PHASE II -- QUESTION 7
How does the Sarbanes-Oxley Act encourage the CEO and CFO to issue reliable and truthful financial reports?
posted by Dr. Scott @ 9/20/2005 02:35:00 AM
43 comments
Tuesday, September 20, 2005
Contributors
- Emilio M
- Ashley Temple
- Emily Shapiro
- Dr. Little
- Steve De Lucia
- Jennifer
- Zak
- Kristen McNamee
- Andrew Chepurny
- Jenna Karmel
- NICHOLAS
- Steve Schirripa
- Whitney DeSena
- nick satinover
- Kevin Kehoe
- Caroline Perdreaux
- Ryan Wallace
- MJS
- Sophia Pappis
- Kristin Huxta
- Andrew Chepurny
- Chris Krallis
- Lisa D
- Henry Tang
- Chase Miller
- CYNTHIA LEE
- Elisabeth Nicholson
- Transam
- jdaiva
- Rob Smith
- Ashley Smith
- sgoodwin
- Andrew Harp
- Joseph Vanaman
- Julia
- Brian Blush
- Schmid
- Katie
- BobSaget
- Chris Darragh
- Dr. Scott
- SamKupelnick
- mheenan
- Dave Conrad (Expert)
- Anna
- Zach
- Brandon Rickwood
- Michael Parker
- Jordan Johanson
- Dr. Little
43 Comments:
The Act encourages CEO and CFO to act ethically and with reliability by "making CEOs and CFO (and other officers and board members) criminally liable for fraudulent and misleading statements within their public financial filings. Severe penalties – up to 20 years in prision — are included for willful violation" (www.prostaffaccounting.com/difference/SarbanesChronology.pdf). There's nothing like adding deterrents to force/encourage these important positions to do the right thing.
In addition to the Act making CEO’s and CFO’s criminally liable for fraudulent and misleading statements, which will result in llawsuits and negative publicity, a corporate officer who does not comply or presents an inaccurate or misleading statement is subject to a fine up to $1 million and ten years in prison, even if done mistakenly. If a false statement was submitted purposely, the fine can be up to $5 million and twenty years in prison.
The Sarbanes Oxley act gives much more of an incentive to the CEO's and CFO's of companies to be truthful about financial reports. The CEO and CFO now when issuing financial reports must include their own statement saying that all the information is correct and fairly presented. If a CEO or CFO makes an incorrect or dishonest statement after this act has been put in place they have much more of a liability. Now that they need to issue statements means they must be aware of what is published into the financial statements. A CEO or a CFO can not longer use ignorance as an excuse since they are required by law to know what is included in the financial statement.
This comment has been removed by a blog administrator.
In addition, the Sarbanes-Oxley Act provides protection for any employee who gives information about fraud going on in that corporation. The Act states that if an employee reports fraudulence, they can not be discriminated against or harassed, and is "entitled to all relief necessary to make the employee whole." The employee will be reinstated to the same status in the corporation, given back pay with interest, and compensation for any other damages as a result of their actions. Knowing that a person inside the corporation need not fear reporting fraud, a CEO or CFO would be even less likely commit this crime, along with all of the previously stated penalizations including fines and prison sentences.
(information taken from section 806 of the Sarbanes Oxley Act)
The Sarbanes-Oxley Act encourages the CEO and CFO to issue reliable and truthful financial reports as the CEOs and CFOs now have to certify that the content of their financial reports are reliable and truthful. The CEOs and CFOs must include a signature page in addition to an auditor’s signature to which asserts the dependability of the statement. In order for a CEO or CFO to certify and make a certification regarding a financial statement, the CEO or CFO must follow certain requirements which when certified, the CEO or CFO is highly accountable and has to be reliable and truthful on the financial reports, or else its their job title and credibility. Look at the website to see the requirements CEOs and CFOs must adhere and abide by in regards to the issuing of financial reports and the certification of the reports to establish credibility. http://www.cooley.com/news/alerts.aspx?id=000037611820
The SOX act works to encourage the CEO's and CFO's of corporations to be held accountable for the establishment and maintaince of internal controls. The purpose, procedures, and effectiveness of these internal controls must be presented in a truthful manner on all financial reports. The officers must also present to the board of directors and auditors any deficiences or problems within the internal controls that would affect the financial report in any way.
Sec. 302. Corporate Responsibility for Financial Reports.
While some financial reports will always be untruth full, there are apects of this act which will help to create more reliable reports.SEC Commissioner Cynthia A. Glassman spoke in 2004 about how the act eliminates conflict of intrest for the external auditors. Under Sox-Oxley rules, audit committees hire external auditors that are paid by the audit committee and not management. This means that an impartial, external force checks the internal work of a company.
refrence: http://www.gwu.edu/~business/news/archive/2004/sbpm_news0426.htm
SOX encourages employees to notify appropriate parties about corporate wrongdoing. Kristen mentioned how SOX provides protection for any employee who gives information about fraud going on in that corporation. Did you know that there is a Whistleblower webpage and Whistleblower Law book? Here's something that I never really thought about: The National Whistleblower Center has been around since 1988.
http://www.whistleblowers.org/
http://www.whistleblowers.org/html/sarbanes_oxley-whistleblower_l.htm
Why does this article talk about retaliation claims?
http://www.workforce.com/section/00/article/24/17/48.html
Just curious about the force of the motivation underlying SOX. Rickwood mentions that CEOs and CFO could be subject to a fine, possiby up to $5 million and twenty years in prison. Are these penalties comparable to the penalties of current executive managers found guilty of fraudulent and misleading statements?
The article posted by Dr. Scott talks about retailiation claims because it is a growing problem in corporate America. Some workers are taking advantage of the broadly written SOX laws, and falsely accusing employers of terminating them for whistle-blowing activities. Although many employers are able to prove otherwise, the process is time consuming and costly. If a company is found guilty, they are forced to reinstate the employee and repay any lost wages. This provision of the law can be very attractive to terminated employees. As more and more cases are filed, the courts will be backed up, and employers may find themselves forced to reinstate terminated employees even before the complaint is resolved. This issue will continue to worsen because as more claims are filed, there will be more publicity, and more people may be tempted to file false retailiation claims.
According to a BBC News article written on July 8, 2004, Andrew Fastow, finance chief of Enron, has agreed to pay fines of $23 million and could face up to 10 years in prison. He pled guilty to two fraud charges spurring from his role in the infamous collapse of the corporation. The SOX Act is responsible for the penalties held against Fastow because such strict penalties are taken out to ensure reliable and truthful financial reports from corporate leaders. Obviously, fraudulent activity occurred within the corporation, and the criminal is forced to abide by the regulations specifically outlined by SOX. However, the penalties that Rickwood mentioned are not so similar to the penalties involved in this situation. Despite the similar prison sentence, Fastow's fine is harsher, probably due to the extent of the fraudulent activity committed within Enron and the amount of money involved in the sham.
References:
http://news.bbc.co.uk/1/hi/business/3398913.stm
In addition to the other penalties a CEO or CFO may face that were listed above to encourage them to issue reliable reports, “the statute of limitations on securities fraud claims is extended to the earlier of five years from the fraud, or two years after the fraud was discovered, from three years and one year, respectively.”
http://www.aicpa.org/info/sarbanes_oxley_summary.htm
I don't believe the punishments for violating executive managers is fair. To say a person should get 10 years in prison for running a company immorally is bad, especially when another person can commit rape and get less than that. I believe the proper sentencing would be even higher fines, a loss of all assets the person owns, and be kicked out of the business world ingeneral would be substantial enough. I don't believe jail time is the answer.
The thing about the Sarbanes-Oxley Act is that the punishment has now become much more personal then it was in the past. In the past, if a CEO issued fraudulent financial reports, it would be the company as a whole that was punished through corporate fines and other means. Even though the company would be hurt both financially and with its reputation capital, the CEO or CFO that would turn in the reports had the potential to get off practically scott-free. It all depended on how the company would deal with it. With SOX in effect though, things are much different. If the CEO or CFO is caught turning in fraudulent financial reports, they are personally punished for the misdeed. Punishment for a simple mistake, could lead to a fine of up to $1 million and 10 years imprisonment. It only gets worse though, as if it was proven that they fraudulent documents were turned in "willingly," the fine can go up to $5 million, and the prison sentence could double to $20 million. It seems the SOX is really trying to crack down on those who would personally gain the most from such scams by making the punishments for them the worst.
I just realized I forgot to include my reference source for my previous post answering the first question, so I apologize for that. Here it is:
http://www.softlanding.com/sox/docs/sox-faq.pdf
The article about the whistle blowers shows how the Sarbanes-Oxley Act can really have the effects of a double-edged sword. While it helps in controlling one area of wrong-doing, it has opened up a new shop in a different area. The way the Sarbanes-Oxley Act is worded really restricts the higher-ups in the corporate ladder, such as the CEOs and CFOs. This gives other employees of the corporations more advantages now, which sadly, look as if they are starting to get abused. With the whole process that is gone through for the whistle blowers, it is very time consuming and costs the corporation either way, so, for the corporation as a whole, dealing with a whistle blower is a lose-lose situation. And while there are some honest workers who may be legitimately arguing their case, now it seems that there are more and more potentially dishonest workers coming out of the woodwork and using all of the little holes and such in the SOX got their own personal gain, which is no different from the higher-ups doing things for their own personal gain. In my eyes, the passing of the SOX is a good step in the right direction, but there are still a lot of holes that need to be fixed within it.
In response to Zak's comment on October 3, I completely agree with him that the punishments seem really harsh towards the CEO and CFO. Although these harsh fines and jail times should likely stop fraud from occuring, its hard to put all that pressure and blame on just one person. William Lyons, Consol Energy's chief financial officer feels it is unfair that a CEO or CFO must attest personally that their financial reports comply with the act. He said, "We drove down here this morning, and I can't guarantee we fully complied with every traffic law in the commonwealth." I would find it hard to guarantee my statements with decades of prison time looming over my head. Does anyone agree or disagree with this and Lyon's opinion? Are the jail times and fines too personal?
http://www.pittsburghlive.com/x/tribune-review/business/eprise/s_325548.html
By requiring the CEO and CFO to sign off on the financial reports of the company. According to section 906 of SOX part c titled criminal penalties, the punishment for setting forth reports that do not comport with all the requirements set forth in that section shall be fined not more than 5 million or 20 years of prison or both.
While browsing the National Whistleblowers Site (www.whistleblowers.org), I found many interesting facts. Pre-SOX, the whistleblowers focused more on environmental issues, such as polluting and chemical waste violations. With the implication of the SOX act in the corporate world, the whistleblowers center now serves an even broader purpose. SOX contains 4 provisions linked to the protection of whistleblowers. First, companies must establish independent and internal audit committees. One of the purposes of this committee is to establish rules and procedures for accepting employee complaints concerning sketchy accounting/financial practices. Second, SOX strives to set new ethical standards for attorneys who work in relation with the SEC. This provision requies attorneys to blow the whistle on their client or employer, holding them legally responsible if they withhold any evidentiary support. Third, SOX protects whistleblowers who provide "truthful information" by criminalizing those who attempt to retaliate against them. The fourth provision grants final say to the SEC over the implementation of SOX, and the protection of whistleblowers.
I would love to think that the Sox-Oxley act and the 1998 whistleblower center is actually doing what its supposed to do. That is give investors confidence and punish those who commit finacial infractions. While this is not always the case, I have found one postive outcome of the whistleblower center. In november of 2004, a company whistleblower told authorities that in May 2002 "Second Chance Body Armor (company) knowingly sold defective vests to the Secret Service, military and police. " It is postive that this story came out to the public and now and investigation has been launched to find out if these claims are true. Assuming these claims are true, this is a great example of whistlebowing being beneficial to society.
Refrence: http://msnbc.msn.com/id/9494356/
In response to Chris Krallis' last comment, after reading the article, it seems to me that William Lyons was being a bit comical when stating "We drove down here this morning, and I can't guarantee we fully complied with every traffic law in the commonwealth,". Although I do agree with Chris about how strict the fines and jail times can be and also how Lyons feels its too harsh, in truth, if these rules didn't apply and the consequences weren't as steadfast, people would probably tend to bend the rules and break them as easily as "rolling through" a stop sign every now and then. Do you agree or disagree?
I agree that a lot of these rules are very harsh, but I do think they had to be made. Sure, what these people did may not have been the same as committing a crime like rape or murder, but their dishonesty and actions went out to affect millions of people (in the Enron case for example) and when you consider how many people they hurt and how many people lost their jobs, these punishments seem justified to me, and if they will keep other CEOs and CFOs from doing the same thing then I believe they are necessary.
I agree with Jennifer's opinion and it is a shame that so many innocent people lost so much with companies like Enron. However, I stick by my claim that CEO's and CFO's should not be personally blamed in some instances. I feel a little sympathy for some of these men and women. The scandals have put a lot of pressure on them. According to Thomas Neff of the executive search firm Spencer Stuart, in 2002, one in twenty CEOs hired will have their job for 20 years. The article I read from USA Today, http://www.usatoday.com/tech/techinvestor/2002/04/08/options-usat.htm, describes many CEO's who lost their jobs. Is it fair to look at them through a microscope? I feel bad for those who will struggle with job security because people before them made mistakes.
I totally agree with Chris. To say that no one else at Enron knew about their hidden problems seems highly unlikely. The CEO's and CFO's shouldn't be the only ones to blame. I agree they should be punished the harshest because they are in a leadership position, but I think the level of the punishment is to high.
I also agree with the fact that CEOs and CFOs shouldn't be the only ones to blame however where do we draw the line of how harsh a punishment is for some people of higher authority who break the law as opposed to those employees who are just trying to make a living.
In my opinion, it makes sense to punish the CEO and CFO to the furthest extent. Their job is to make sure their company's statements are flawless, and if they report false information, it could cause the company to go bankrupt and could leave thousands of workers unemployed. However large the repercussions, nothing will add up to costing people their jobs and losing investors' money.
Section 302 of SOX talks about corporate responsibility for financial reports. Subsection 4 says that the signing officers
-Are responsible for establishing and maintaining internal controls;
-Have designed such controls to ensure that material information relating to the issuer and its cfonsolidated subsidiaries is made known to such officers whitin those entities, particularly during the period in which periodic reports are being prepared;
-have evaluated the effectiveness of the issuer’s internal controls as of the date within 90 days prior to the report; and
-have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;
All of these are forms of encouragement to the board of directors to do their job.
Here is an interesting website I found that relates the SOX Act to the music industry regarding MP3 files and how the CEO's and CFO's can be held accountable in wrongdoings.
http://www.mp3newswire.net/stories/5002/sarbanes.html
I am in a disagreement with Zak on the punishment level of the CEOs and CFOs to a certain extent. For those who willingly issue fraudulent financial reports for their own personal gain, I think the punishment is more than fitting. I hate to sound like a "jerk" but I honestly believe that. The thing is, when the CEOs and CFOs make these decisions to issue fraudulent financial reports, it really has an effect on so many people. First off, it hurts the company as a whole financially. Also, once things are brought out to public, many others are affected. Every single employee involved has their livelihood at stake, as jobs can be lost through this, from both the discovery of fraudulent financial reports resulting in budget cuts, as well as the decrease of revenue flowing in dure to poor public image. A badly developed image for a company often times can be the kiss of death for it. Also, with all the stockholders, they lose money and are hurt by this. A big enough scandal can have the "paranoia effect" on investors, which can then hurt the stock market as a whole. For the Hell that dishonest CEOs and CFOs have the potential to cause from filing fraudulent financial reports, the punishment is definitely in my eyes merited.
But, the one thing that bothers me is the fining of a CEO/CFO that just made a simple mistake. Then again, they are not being paid to make mistakes, but rather to their work efficiently. Still though, it is kind of tough to look at their punishment as merited. But then again, how is it to be judged as a simple mistake rather than one saying it was a mistake to cover up a planned issuing of fraudlent financial information. With people in those kinds of positions, it really is difficult to judge in some situations whether something is deliberate or not.
Another notable section of the Sarbanes-Oxley Act is section 404, which requires each annual report of SOX to also contain an internal control report. This report will contain a statement of the management's responsibility of keeping a good internal control structure and their financial performing procedures. Then, management must report on the effectiveness of the procedures of the last fiscal year. Forcing this is yet another way that the Sarbanes-Oxley Act helps to ensure more reliable accounting in corporations.
Following what Kevin Kehoe said, what really is the consensus on whether or not the punishment is just. Because just like Kevin said, how is one supposed to know whether or not an error in the report was simply just a mistake or if it was an intentional error trying to be covered up as a mistake? One solution can be found from another post. This issue of an ethics officer may be able to help this situation and solve this question. However, how can anyone other than the actual reporter know whether or not they are being honest?
I agree with Michael Parker's last message about how anyone can know whether the CEO and CFO's are being honest or not. Also, I feel that SOX is just trying to make an honest man out of all of this. Because confidentiality is being covered for those who report such frauds and it makes CEO's and CFO's more responsible for their actions.
In response to michael and cynthia's comments, I discovered an article on how to solve part of the problem of honesty. Kate Mitchell, CEO of CopperEye, states that CEOs and CFOs obviously cannot do the entire process all by themselves, but must still vouch for results. She mentions how manual processes like rekeying data leave open the possibilities of unintentional and intentional manipulation. She feels automated business processes will create more reliable, accurate results. However, periodic auditing must occur because it is not always completely accurate, it is costly, and a lot of data needs to be able to be stored.
Reference:http://www.s-ox.com/ resources/roundtable/2004.1/detail .cfm?RoundID=67
I agree with Kevin Kehoe's comment made on 10/6 that the fines for CEOs and CFOs who just made a mistake seem a bit harsh, but it is their job to be accurate.
A million dollars for one little mistake is definitely harsh. Hoewever, it is very important that financial statements are accurate because so many people are counting on them.
Also, as those of you who have had accountinng before know, there are a lot of built-in checks in acccounting. We have already learned about the accounting equation. As we move further into the course, we will learn that there are numerous other equations, and they usually won't all come out right if you make a mistake.
Yes, it is possible to make accidental little mistakes. On the other hand, they are much less likely to slip by unnoticed than you might think.
It seems that the influence of section 806 of SOX (protection for whistle-blowers) is extending to the government as well. A recent newspaper article explained the need for whisle-blower protection in Denver, Colorado. City employees are afraid to speak out against government wrongdoings for fear of losing their jobs. The city's auditor is quoted as saying "In this age of Enron and a focus on increased accountability demanded by the public, particularly as related to government, for Denver not to have such an ordinance is intolerable." He also believes that Denver citizens should have the same protection SOX offers shareholders, by comparing the taxpayers of Denver to shareholders of a corporation.
Source: http://www.rockymountainnews.com/drmn/news/article/0,1299,DRMN_3_4141065,00.html
The encouragement is all learned by example. Richard Scrushy, the former CEO of HealthSouth Corp. was the first man to be indicted under the Sarbanes-Oxley Act. The indictment consisted of eighty-five counts of consiracy and fraud due to 2.74 billion dollars of ficticious income. Three of them violated the Sabanes-Oxley act which tack on the longest prison statement written in the law (up to twenty years). I think that this kind of punishment sends a clear message to big companies to keep the books clean. The risk is not worth the benefits of increased investment.
http://find.galegroup.com/ips/retrieve.do?subjectParam=Locale%2528en%252CUS%252C%2529%253AFQE%253D%2528SU%252C29%2529Sarbanes%2BOxley%2Bact%2Bviolations%2524&sort=DateDescend&tabID=T003&sgCurrentPosition=0&subjectAction=DISPLAY_SUBJECTS&searchId=R2&prodId=IPS¤tPosition=3&userGroupName=udel_main&resultListType=RESULT_LIST&sgHitCountType=None&qrySerId=Locale%28en%2CUS%2C%29%3AFQE%3D%28KE%2C29%29Sarbanes+Oxley+act+violations%24&inPS=true&searchType=BasicSearchForm&displaySubject=&docId=A116791760&docType=IAC
In response to what Chris said about the automated Accounting, I think its a really good idea. Unfortunatly, it still poses the same problem. There is an issue with security. If financial statements are kept automated, anyone can access them, I'm thinking more along the lines of a rival company. With today's technology and people with knowledge of the Hacking craft, I think its a rather bad idea. Although, I did run into an article featuring a piece of software meant to help keep the numbers of a firm. Its price ranges around $25,000, so I guess you get what you pay for. Me personally, I have a hard enough time looking at my Checking Account Statement online. But at least this way, it does help fix any "mistakes" that might come from human error.
http://find.galegroup.com/ips/infomark.do?&type=retrieve&tabID=T003&prodId=IPS&docId=A104730682&source=gale&srcprod=CDB&userGroupName=udel_main&version=1.0
Id like to agree with andrew's comment on HealthSouth Corp., but Richard Scrushy walked away a free man. He was acquitted of all the charges.The case was lost even with five previous CFO's pleading guilty and testifying against him. The verdict came as a result of key witnesses not being credible and substantial evidence linking the fraud to Scrushy not being presented.
Reference:
http://www.msnbc.msn.com/id/8293846/
Hmmm, good observation, the abstract I read didn't mention him being aquited. I guess the legal team that protected him must have been amazing. It's really hard to walk away from that much fraud.
I sympathize with what Andrew Chaperny wrote about automated accounting systems and having trouble with computers. I would also agree with Chris and Andrew when they say that software helps detect errors. When we used PeachTree Accounting in high school, error messages would pop if something didn't make sense to the program. I did have some difficulty usng it at first, though. Fortunately, there are lots of courses on automated accounting for the technologically challenged among us. Here are a few companies and institutions that offer offer them:
Automated Accounting Solutions
http://www.automatedaccounting.com
Cardinal Gibbons High School
http://www.cghsnc.org/business/accounting_ethics.html
Wedco Employment Center
http://www.wedco.net
I agree with Zak when he said that the punishments are too harsh. However, it depends on what one's morals and where one's priorities stand. There are more extreme crimes that are currently being treated with not as harshly as breaking the SOX act. I agree with Zak and Chris Krallis when they say they do not believe jail-time will not resolve these issues. The reason CEO's and CFO's commit fraudulent acts is to become more wealthy. Therefore, there should be heavy, extreme fines to those who break the SOX Act. Because upon breaking the act, the one who commited the fraudulent act will have to give up all that he had tried to gain.
Post a Comment
<< Home