarbanes oxley.
  • Opines that companies need to show due diligence to protect themselves from accounting issues. the higher the compliance checks and balances are and the more secure processes are in place, the better chance the company has to defend itself.
  • Opines that sarbanes-oxley is only effective if the general idea of the organization leans toward ethical business practices.
  • Opines that whistle blower protection should be strong and understood in sarbanes-oxley to help promote ethical standards. this will allow employees to discuss issues without fear of retribution.
  • Opines that sarbanes-oxley is not an option for publicly traded companies. the company must decide whether to implement the minimum to get by with compliance or do you put in place a strong system to fully protect and improve current accounting practices.
  • Opines that sarbanes oxley compliance is not an overnight transition. companies need to take a look at the needs of their organization, their current structure, and put in place what will work best for their investors, employees and company.
  • Describes the contents of the book, "ethics in auditing".
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