Internal Controls

SOX and Corporate Governance

The Sarbanes-Oxley Act of 2002 (SOX), is a law enacted as a direct result of corporate scandals such as Tyco International, Adelphia, WorldCom and Enron. The reason that SOX is an important tool to avoid further scandals is that it creates the Public Company Accounting Oversights Board to register and regulate all public accounting firms, as well as requiring that the CEO of a corporation, along with its chief financial officers certify that all financial statements are accurate — this to keep the CEO from trying to disavow any knowledge of wrongdoing as occurred in several of these scandals (OSU, n.d., para. 2,5). SOX also takes several steps to prohibit certain activities by corporate executives and provides whistle blower protection as well as establishing criminal penalties for actions taken by the corporation against them.

In summary, SOX addresses almost all of the criminal offenses that were committed in the corporate scandals both by the corporation itself and the accounting firms who committed offenses in their auditing of the firms. On the other hand, Wallace (2007) reports the jury is still out on its affectivity but that there are indications of its sufficiency along with other legislation to “power incremental change” and to restore the public confidence in corporate governance.

IFRS

International Financial Reporting Standards has established a “framework” by which corporate financial statements must provide understandable, relevant, reliable, and accurate statements to its shareholders of the corporate financial position. More than 100 countries have adopted the new accounting standards incorporated into IFRS. However, it is only now being implemented by a small number of companies, and is not mandatory until 2014 for large public companies. The indications, as with SOX, are positive towards increasing investor transparency into the financial operations of these corporations.

Internal Audit

This basic function of a corporation assessing its own internal control systems and identifying and correcting deficiencies has been strengthened through some of the processes and legislation we have already discussed. However, it is not clear how many large corporations actually make the detection of improprieties, unethical behaviors, and fraud a main focus of these audits. and, most internal auditors are still reporting to the CEO or chief financial officers — the very people who were responsible for most of the past enormous scandals. Therefore, the affectivity of internal audits in correcting the original problems that caused the Enron scandal, for instance, is minimal at best right now. While SOX requires management to test internal controls over financial aspects of the corporation, this reporting structure poses obstacles.

Risk Management

While risk management, as part of corporate governance, includes identifying and tracking all risk areas and developing plans to deal with those risks, including fraud, it is clear that only with frequent re-assessment can risk management become an effective tool to control illegal and unethical practices. Again, along with other effective corporate governance activities and responsible company management, risk management has the potential to avoid another Enron.

Conclusion

HealthSouth Corp., Chiquita Brands, AIG, Bernard Madoff — all are financial scandals since 2002, when SOX and other safeguards, were put in place. If corporate top level management is inclined to cheat and commit fraud, nothing, evidently, will stop them. We can only hope that the measures now in process will ease the consequences to investors and punish the offenders.

Bibliography

Fusaro, P., & Miller, R. (2002). What went wrong at Enron: everyone’s guide to the largest bankruptcy in U.S. history. Hoboken, NJ: John Wiley and Sons.

OSU . (n.d.). Brief summary of Sarbanes-Oxley Act of 2002. Retrieved September 27, 2009, from Ohio State University (OSU): http://ocdc.osu.edu/pdf/sarbanes.pdf

Thapa, S., & Brown, C. (2007, January). Corporate scandals, the Sarbanes-Oxley act of 2002 and equity prices. Retrieved September 28, 2009, from findarticles.com (from Academy of Accounting and Financial Studies Journal): http://findarticles.com/p/articles/mi_hb6182/is_1_11/ai_n28565873/

Wallace, D. (2007, October 8). What has SOX done for us lately? Retrieved September 28, 2009, from s-ox.com: http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=2002