The Go-Go Corporation: Breaking The Sector301 Sarbanes-Oxley Act

Appendix A.2 also lists several factors that could provide opportunities for management/employees to commit fraud. One factor that could lead to fraud is if, “There is ineffective monitoring of management as a result of: domination of management by a single person or small group without compensating controls.” The auditors should have taken notice of the lack of controls and segregation of duties with respect to Phar-Mor’s

In the Sarbanes-Oxley Act of 2002, the audit committee is responsible for adequate supervision and reporting and for responding to:

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.

However, the application of SOX has brought on regulations that public companies must put in place and follow to prohibit these unethical occurrences. One major advantage for associated with SOX is that more thorough audits are being conducted by auditing firms. Audits being conducted more thoroughly will provide accuracy and an increased reliability of financial data. This will affect taxes in a positive way and provide firms with an advantage. Causholli, Chambers, and Payne (2014) suggest that prior to the implementation of SOX in 2002, “an auditor’s opportunity to sell additional non-audit services in the subsequent year, coupled with the client’s willingness to buy services, intensified the economic bond between auditor and client, in turn reducing auditor independence and the quality of financial reporting” (p.681). The regulation of auditor provided non-audit tax services has increased the reliability of tax and financial reporting within companies. Seetharaman, Sun, and Wang (2011) explain that “in a post-Sarbanes-Oxley environment, the benefits of auditor-provided non-audit tax services (NATS) seem to manifest themselves in higher quality tax-related financial statement management assertions” (p. 677).

Exceptions can be approved by the Board and are made in cases where the revenue paid for such services contributes less than 5% of revenues paid to the auditing firm. Also, a public accounting firm may provide these non-audit services along with audit services if it is pre-approved by the audit committee of the public company. The audit committee will disclose to investors in periodic reports its decision to approve the performance of non-audit services and audit services by the same accounting firm. This requirement to disclose to investors is likely to inhibit auditing committees from approving the performance of auditing and non-auditing services by the same accounting firm. Other sections outline audit partner rotations, accounting firm reporting procedures, and executive officer independence. Specifically, subsection 206 states that the CEO, Controller, CFO, Chief Accounting Officer or similarly positioned employees cannot have been employed by the company's audit firm for one year prior to the audit.

With the induction of SOX, Section 301 dictates that the boards of directors for each publicly traded organization are required to fund and create an internal audit committee or have the entire board serve as the committee, with a minimum of three independent members, accountable for selecting and directing an external independent accounting firm responsible for confirming the integrity of the organization’s financial reports, and creating a process to address

External auditors at the time failed to expose the fraudulent financial practices taking place at WorldCom. Although internal auditors expressed concern about the classification of operating expenses as capital expenditures, their efforts were purposely neglected by top level financial executives allowing the fraud to continue (Lyke,2002) WorldCom's financial standing was manipulated to show that the company was profitable when in reality was on the brink of bankruptcy; on top of that, WorldCom's CEO got a $400 million personal loan with lack of oversight from the board of directors (green 2004, p37 paper). The Sarbanes–Oxley Act brought about a series of financial regulations that could have prevented WorldCom's fraudulent practices. Sarbanes–Oxley requires principal executive and financial officers to certify the accuracy of financial statements and the effectiveness of internal controls for the compilation and disclosure of these statements with enforcement provisions such as fines or imprisonment. The Act prohibits the boards of directors from granting loans to executives. The Sarbanes–Oxley Act also established the Public Company Accounting Oversight Board to oversee the audits of publicly traded companies and regulate accounting practices. If all

Title I of the SOX comprises the creation of the Public Accounting Oversight Board (PCAOB) (Sarbanes-Oxley Act, 2002). The PCAOB is a private-sector, nonprofit corporation which oversees the auditors of public companies. It is to protect the interests of the investors and to further the public interest when preparing informative, fair, and independent audit reports. The title consists of 9 subsections. Section 101 describes the establishment of PCAOB, which consists of 5 full time members, 2 of which are CPAs, all selected by the SEC (Philipp, CPA, & CGMA, 2014). Section 102 states that public accounting firms are required to register with the PCAOB in order to issue or prepare in the issuance of an audit report to an issuer (Philipp, CPA,

Go-Go’s (GG’s) audit committee is not comprised of non-employee members of the board of directors, it is in violation of SOX §301. To rectify this, all members of the audit committee should be on the board of directors.

Fraud Risk: These weakness affects all levels of the internal control environment and other areas of the company. It shows that internal controls are not as important as meeting the company’s performance outlooks. If management does not openly display ethical conduct, the expectation of fraud and misappropriation

The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence.   In protecting the shareholders and the general public the SOX Act is intended to improve the transparency of the financial reporting.   Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a

Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become

The internal auditor have a several roles in the company which is the first one the audit committee need to discharge and restrict the governance responsibilities and the

| Internal audit may not be privy to allsources of information throughout thecompany if seen as “outside” themanagement structure.The chairman of the audit committee maynot have allocated sufficient time, or haveadequate resources/capacity to deal withthe oversight of the internal auditfunction.It would be necessary to set up aspecific charter outlining the roles andresponsibilities of the board in relationto internal audit, as separate frommanagement. For example, who wouldlook after the HR administration, includingpersonnel evaluations, compensation andcareer planning for the head of internalaudit?The audit committee would be assumingmore responsibility and therefore,perhaps, more liability in relation to theadequacy of the internal control and risksystems of the organisation.Potentially restricts the ability of the CEOto use internal audit as a tool to reinforcecontrol principles, or in special projects.

Internal auditor, should be the eyes and ears of the company to combat fraud. As fraud becomes a growing problem to every company nowadays no matter what size the organization is, the risk of fraud is like a storm that could wipe the company out dry at any given time. Most companies have strategically strengthen its internal control and corporate governance to effectively mitigate fraud as it is becoming a necessity to protect the company from the perpetrators through an internal audit function. This is consistent to Flostoiu (2012) research conclusion that the excellent way to prevent fraud is by internal control and evaluate consistently to ensure internal controls remain effective, as organization with successful implementation of internal audit programs is more audit-ready and more equipped to detect fraud, as internal audit function is becoming extremely significant towards identification of fraud indicators (p.27). Nicolaescu (2013) determined the organization’s internal audit is a corporate governance structure’s important part and the internal auditor’s abilities to conduct “fraud work” (p.110). In response to the growing concern of fraud, the Auditing Standard Boards issued Statement on Auditing Standards (SAS, 2002) No. 82: Considerations of Fraud in a Financial Statement Audit, which requires auditor to strategically accomplish the audit and identify the risk of material misstatement due to fraud or error