“The paper describes the main aspects of the regulatory environment which will protect the public from fraud within corporations. It pays particular attention to SOX requirements and specifically evaluate whether SOX will be effective in avoiding future frauds” (University of Phoenix, 2014). Introduction
“In the never ending battle against white collar crimes and corporate corruption, the government is enacting and applying various laws and regulations regularly. The policies is updated when and where required but most importantly these regulation must be followed strictly. New regulations and ongoing concern about globalization point to stepped-up oversight for financial institutions and lenders. But uncovering fraud remains a titanic task. Even with new measures, preventing those determined to commit fraud will remain difficult. Champions of the new legislation warn that businesses must adapt to the changing environment or face higher level of regulatory risk” (Sweeney, 2011). Main aspects of the regulatory environment
Regulatory environment plays a vital role in monitoring the proper functioning of financial aspect and helps to protect the interest of investors, creditors and other users. “The value of the claims of financial institutions on borrowers is dependent upon the certainty of legal rights, coupled with the predictability and speed of their fair and impartial enforcement. Legal and regulatory frameworks that empower the regulator and govern the conduct of market participants form the cornerstone of the orderly operation and development of the financial sector” (Making Finance Work for Africa, 2012).
U.S. Securities and Exchange Commission
“U.S. Securities and Exchange Commission (SEC) protects investors, maintains fair, orderly, and efficient markets, and facilitate capital formation. As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever. As the nation’s securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation. And the common interest of all Americans in a growing economy that produces jobs, improves our standard of living, and protects the value of our savings means that all of the SEC’s actions must be taken with an eye toward promoting the capital formation that is necessary to sustain economic growth” (U.S. Securities and Exchange Commission, n.d.).
“The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions” (U.S. Securities and Exchange Commission, n.d.). Sarbanes – Oxley Act
“The Sarbanes-Oxley Act, passed in 2002, is aimed primarily at public accounting firms who participate in audits of corporations. It was passed in response to a number of corporate accounting scandals that occurred between the years 2000 to 2002. This act set new standards for public accounting firms, corporate management, and corporate boards of directors. Sarbanes-Oxley, or SOX, is a federal law that is the most comprehensive reform of business practices since Franklin D. Roosevelt was President of the U.S. who passed the New Deal” (Peavler, 2014). “The Enron scandal proved the need to new compliance standards for public accounting and auditing.
Enron was one of biggest and financially sound companies in U.S. But its malpractice resulted as a catalyst for the Sarbanes-Oxley legislation. In order to cut down on the incidence of corporate fraud, Senator Paul Sarbanes and Representative Michael Oxley drafted the Sarbanes-Oxley legislation or SOX prior to 2002” (Peavler, 2014). “The Act compliance required top executives to personally certify corporate accounts in addition to maintaining strict internal-control structure and procedure for financial reporting. Sarbanes-Oxley allowed for criminal penalties if fraud was uncovered” (Amadeo, 2014). Will SOX be effective in avoiding future frauds?
“Although Sarbanes-Oxley strengthens internal control, requires a more transparent disclosure of off-balance sheet entities, and increases oversight and regulation on public auditors, it does not necessarily guarantee the prevention of a future Enron-like scandal. Since 2002, Oversight Systems Inc. has been doing a study as to whether Sarbanes-Oxley has been efficient in eliminating corporate fraud. They stated in their report, that although Sarbanes-Oxley has reduced the risk, there will never be a way to eliminate it (Business Wire, 2005). Sarbanes-Oxley’s put standards and regulations into place that are meant to strengthen internal control, enhance disclosure for off-balance sheet entities, and reduce conflicts of interests between a firm and its auditing staff. Through these provisions it will be reasonably effective at preventing another Enron tragedy from occurring in the future” (Effectiveness of SOX, n.d.). Conclusion
“The Sarbanes-Oxley Act of 2002 was established primarily as an attempt to combat an increasing level of corporate fraud and to hold executives accountable. However, the level of fraud and the cost of fraud continue to increase. This paper has provided a trend analysis of fraud factors in an attempt to evaluate the factors that are most prevalent so as to assist in the identification of fraudsters and the reduction of fraud occurrences” (Bales & Fox, 2011). “The Act has helped to improve the protection of the public from fraud within the corporation. However, fraud is a problem that cannot be solved by legislation. The additional cost from the SOX is costing companies more money and in some cases there are no substantive benefits related to fraud prevention and detection.
Fraud prevention is enhanced by moving toward a more ethical corporate culture in conjunction with policies and procedures that truly prevent fraud. Substantive internal controls specifically designed to reduce and eliminate fraud are the key. Companies should actively work toward improving anti-fraud efforts with or without regulations because fraud prevention is good for business” (Coenen, 2014). The bottom line is SOX may make a difference in fraud within the corporation in the future, if companies are willing to pay the extra cost and are willing to follow all the regulations that they have set.
Amadeo, K. (2014). Sarbanes-Oxley Act of 2002. Retrieved from http://useconomy.about.com/od/themarkets/p/sarbanes-oxley.htm Bales, K., & Fox, T. L. (2011). Evaluating a trend analysis of fraud factors. Journal of Finance and Accountancy, 5, 1-10. Retrieved from http://search.proquest.com/docview/853887261?accountid=458 Business Wire. Oversight systems fraud survey finds Sarbanes-Oxley effective in identifying financial fraud. (2005). Business Wire, 1. Retrieved January 30, 2009, fromhttp://global.factiva.com/ Coenen, T. (1999-2014). Has Sarbanes-Oxley really done anything to curb fraud? Retrieved from http://www.allbusiness.com/professional-services/accounting-tax-auditing/5220240-1.html Effectiveness of SOX. (n.d.). Retrieved from http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1083&context=honors Making Finance Work for Africa. (2012). Legal and Regulation Environment. Retrieved from http://www.mfwda.org/legal-reglatory-environment/html Peavler, R. (2014). The Sarbanes-Oxley Act and the Enron Scandal – Why are they Important? Retrieved from http://bizfinance.about.com/od/smallbusinessfinancefaqs/a/sarbanes-oxley-act-and-enron-scandal.htm Sweeney, P. (2011, January/February). Will new regulations deter corporate fraud? Retrieved from http://www.alixpartners.de/en/Portals/alix/news-docs/Kelly%20Art.pdf U.S. Securities and Exchange Commission. (n.d.). The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation. Retrieved from http://www.sec.gov/about/whatwedo.shtml#.U31C8HTnbIU University of Phoenix. (2014). Sarbanes-Oxley Act of 2002 paper instructions. Retrieved from
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