Audit Committee Member Hypothesis

In order to ensure effective regulation, the Sarbanes-Oxley legislation contains eleven sections that describe responsibilities of corporate boards (Engel, Hayes, & Wang, 2007). In case these responsibilities are not performed, criminal penalties are applied. The need for stricter financial governance laws created the global trend and such countries as Canada, Germany, France, Australia, Israel, Turkey and others also enacted the same type of regulations (Damianides, 2005). Today, the Sarbanes-Oxley legislation continues to play a fundamental role in the process of protecting the rights of investors and supporting a high level of investment attractiveness of the United States and companies that operate in the country. That is why this particular legislation can be considered as extremely benefiting for the national economy as well as investors.

A major impetus behind the Sarbanes-Oxley Act was deliberate financial statement fraud. When committed on a large scale, billions of dollars can be lost and investor confidence in financial market will be reduced. Evidence suggests that the incidence of fraud has declined relative to the pre-SOX era. This can only be interpreted as suggesting that SOX

In 2015, the Legislative Joint Auditing Committee audited Hector School District. In the Summary of Auditor’s Results and Financial Statement Findings, the auditors did indicate a material weakness in internal control. Here, the specific requirement noted that management is where the responsibility falls for implementing sound accounting policies and maintaining internal control over financial procedures that are consistent with their own assertions found in the financial statements. The stated condition for this material weakness was that the district failed to segregate financial duties among qualified employees. Instead, one sole employee was in charge of all of the financial accounting duties. Thus, the school

According to UK Law, the directors should act in good faith in the interest of the company, and exercise care and skill in carrying out their duties. The Company Law Reform Bill (2005) defines, in section 154-161, the directors’ duties as follows:

Prior to the advent of the Sarbanes-Oxley Act of 2002, referred to herein as “SOX,” the board of directors’ pivotal role was to advise senior leaders on the organization’s strategy, business model, and succession planning (Larcker, 2011, p. 3). Additionally, the board had the responsibility for risk management identification and risk mitigation oversight, determining executive benefits, and approval of significant acquisitions (Larcker, 2011, p. 3). Furthermore, for many public organizations, audit committees existed before SOX and provided oversight of internal processes and controls. Melissa Maleske (2012) advised that the roles and responsibilities of the board were viewed “…from a perspective that the board serves management” (p. 2). In contrast, Maleske (2012) noted that SOX regulations altered the landscape “…to a perspective that management is working for the board” (p. 2). SOX expanded not only the duties of the board and the audit committee, but also the authority of these bodies (Maleske, 2012, p. 2).

The study conducted by Hardjo and Alireza (2012, p. 4) represented that the independent directors have a few understandings of the company’s circumstances, and make decisions depends on what the management provides (Hardjo & Alireza, 2012, p. 4). Although Gallagher and Bennie (2015, p. 20) contended that the independent directors are likely to express their individual opinions and focus on the interest of the company. Thus, the formation of the directors’ board with a significant number of independent directors might not prevent DSE from the downfall due to reliance on filter information which is not adequate to make decisions (Rankin et al., 2012, p.

In the article “SOX- Context and Theory: Market Failure, Information Asymmetry & The case for regulation …volume 9(3), Professor Jasso argued that Sarbanes Oxley Act is a principle that be used only for the “ethical and moral boardroom in the public corporation”, however, it is intensely more than that (Jasso, 1). In other words, Professor Jasso had many reasons to proof that the act itself had made a positive impact to the financial and managerial accounting since the ‘July 30, 2002’ (Jasso, 1). He described how SOX had made

On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law by the acting President George W. Bush. The overall purpose of the Act was “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” (SEC, 2013) This Act mandated multiple amendments to improve corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraudulent practices. One requirement of the Act involves a management’s report on internal controls over financial reporting to be included in the annual financial reports of a company. On July 30, 2014, the Securities and Exchange Commission (SEC) announced that CEO Marc Sherman and former CFO Edward L. Cummings of a computer equipment company named QSGI, Inc. are being charged with misrepresenting the state of its internal controls over financial reporting to external auditors and the investing public. Inadequate internal control within the company can be extremely detrimental because investors and lenders rely heavily on financial reports to make decisions. The incorrect records of QSGI enabled the company to maximize loans from their top creditor. This report will show how QSGI’s lack of internal controls hindered their ability to generate revenue and maintain one of the company’s operation centers.

Prior to 2002, financial statement reporting for publically traded companies within the United States was overseen with far less oversight in comparison to current reporting standards and procedures. Appropriate financial reporting is merely one element that was not occurring prior to 2002. An element of corporate dishonesty and deception existed within some the largest publically traded companies and this idea of deceitfulness was perpetuated by the executive staff of the businesses. Enron’s financial disintegration became the facilitator for the need of more rigid financial oversight, but they were not the only company that added to the idea of corporate fraud.

Sarbanes-Oxley is an Act that was enacted in 2002. The enactment was undertaken by the United States Congress thus making it a federal law. In addition, this Act was supported by Michael Oxley and Paul Sarbanes, represents a gigantic change to government securities law (Franzel, 2014). The motivation behind the enactment was to ensure that there was a legal framework that could help deal with the increased number of major corporate and accounting scandals that had been witnessed in the United States. Various sections of this bill are concerned with the roles and responsibilities that have to be played by the board of directors.

Corporate fraud was the cornerstone for the strict implementation of the Sarbanes-Oxley Act of 2002 (SOX). SOX implements many compliance regulations, but one of its regulations, specifically Section 404, relates to an organization’s internal control procedures with the purpose of protecting organizational assets and investors’ interest. Consequently, organizations, big or small, private or public, are prone to fraud. SOX’s compliance of internal control procedures is developed through the Committee of Sponsoring Organizations of the Treadway Commission (COSO) known as the COSO framework that consists of the following procedures: control environment, risk assessment, control activities, information and communication and monitoring. Each variable address a layer that builds upon each other by

Following these series of failures, SOX was enacted to restore investor’s confidence which was rattled and to prevent accounting frauds in the future with improved corporate governance and accountability which all public companies must comply. SOX was named after Senator Paul Sarbanes and Representative Michael G. Oxley, who were the main drafters of the Act. It was approved by the House of Representatives and signed into law by the President George W. Bush on July 30, 2003. Lack of ethics and integrity seem to be the key factors that caused accounting fraud. SOX revised the framework for the public accounting and auditing profession, provided guidance for better corporate governance and created regulations to define how public companies are to comply with the law. Although many have questioned whether SOX is actually effective to prevent frauds like Enron and WorldCom in future, it is considered to be the most extensive legislation related to publicly- traded companies and external independent auditors since the 1930s. President Bush called it “the most far reaching reforms of American Business Practices since the time of Franklin Roosevelt” (BUMILLER, 2002). The purpose of this paper is to determine whether or not Sarbanes Oxley’s regulations will be effective in preventing another financial statement fraud like Enron and WorldCom.

Lack of integrity, incomplete discloser, and unwilling to speak the truth are all scopes of dishonesty (Ferrell, Fraedrich, & Ferrell, 2013). Some businesses prompt and participate in dishonorable activities through unethical behavior. This is the very reason why today’s economy faces financial disaster. The Sarbanes-Oxley Act appears to have a strong grasp on controlling the financial environment in organizations; however, other financial disasters will more than likely hit home. Because these transgressions will emanate additional legislation might greatly prevent future misconducts. For this reason, legislations continue to recover with up-to-date implementations.

The appointment of independent directors became very necessary, as shareholders looked for a way by which management became more responsible and accountable, and as such; the need for independent directors, who would not only checkmate the excesses of the board of directors, but also have the interest of the company and the shareholders at heart.

“Audit committee members or their agents may proactively examine areas, functions, and personnel where collusive fraud risk is reasonably likely to be perpetrated,” (Zmags). The search for fraud, even if performed in the same location multiple times, may continue until the audit committee feels confident that they have ruled out the probability that fraud is prevalent. One of the biggest risks of fraud is management override of controls, requiring the extensive search for risk in, “journal entries and other adjustments and reviewing accounting estimates for possible biases that could result in material misstatements,” (Nysscpa).