Regulatory Issues The Sarbanes Oxley Act (SOX) restricts management from influencing auditors through manipulation or coercion. Therefore, Sullivan’s hostility over Cooper’s internal audit as well as trying to make Cooper hold off from completing the audit are violations. The SOX also contains two components that impact the fraud investigation: the fraud discovery and whistleblower protections. It enforces an extended statute of limitations that enables fraud to be discovered within two years of occurring or five years after committed. Extending the time frame enables Cooper to still come forward if she is stalled. Cooper is WorldCom’s whistleblower, but Section 806 “prohibits publicly-traded companies from retaliating against employees who report various acts of wrongdoing to their employers” (Foti 2013). Without this protection, there will be fewer investigations as employees may be too scared to come forward. (Colbert 2004) (Carozza 2008) (Foti …show more content…
2013) (How the Sarbanes-Oxley Act of 2002 Impacts the Accounting Profession 2015). As suggested in Statement of Auditing Standards (SAS) #99, auditors and forensic accountants are responsible for exercising professional skepticism.
In fraud investigations, the need to maintain professional skepticism is in accordance with professional due care. Furthermore, professional skepticism is when an auditor or a forensic accountant begins an investigation with the attitude that fraud is possible despite prior connections with the company. As I proceed through my WorldCom fraud investigation, I need to keep my mind open to the idea that I may find evidence of material misstatements. Any previous dispositions or biases prior to starting the investigation cannot create bias. WorldCom’s integrity and honesty are no longer relevant as I am required to focus on the compelling evidence found during my investigation. “… the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest” (Consideration of Fraud in a Financial Statement Audit
2002). Fraud Risk Inquiries A company’s internal controls include the policies and procedures that are put in place to maintain the efficiency and effectiveness of accounting systems. Internal controls also act as a catalyst against fraud risks when applied properly. The types of internal controls are: separation of duties, access controls, physical audits, documentation, trial balances, reconciliations, and approval authority. However, WorldCom’s lack of internal controls is less than to be desired. I need to complete a fraud risk assessment to assess possible exploitations. Therefore, I need to identify the inherent fraud risk, assess the likelihood and significance of the inherent fraud risk, and respond to the reasonably, likely, and significant inherent fraud risks. A risk assessment team will be assembled to identify the inherent risks. For example, documentation enables WorldCom to maintain proper record-keeping. However, there transactions are not supported by source documents (Managing the Business Risk of Fraud: A Practical Guide 2008) (Ingram 2017). Upon further review of WorldCom’s internal controls, all seven appear to be inherent fraud risk. Weakened internal controls enable employees with the incentive, opportunity, and rationalization to more easily commit fraud. Assessing the likelihood and significance of the inherent fraud risk requires interviews with the staff and researching potential fraud schemes. After interviewing Cynthia Cooper, Ebber uses his authority to closely monitor the financial department. Another employee comments that some of the report transactions are missing source documents. Based on my data, I conclude that all seven inherent risks are probable of leading to fraud. Significance is based off cost analysis, but the likelihood of someone exploiting these weaknesses can lead to significant or even material misstatements. WorldCom needs to reassess its internal controls and redevelop them, however, failure to do so will lead to WorldCom’s downfall (Managing the Business Risk of Fraud: A Practical Guide 2008) (Button 2015) (Ingram 2017).
Most of Scrushy’s alleged misconduct occurred prior to the enactment of Sarbanes-Oxley (SOX). To sum...
When it comes to the audit objectives, the public and the auditing profession maintain varying expectations. The public expects the prevention of fraud to be the auditor’s responsibility. However, the auditors believe that they are responsible for fraud detection, but not obliged to find all of it. In addition, the public views the fraud by the characteristics displayed by management and employees. For example, WoolEx Mills’ management wanted to exude a prevailing financial position and to uphold reputations. By committing financial statement fraud, it made the company look successful even though Sales and cash flows were decreasing. The public would view these particular characteristics as pressures to why the company committed fraud. Greed, recognition, and influences also impacted the public’s view of Wool Ex Mills’ fraud scheme. The CEO used authority to influence employees to take part in the fraud scheme. The public would see that the CEO utilized power to manipulate shareholders, which impacted their trust with WoolEx Mills (Cohen, Ding, Lesage, & Stolowy 2015) (Krishnan & Shah
The Sarbanes-Oxley Act was drafted to encourage and protect whistleblowers from retaliation after the fraud scandal that cause the collapse of Enron in 2001. In a 2010 Senate Report found that “external auditors detected only 4.1 percent of uncovered fraud schemes, “whistleblower tips detected 54.1% of uncovered fraud schemes in public companies” and were thirteen times more effective than external audits” (Turpan, 2016). Whistleblowers serve an important service to the public and are more effective than external audits. The CFAA has been used to by employers to retaliate against employees who act as informants for agencies like Internal Revenue Service or Security Exchange Commission to expose fraud. There employees, not to their financial gain, gather information as evidence of fraud by the company. With a broad interpretation of CFAA, the employee would "exceed their authority" and was "unauthorized" to access the information, therefore allowing the company to hide their illegal
A possible flaw of Sarbanes-Oxley is it failed to put up any resistance in thwarting the financial crisis. While the degree to which fraudulent behavior can be traced to the roots of the Great Panic of 2007 will likely be up for eternal debate, it might be telling that Sarbanes-Oxley effectively did nothing. It seems this could indicate that stronger incentives for whistleblowers (such as Dodd-Frank and perhaps other whistleblower protection regimes) are very necessary given the extreme social costs. This conclusion may be hasty, however, given the short time period between the enactment of Sarbanes-Oxley and the crash. Not only is the status of Sarbanes-Oxley still in flux over a decade later, but one has to consider the substantial learning and switching costs associated with a regime with such a substantial ruach. Certainly, this is not to say that additional protections may in fact be necessary given the putative reluctance of lawyers to report fraud, but Sarbanes-Oxley likely needed more time to really crystalize and provide some level of predictability before it can be declared a bust.
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to strengthen corporate governance and restore investor confidence. The act’s most important provision, §404, requires management and independent auditors to evaluate annually a firm’s internal financial-reporting controls. In addition, SOX tightens disclosure rules, requires management to certify the firm’s periodic reports, strengthens boards’ independence and financial-literacy requirements, and raises auditor-independence standards.
CEO Jeffery Skilling and Kenneth Lay, the CEO prior to Skilling, were taken to trial. They were both found guilty of committing multiple types of financial crimes, and sentenced to 24 years in prison. CFO Andrew Fastow was also taken to trial and was found guilty and sentenced to 10 years in federal prison. The collapse of such a large corporation led to changes in financial controls. U.S. Congress passed the Sarbanes-Oxley Act in 2002. The SOX Act protects investors from deceitful accounting actions by companies (4). The Financial Accounting Standards Board increased its ethical behavior. FASB is responsible for generally accepted accounting principles, which provides standards for financial statements of publicly traded companies. These changes brought to life after the Enron scandal have decreased fraud and increased investor confidence. Although the acts that Enron committed were immoral and destroyed thousands of lives, it has lead an increase of controls and compliance, preventing something like this from happening in the
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
The Hollate Manufacturing case provided by Anti-Fraud Collaboration has well illustrated how several common issues in an organization contributed to the fraud’s occurrence. These issues can be categorized into two major groups: ethical culture (internal aspect) and internal control system (external aspect). By taking effective actions to enhance these two aspects, an organization can protect itself against the largest frauds, which result in financial and reputational damage.
One of the major unintended impacts of the Dodd-Frank Act has been on credit unions and community banks. These banks weathered the credit crisis and lost only 6% of their share of banking assets between 2006 and mid-2010. A recent Harvard study indicates that this decline accelerated to 12% since the passage of the Dodd-Frank in July 2010. [a] While the community banks’ earnings increased by 12% to $5.3 billion by mid 2015 the number of these banks had declined according to Federal Deposit Insurance Corporation. The number of banks with assets under $1 billion has declined from around 7500 in 2010 to less than 6000 since Dodd-Frank came into effect. [b] Increased compliance costs due hiring of new personnel to interpret the new regulations compelled these banks to cut down on customer service amongst other things. The law hurt them disproportionately and forced them to consolidate. Regulatory economies of scale drive the process of consolidation. A larger bank is often more equipped at handling increased regulatory burdens
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
Sandberg, J., Solomon, D., & Blumenstein, R. (2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html
The quantity of accounting fraud cases keeps on rising. Fraud is a consistent thing that will reliably be around, and in a bigger number of routes than just a single. An extensive apportion of organizations out there fight with fraud, either from within the organization, or from outside the organization. Knowing how to manage this is essential for an organization to be productive over a drawn out extended period of time. The investigation regarding the matter of accounting fraud will utilize sources from the web and the DeVry school library. The principle territory we are planning to address is accounting fraud and how it could impact an organization by answering, the who, what, when and how. Its goal is to increase the awareness
Companies always know there is a possibility that the whistle will be blown, in this case the obstacle is created by knowledge that their employees stand to gain an advantage from uncovering corporate misbehaviour and thus they may be proactively looking for other people outside the organization to inform the
The Enron Corporation was an American energy company that provided natural gas, electricity, and communications to its customers both wholesale and retail globally and in the northwestern United States (Ferrell, et al, 2013). Top executives, prestigious law firms, trusted accounting firms, the largest banks in the finance industry, the board of directors, and other high powered people, all played a part in the biggest most popular scandal that shook the faith of the American people in big business and the stock market with the demise of one of the top Fortune 500 companies that made billions of dollars through illegal and unethical gains (Ferrell, et al, 2013). Many shareholders, employees, and investors lost their entire life savings, investments,