The CEO's Private Investigation: A Case Study

Section 180 says that a person must perform his duties with care and diligence that a director of a company in same position and situation would perform. In this case, the board member negligently made a financial report and was shown profit instead of loss. Harvey one of the directors could not show the errors in the board while James who is also a non-executive director did not ask any questions regarding the

Presence of Board of Directors, Audit committee, Board’s compliance with the SEC’s Blue ribbon committee, independent and experienced board members, management’s oversight and audit committee’s annual review’s leaves very less room for opportunity for employee’s to commit any type of fraud and present misstated financial information.

Of these transactions, most of it was not in the interest of Enron of Enron’s shareholders; such as profits and cash flows were manipulated and grossly inflated which caused misleading to the investors. AA has also failed to recognise the Generally Accepted Accounting Principle (GAAP) – which is accounting rules used to prepare, present and report financial statements for a wide variety of entities used in United States. AA also did not advise Enron’s audit committee that Enron’s CFO – Andrew Fastow – and his helpers were involved in significant conflict of interests. Enron’s politics and internal control was also found out to be inadequate to protect the shareholders interests. These should have made known and clear as these are responsibilities of an auditor. AA has also make the mistake by which it did not act upon evidence found or neither has it find any audit evidence relating to the numerous share rights transferred to SPEs and the side deals between Enron and banks which remove the banks’ risk from transactions. In auditing, audit documentations are key part to the audit processes.

Describe the conflict faced by corporate insiders who discover unethical or illegal activities within their organization.

* U.S. governmental oversight of accounting fraud and abuse and its effect on the company Potential corruption schemes to be aware of in the company

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).

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.

Prior to 2002, there was very little oversight of accounting procedures. Auditors were not always independent and corporate government procedures and disclosure provisions were inadequate. Sometimes, executive compensation was tied to the stock of the company which created an incentive to manipulate the stock price by using fraudulent accounting practices to make it look like companies were making more money than they actually were. The Sarbanes-Oxley Act of 2002 was introduced because of the collapse of several major corporations due to these practices. This paper will

Case 10-10 An Offer You Can’t Refuse Fast Eddie, a publicly held company, manufactures and installs refrigeration systems for governmental and commercial applications. Fast Eddie is being investigated by a governmental agency for overpricing on government sales during the period from 2007 through 2009 as well as allegations of misrepresentations by one of Fast Eddie’s former officers, Sweet Lou. The criminal and civil investigations began in late 2009. In the prior fiscal year, the company’s auditors, CPAs-R-Us, obtained management’s representation and a letter from Fast Eddie’s independent legal counsel that indicated that the ultimate outcome of the investigation could not be determined and that any potential payment for the alleged

“The business judgment rule, as a standard of judicial review, is the common law recognition of the statutory authority that has been vested in the board of directors (Shu-Acquaye, 2004).” “Under the rule, which operates as a standard of judicial review, the burden is placed on the party challenging a decision of the directors to establish facts rebutting that presumption (Skinner, 2006).” “Courts invoke the business judgment rule in assessing the conduct of directors and determining whether to impose liability in a particular case (Shu-Acquaye, 2004).” This rule does not provide unlimited protection for directors though. “Although, the business judgment rule is designed to foster the complete exercise of managerial power granted to directors, it is not an unfettered power (Shu-Acquaye, 2004).” “Consequently, the business judgment rule does not afford protection to directors who exercised "unintelligent" or "unadvised judgment," or who submitted to "faithlessness, fraud, or self-dealing (Shu-Acquaye, 2004)."” “Application of the business judgment rule is based on a demonstration that informed directors did in fact make a business judgment sanctioning the matter being examined. A director's obligation to inform himself, in preparation for his decision, derives from the fiduciary capacity in which he serves the company and its stakeholders (Shu-Acquaye, 2004).” “So long as the directors’ decision was reasonably informed and can be attributed to any rational business purpose, a court will not substitute its own notions of sound business judgment for that of the directors, unless that presumption is rebutted (Skinner, 2006).” Prior to the court’s decision in Smith v. Van Gorkom, the court was reluctant to hold boards liable for breach of

However, when a company does break compliance or commits any type of accounting fraud, that is when the U.S. Department of Justice comes in and “prosecute the federal crimes associated with the Act such as ‘attempts or conspiracies to commit fraud, certifying false financial statements, document destruction or tampering, and retaliating against corporate whistleblowers’” (Jasso, 2009, p.8). Under the incredibly detailed list of compliance rules under the Sarbanes-Oxley Act and comprehensive auditing and supervising of the PCAOB, it becomes increasingly difficult to cook the books; however, it still can happen. When a company violates the integrity of SOX, the Department of Justice takes action. Under the Thompson Memorandum, a modified guideline that intends to instruct how those who have failed under SOX should be prosecuted, and it gives prosecutors from the Department of Justice a structure in determining the nature and seriousness of the crime. To start, according to Imperato (2008), companies that are found violating the Sarbanes-Oxley Act must conduct an internal investigate and attempts to correct the misconduct. If the problem is small, it is recommended that the company let public know by issuing a statement. The Department of Justice gets involved when the company is no longer able to control the problem and becomes a risk to that affects the public. There are

The executives of the company failed to exercise proper judgement on behalf of their principals. The senior officers and professional accountant acted in their own self-interest rather than for the benefit of the shareholders. A director is legally expected to make judgements in the best interest of the company and its shareholders, and perhaps some benefits will flow to other stakeholders and the public interest (Brooks & Dunn 2014). Moreover, both HealthSouth and Enron were charged with accounting fraud, as HealthSouth cheated on accounts and falsified documents, and Enron kept huge debts off the balance sheets and led to

(1)It’s against the SEC laws and inconsistent with GAAP standards; unfair to stockholders; uncertainty about how long the company can cover up the deficiencies which keep growing with the company; honesty and integrity are challenged. (2)Loyalty to Eddie and the company is challenged. No more personal financial benefit can be generated from the rising stock price and the CFO position any more. Investors are still kept in the dark. (3) The company’s stock price may drop significantly when investors learn about the truth; company may face bankruptcy due to loss of public confidence. The wealth of Eddie’s whole family will shrink seriously. (4) While Eddie may

Cable provider Adelphia was one of the major accounting scandals of the early 2000s that led to the creation of the Sarbanes-Oxley Act. A key provision of the Act was to create a stronger ethical climate in the auditing profession, a consequence of the apparent role that auditors played in some of the scandals. SOX mandated that auditors cannot audit the same companies for which they provide consulting services, as this link was perceived to result in audit teams being pressured to perform lax audits in order to secure more consulting business from the clients. There were other provisions in SOX that increased the regulatory burden on the auditing profession in response to lax auditing practices in scandals like Adelphia (McConnell & Banks, 2003). This paper will address the Adelphia scandal as it relates to the auditors, and the deontological ethics of the situation.

The purpose of this paper is to highlight the role of external auditing in promoting good corporate governance. The role of auditors has been emphasized after the pass of the Sarbanes-Oxley Act as a response to the accounting scandal of Enron. Even though auditors are hired and paid by the company, their role is not to represent or act in favor of the company, but to watch and investigate the company’s financials to protect the public from any material misstatements that can affect their decisions. As part of this role, the auditors assess the level of the company’s adherence to its own code of ethics.