Does the 2002 Sarbanes-Oxley Act really work to reduce accounting fraud?
Does the 2002 Sarbanes-Oxley Act really work to reduce accounting fraud?
The Sarbanes-Oxley Act came into existence so that the management of public companies can assess the effectiveness of internal control of issuers for financial reporting. According to Section 404 (b), it was mentioned that the Act need a public held company auditor to attest and report on the management assessment regarding their internal control activities. When Congress suddenly passed Sarbanes-Oxley Act of 2002, they had in mind to combat fraud that will improve the dependability of financial reporting as well as reinstate confidence among the investors (Willits & Nicholls, 2014). The most troublesome element of Sarbanes-Oxley Act was Section 404 where the main responsibility of the manager was to uphold a sound internal control arrangement for monetary coverage as well as assessing its own effectiveness. The responsibility of an auditor is to show to the soundness of assessing the organization as well as report to the state of overall financial control scheme. After implementation of Sarbanes Oxley Act, many accounting fraud and scams could be noted and lead to reduce accounting fraud. The Enron Scandal is a well-known one to all where companies did whatever they can do for preventing employee fraud. To that, companies have not fundamentally changed their fraud prevention policies as well as events (Basile, Handy & Fret, 2015). Sarbanes-Oxley Act had been the answer to many of the fraud activities. This Act was planned to restore faith in the truthfulness of business as well as executives that had not been measured yet that can have impact on fraud. Rules under Sarbanes-Oxley Act create an exclusive paperwork exercise for companies.
Aims and objectives of the research
The main aim of the research study is to find out how far implementation of Sarbanes-Oxley Act helped in reducing accounting fraud.
- To find out whether Sarbanes-Oxley Act helped in reducing accounting fraud
- To highlight the reason behind less accounting fraud today (Garner, McKee & McKee, 2014)
- To discuss how whistleblowers make potential violators think twice before planning for fraudulent activities
- To elaborate on facts as to why accounting frauds has not gone away completely irrespective of controls, detection and incentives (Abdioglu et al., 2015).
- Does the 2002 Sarbanes-Oxley Act really work to reduce accounting fraud?
- What is the reason behind less accounting fraud recently?
- How whistleblowers make potential violators think twice before planning for fraudulent activities?
- Why accounting fraud has not gone away completely besides so much of improvements, control, detection and incentives?
As rightly put forward by Pompper (2014), Sarbanes-Oxley Act has cost companies million of dollars yearly at the time of implementation with a rough estimation of $1 trillion. Though, this has been a huge money-making chance for the consultants who are engaged in assisting with Sarbanes-Oxley compliance and values that it adds to the business stakeholders. There is good evidence that Sarbanes-Oxley Act of 2002 has enhanced the quality of financial reporting by improving the audit committees, audit profession as well as internal controls and individual accountability (Basile, Handy & Fret, 2015).
According to Kim (2014), Sarbanes-Oxley Act focused mainly on bringing improvement within the Audit Committees, auditing as well as internal control disclosures that is not directly linked to fraud prevention activities. Improvement is needed in areas that will help in minimizing the opportunities for committing fraud but there will be possibility of management to override with the inherent limitations of inherent controls.
As opined by Basile, Handy & Fret (2015), Sarbanes-Oxley Act may get credit for reducing the number of restatements but it is not clear whether the reduced number of restatements can be positive or negative. In recent times, managers are using earnings revision rather than item 404 restatements so that they can handle errors and avoid any clawbacks on executive bonuses as well as shareholder lawsuits. Therefore, frequent revisions actually raised questions about the internal controls that surround with the accounts revised (Karim, Shaikh & Hock, 2014).
As rightly put forward by Willits & Nicholls (2014), Sarbanes-Oxley Act was feel-good legislation where shareholder as well as users of financial statements was feeling better after the big business frauds became public. With government intervention, it was possible that public companies should now take action against fraud. This Act came out suddenly just to pacify the investors as well as general public and due to this the legislation lack the impact that everyone was interested in. The Act actually specifies that company to proactively prevent as well as detect fraud action but at the same time, the law should mention the comprehensive certification of the events. Proactive companies have already realized the advantages from the work being done that complies with Sarbanes-Oxley Act even for the fact that the legislation requires few definite changes in the way how trade is being conducted. The documentation required Sarbanes-Oxley Act that causes companies for evaluating some of the procedures and determining the most standardized procedures when needed. A major role had been played by Business Corporation while undertaking the internal audit function (Garner, McKee & McKee, 2014). The internal auditor has stronger presence in terms of risk and control of company as it adds value to the business organization. Furthermore, the Board of Directors plays important role in most of the companies especially in areas of controls as well as governance. It was not required for proactive fraud prevention as most of the company showed interest in making improvements at organizational level. These companies took the advantage of the opportunity for improving anti-fraud process in their operations (Abdioglu et al., 2015).
Sarbanes-Oxley Act was recognized mainly as a direct reaction to the accounting indiscretion as well as fraud that took place in the accounting firm such as Enron. The company actually had weak internal control, conflicting interests with the external auditors as well as abuse of off-balance sheet entities (Garner, McKee & McKee, 2014). Sarbanes-Oxley Act could easily confront all these issues.
As opined by Willits & Nicholls (2014), Sarbanes-Oxley Act was been accepted by everyone. This Act came into existence to make any difference in preventing future fraud. It is argued by some people that the Act will add unnecessary costs as well as diverts the management attention from its primary mission of innovation, profitability and competitiveness.
Sarbanes-Oxley Act’s strengthening of internal control
The internal control requirements of Sarbanes-Oxley Act are quite extensive. As mentioned in Section 404, the Act deals with internal control that has received quite bit of criticism as well as opposition to its demanding requirements (Garner, McKee & McKee, 2014). In addition, the auditing standards is the process that is designed for providing reasonable assurance in the areas such as efficiency, competence of operations as well as dependability of financial reporting and observance with all the laws and regulations (Basile, Handy & Fret, 2015). Sarbanes-Oxley Act actually speaks in three main areas of internal control such as management assessment of internal control, new audit committee provisions as well as code of ethics for senior financial managers. Furthermore, the main purpose of the Act is to strengthen internal control after looking at the internal control of Enron that had lead to collapse of the company. Most of the people are of the opinion that the Act adds cost weight of the internal control requirements that do not add enough value to the smaller companies (Abdioglu et al., 2015).
The opportunities for accounting fraud are always present at higher levels of company where there are many accounting frauds that take place. It is mostly of the reason when management has the ability for overriding even effective internal controls (Basile, Handy & Fret, 2015). It is all about opportunities of accounting fraud that had enhanced to detect the fraudulent practices in the company. People are getting involved in committing accounting fraud due to pressure and the accounting fraud include desire to increase personal wealth or obtaining promotions, efforts for maintaining or elevating social status as well as making an attempt to escape from penalties of poor performance that postpone the dealing with financial difficulties (Garner, McKee & McKee, 2014).
Secondary research will be conducted by the researcher to find out whether implementation of Sarbanes-Oxley Act had actually worked to reduce accounting fraud.
Figure: Research Onion
(Source: Gast & Ledford, 2014).
The secondary research will be conducted by the researcher that is based on mono method approach that includes only qualitative research design. Here, qualitative research design means a systematic subjective approach that is mainly used in the research study to define any type of real-life experiences and give the researcher a meaningful connotation. The current research is conducted to find out whether implementation of Sarbanes-Oxley Act had actually worked to reduce accounting fraud by the researcher through use of secondary data information. In this particular study, researcher will be using case study approach for gathering the qualitative data from reports, observations and documents. It is quite important for the researcher to collected information from collapse of Enron company scandal as this scandal is popular one and it can be linked with use of Sarbanes-Oxley Act. By using the Act, the scandal could have been improved and this will be a positive finding for the researcher (Glesne, 2015).
The researcher will be using Interpretivism research philosophy for conducting the research study to find out whether implementation of Sarbanes-Oxley Act had actually worked to reduce accounting fraud. Interpretivism research philosophy deals with emotional side of human beings. Positivism and realism cannot be used as it deals with quantitative data activities that are not possible in this particular research study (Mackey & Gass, 2015).
The researcher will be using Deductive approach rather than inductive approach to find out whether implementation of Sarbanes-Oxley Act had actually worked to reduce accounting frauds. The reason for selecting deductive approach is that as the research mainly focuses on investigating whether the known concept of Sarbanes-Oxley Act is valid or not. This particular research will create a hypothesis that is based on identified concepts that will test validity by comparing it with the secondary data. Inductive approach cannot be used by the research as none of the concepts are new or innovative that needs to be researched. Deductive approach can only be used as existing concepts need to be analyzed and drawn conclusion at the end by the researcher (Panneerselvam, 2014).
Qualitative data will be collected by the researcher through thematic data analysis approach. Secondary data will be collected by the researcher from peer-reviewed journal articles, academic books and authentic websites (Taylor, Bogdan & DeVault, 2015). A source of secondary data will be collected by the researcher from the field of research such as journal “Efficacy of the Sarbanes-Oxley Act in curbing corporate fraud” (Rolf, 2005). The source can be found from Researcher will be using secondary data that aligns with the research topic as well as identifying the research gaps that need to be covered in the next pape
4th and 5th week
5th and 6th week
Research Topic Selection
Developing Research Plan
Findings and Analysis Of Secondary Data
Conclusion And Recommendation
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Basile, A., Handy, S., & Fret, F. N. (2015). A Retrospective Look at the Sarbanes-Oxley Act of 2002-Has it accomplished its original purpose?. Journal of Applied Business Research, 31(2), 585.
Garner, D. E., McKee, D. L., & McKee, Y. A. (2014). Accounting and the global economy after Sarbanes-Oxley. Routledge.
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Glesne, C. (2015). Becoming qualitative researchers: An introduction. Pearson.
Karim, A. M., Shaikh, J. M., & Hock, O. Y. (2014). Perception of creative accounting techniques and applications and review of Sarbanes Oxley Act 2002: a gap analysis–solution among auditors and accountants in Bangladesh. Port City International University Journal, 1(2), 1-12.
Kim, S. (2014). Commentaries on Sarbanes Oxley Law of 2002-Impact on Accounting Profession, Corporate Governance and Management. Asia-Pacific Journal of Business & Commerce, 6(3), 1-18.
Mackey, A., & Gass, S. M. (2015). Second language research: Methodology and design. Routledge.
Panneerselvam, R. (2014). Research methodology. PHI Learning Pvt. Ltd..
Pompper, D. (2014). The sarbanes-oxley act: impact, processes, and roles for strategic communication. International Journal of Strategic Communication, 8(3), 130-145.
Rolf, C. (2005). Efficacy of the Sarbanes-Oxley Act in Curbing Corporate Fraud. Rivier College Online Academic Journal, 1 (1), 1-16.
Taylor, S. J., Bogdan, R., & DeVault, M. (2015). Introduction to qualitative research methods: A guidebook and resource. John Wiley & Sons.
Willits, S. D., & Nicholls, C. (2014). Is the Sarbanes-Oxley Act Working?. The CPA Journal, 84(4), 38.