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 ... ...vin. "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.
Weld, L. G., Bergevin, P. M., & Magrath, L. (2004). Anatomy of a financial fraud. The CPA
Dodd-Frank and Sarbanes-Oxley Acts are important legislations in the corporate world because of their link to public and privately held companies. Sarbanes-Oxley Act was enacted to enhance transparency and accountability in publicly traded companies. On the contrary, Dodd-Frank Act was enacted to disentangle the confused web of financial service company valuations. Actually, these valuations are usually hidden by complex and unclear financial instruments. The introduction of Sarbanes-Oxley Act was fueled by recent incidents of accounting frauds by top executives of major corporations such as Enron. In contrast, Dodd-Frank Act was enacted as a response to the tendency by banks, insurance companies, hedge funds, rating agencies, and accounting companies to serve up harmful offer of ruined assets and liabilities brought by systemic non-disclosure (Anand, 2011, p.1). While these regulations have some similarities and differences, they have a strong relationship with the financial markets.
In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
After major corporate and accounting scandals like those that affected Tyco, Worldcom and Enron the Federal government passed a law known as the Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act. This law was passed in hopes of thwarting illegal and misleading acts by financial reporters and putting a stop to the decline of public trust in accounting and reporting practices. Two important topics covered in Sarbanes-Oxley are auditor independence and the reporting and assessment of internal controls under section 404.
Ethics continues to be a hot issue in the business world. The focus on business ethics grew after several significant business scandals beginning in the millennium. These scandals prompted the government to pass new accounting regulations to increase the control and accuracy of financial reporting. A prominent piece of legislation is the Sarbanes-Oxley Act of 2002, which applies to publicly traded businesses. The basis of Sarbanes-Oxley is to increase the reliability and accuracy of financial reporting (Noreen). At the time of these scandals, many businesses and individual professions already had ethical and accounting standards in place. Subsequently, more businesses have developed ethical codes of conduct.
What makes the Sarbanes-Oxley Act effective is that it is “Administered by the U.S. Securities and Exchange Commission (SEC), SOX sets deadlines for compliance and publishes rules on requirements, covering a wide range of rules. The consequences for failing to comply with certain provisions range from fines to imprisonment” (Cunningham). The SOX also creates, “accountability of company executives and members of the board of directors” (Jahmani). The act essentially created several provisions to regulate and protect shareholders along with the general public from accounting errors and fraudulent practices in the enterprise. The accounting industry, financial reporting, and the auditing of public companies in particular must follow these provisions.
Building standards of ethical behavior is essential for public company. Otherwise, it causes accounting scandals and bankrupts. Over the last decade, there were a lot of enormous bankrupts that because of unethical behavior of investors and auditors. Lehman Brothers Holding Inc. is an example of accounting scandals. In this research paper, I am going to analyze this firm.
Marshall, D., McManus, W., & Viele, D. (2004). Accounting, what the numbers mean. 6th ed. New York: McGraw Hill Irwin.
The company concealed huge debts off its balance sheet, which resulted in overstating earnings. Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001. This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
Unethical accounting practices involving Enron date back to 1987. Enron’s use of creative accounting involved moving profits from one period to another to manipulate earnings. Anderson, Enron’s auditor, investigated and reported these unusual transactions to Enron’s audit committee, but failed to discuss the illegality of the acts (Girioux, 2008). Enron decided the act was immaterial and Anderson went along with their decision. At this point, the auditor’s should have reevaluated their risk assessment of Enron’s internal controls in light of how this matter was handled and the risks Enron was willing to take The history of unethical accounting practic...
...se of accounting fraud. Even ones that got involved in any type of accounting fraud are still suffering from the consequences, such as, fines, as well as losing reputation in their name, such as, Waste Management Inc. The passing of the Sarbanes Oxley Act of 2002 has decreased the amount of fraud that is taking place today and has put their main interest in protecting the investors. A company being honest and showing integrity in their financial statements has helped investors by giving them the correct information before they invest, and understanding the amount of risk they are taking by investing in each particular company. The laws have evolved with the fraud in accounting, but will the laws keep up with the revolution of the criminal mind? In the past the laws were one step behind, but as for now they are holding their ground to protect people from fraud.
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Albrecht, W. S., Stice, J. D., Stice, E. K., & Skousen, k. F. (2002). Accounting Concepts and Applications. Cincinnati: South-Western.
There are many highly publicized scandals about corporations getting caught using unethical and illegal accounting practices. Whether a whistle blower who is an insider with knowledge of illegal goings on at their company, a news reporter covering a story about a company ?? or an audit that might uncover financial irregularities noticing a company that is not using the generally accepted accounting practices (GAAP), a company not using the accounting standards set forth by governing oversight committees is bound to unravel.