Sarbanes-Oxley Act: The Case Of Bernard Madoff From Bernard L.

Throughout history and in our own time, legitimate accounting methods have been utilized to fraudulently engage in manipulating activities that results in illicit gains to the perpetrators and losses to individuals and financial institutions.

In the past, many corporate executive have committed various forms scandals in their organizations. Such fraudulent arts are unethical and immoral behavior. This led the US government to form legislation in order to control fraudulent activities; mostly performed by senior officers in the organization. In view of this, this paper will address the following: historical summary on SOX enactment, the key ethical components of SOX, social responsibility implications regarding mandatory publication of corporate ethics, whether the criticisms of SOX implication presents an unfair burden on smaller organizations and suggestions on the improvement of SOX legislation.

Thankfully, after the Enron Corporation scandal, the government has recently started to crack down on corporations and pay more attention to what they are doing. This is due to the extent of what Enron Corp did for so long. From approximately 1996 to 2001,

The word “fraud” was magnified in the business world around the end of 2001 and the beginning of 2002. No one had seen anything like it. Enron, one of the country’s largest energy companies, went bankrupt and took down with it Arthur Andersen, one of the five largest audit and accounting firms in the world. Enron was followed by other accounting scandals such as WorldCom, Tyco, Freddie Mac, and HealthSouth, yet Enron will always be remembered as one of the worst corporate accounting scandals of all time. Enron’s collapse was brought upon by the greed of its corporate hierarchy and how it preyed upon its faithful stockholders and employees who invested so much of their time and money into the company. Enron seemed to portray that the goal of corporate America was to drive up stock prices and get to the peak of the financial mountain by any means necessary. The “Conspiracy of Fools” is a tale of power, crony capitalism, and company greed that lead Enron down the dark road of corporate America.

The Sarbanes-Oxley Act of 2002 (SOX) was passed by Congress and signed into law by President Bush to “mandate a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud” and applies to all public companies in the U.S., large and small (The Laws That Govern the Securities Industry, 2015). The main purpose of Sarbanes-Oxley is to “eliminate false disclosures” and “prevent undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers, and shareholders” (Neghina & Riger, 2009). As a whole, the Sarbanes-Oxley Act is very complex and affected organizations must do their due diligence to ensure they

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).

White collar crime has been around for ages. Today more and more news stories can be found where the elite, the top executives of fortune 500 companies, are being prosecuted for participating in illegal activities. It was hoped that the passing of the Sarbanes Oxley Act of 2001 after the Enron debacle would reduce the amount of illegal acts being committed in corporate America. The Sarbanes Oxley act makes executives personally responsible for their activities requiring top management to sign off on financial statements stating they are true and accurate and these executives can face jail time for committing fraudulent acts. Unfortunately, immorality in business is still running rampant. One illegal practice we see happening in

Companies such as Enron from approximately 1996 to 2001 were thriving and the stock price rising constantly. Such a move on the company’s stock was attracted millions of investors who wanted to invest in a stable company they could trust. Little did they know that the company with over 60 Billion dollars in market capitalization at one point, was about to collapse. The company’s stock reached a high of approximately 90 dollars per share in 2000, and the following year shares plummeted to less than one dollar. As one can imagine, investors were terrified, millions lost the entire retirement savings, and other were just afraid to trust the financial markets. Enron, and others were taking advantage of the loose accounting regulations to recognize revenue improperly, make use of special purpose entities to create “fake” revenue, and weak corporate governance.

Fraudulent activities and embezzlement are more prevalent in organizations than most people think. Because of the multitude of previous scandals, the Sarbanes-Oxley Act has required all publicly traded U.S. companies to have internal auditing and internal controls to check for fraudulent activity and embezzlement. While the Sarbanes-Oxley Act only applies to public businesses, the requirements of it should be applied to all types of businesses, even universities. In the Case of the City University of New York, having internal controls and auditing would have halted the embezzlement occurring there.

This was but one of many accounting scandals, but it was possibly the worst. To help prevent something like this from happened again, the Sarbanes Oxley Act was passed. This act greatly increased the accountability of auditing firms, and it also increased penalties for acts such as defrauding shareholders, as well as faking, destroying, or altering records (Jennings, 2015).

The Sarbanes-Oxley Act, is an act passed by U.S. Congress on July 30, 2002. The primary reason was to protect investors from the possibility of fraudulent accounting activities by corporations. The act is commonly known as SOX Act. The act is named after its cosponsors, U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley. It mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud. The Sarbanes Oxley Act is arranged into eleven titles. They are Public Company Accounting Oversight Board (PCAOB), Auditor Independence, Corporate Responsibility, Enhanced Financial Disclosures, Analyst Conflicts of Interest, Commission Resources and Authority, White Collar Crime Penalty Enhancement, Corporate Tax Returns, and Corporate Fraud Accountability. These titles provide the description of specific requirements and mandates for the financial reporting. The SOX Act monitors compliance through various sections. However, the most significant sections are 302 (Disclosure controls), 401 (Disclosures in periodic reports), 404 (Assessment of internal control), 802 (Criminal penalties for influencing US Agency investigation/proper administration). As a result of SOX Act, the top management must individually certify the accuracy of financial information. The Act increased the oversight role of board of directors and the independence of the outside

Another corporate accounting scandal that occurred in the United States before the Sarbanes-Oxley Act came into effect was the WorldCom scandal in 2002. Seventeen thousand employees were fired and $3.8 billion dollars in profit were removed from their accounting books after an internal audit discovered improper expense accounting in 2001 and 2002. This improper accounting inflated the cash flow so the company would not report a net loss, only a net gain (Hancock, 2002).

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.

The Sarbanes-Oxley Act was passed in 2002 as a response to a wave of corporate accounting scandals that damaged public trust in the controls of the US financial system. SOX therefore was created in order to create the framework for better control over accounting information and better accountability among members of senior management. Damianides (2006) notes that much of the burden of providing these tighter controls has fallen to IT departments. The Act not only sets out prescriptions for tighter internal controls, but effectively mandates that senior IT managers will need to communicate those controls to their CFO and CEO, as well as to external auditors.

We chose Bernard Madoff’s case because we thought that we could relate his case to many unethical behaviors. The analysis can be made on decision making and lack of ethical training which we think is an important topic to focus on this course.