ACCOUNTING AND AUDIT ENFORCEMENT
Accountingand Audit Enforcement
Accountingand Audit Enforcement
Inthe early 2000s, the United States corporate environment experiencedseveral accounting scandals that caused panic in the economy. Some ofthe most published scandals were the Enron and Arthur Anderson andother which were reported in 2001 and 2002. These financialimproprieties initiated a legal debate that lead to the enactment ofThe American Competitiveness and Corporate Accountability Act of2002. This law, commonly known as the Sarbanes-Oxley Act or simplySOX was aim at restoring public trusts on the financial management inthe public sector. The act sets strict rules that should be followedby public companies especially in auditing processes and financialtransactions and reporting (Matulich & Currie, 2008). Althoughthe law targeted public companies, it has a huge implication on forprofit and not for profit health institutions. The government steppedforwards and intervened through legislation in the financialmanagement in the corporate sector because corporate leaders wereunable to promote ethical management of financial resources. Thisacted as a wakeup call to leaders and executive in for profit and notfor profit health industry. Therefore, although the regulations inthe Sarbanes-Oxley Act did not target the nonprofit industrydirectly, it gives practical recommendations that promote ethicalfinancial management in not for profit health organizations (Matulich& Currie, 2008).
Thereare many ways through which Sarbanes-Oxley Act has promoted ethicalbehaviors in governance of healthcare institutions. Nearly all themain provisions of the Sarbanes-Oxley Act have implications on thenot for profit and for profit healthcare facilities. The regulationsact as benchmarks in promoting ethical behaviors and financialpropriety. Some of the Sarbanes-Oxley Act regulations that arerecommended for nonprofit governance include the “role of theboard’s audit committee, the certification of senior executive,compensation of senior executives, a CFO’s code of conduct, andenhanced enforcement powers to remove unfit directors” (Kennedy,2012).
Sarbanes-OxleyAct clearly outlines how corporate organization should create a boardaudit committee and its roles. The main responsibility of thecommittee is to supervise the audit process. On the other hand, thecommittee must be independent, and therefore the CEO or the CFO mustnot influence the committee or be a member. The committee should haveat least one financial expert and if not, an explanation for thereason. Additionally, the committee should provide adequateprocedures for whistle blowing on accounting malpractices in theorganization. To avoid a perception that health care institutions aremismanaged or laxly governed compared to public companies, adheringto the provisions of the act in the creation of audit committeevoluntarily is important (Kennedy, 2012). The requirement forfinancial statements certified by the Chief Finance Officer and theChief Executive Officer is also important in promoting ethicalbehaviors and good financial management practices in not for profitand for profit health organizations. Full disclosure of the financialposition of the organization and ensuring that there areorganizational systems that promote accurate financial reporting isan important regulation in the Sarbanes-Oxley Act. As a result,adopting these financial reporting requirements increased publicscrutiny and transparency which is essential in promoting ethicalbehaviors in health care facilities (Kennedy, 2012).
Sarbanes-OxleyAct also promotes ethics by prohibiting personal loans from theinstitution to senior executives, the conduct of chief financeofficers and provisions for removing unfit executives. This isbecause if a health care organization extends a personal loans toexecutive will be difficult to justify or account for. Additionally,well defined code of conduct that govern the behaviors and actions ofsenior executive in finance and accounting are also necessary inpromoting ethics and financial propriety. Lack of these standards ina health care facility may be perceived negatively by the media,stakeholders and credit rating agencies. The health careorganizations need to establish structures that allow the removal ofunfit directors. This ensures that directors in these organizationsand facilities are ethical and meet the minimum code of conduct toremain in the boards. Therefore, increased familiarity and adoptionof the provisions of Sarbanes-Oxley Act have had positive impacts onfinancial management in for profit and not for profit healthorganizations and facilities. Compliance with the provisions has beeneffective in promoting ethics in health care organizations (Kennedy,2012).
Oneof the most published accounting frauds in the health care industrywas the HealthSouth Corporation scandal which emerged in 2003. HealthSouth Corporation is one of the largest public companies in theUnited States that is directly engaged in health care. It is also thelargest owner of inpatient rehabilitation hospitals in the UnitedStates. The health care giants provide health services ranging frominpatient and outpatient surgery, diagnosis and patientrehabilitation. However, the company management led by the foundingchairman and chief executive officer castigated one of the biggestaccounting frauds in the health care sector. According to theSecurities and Exchange Commission, the CEO and Chairman ofHealthSouth Corporation, Richard Scrushy advised the junior employeesin the accounts department to systematically exaggerate the earningsof the company by over stating the profits (Markham, 2005). Since1999, the company overstated it earning by over 1.4 billion dollarsin order to exceed the Wall Street expectations. This resulted into afalse increase in the HealthSouth Corporation reported assets. By thebeginning of the last quarter of 2002, the company assets were overstated by about 10 percent. According to the Sarbanes-Oxley Actregulations, the executives in all public companies are required tocertify the accuracy and completeness of the financial statementprepared by the organization. Despite the fact that Scrushy was awareof the financial impropriety in the company’s report, he satisfiedthe misleading and false statements (Markham, 2005).
Theaudit report by the Securities and Exchange Commission indicated thatplans to overstate the company earnings was instigated in 1996 afterthe health care giant became a public traded company. However, theartificial inflation of the company earnings occurred between 1999and 2002. The aim of the artificial inflation was to maintain theprices of stock in the market and meet the analysts’ expectations. The CEO and other senior officers in the company benefited from thescandal. For example, during the artificial inflation period, he soldover 7.7 million shares in the stock market. Additionally, his salaryand bonuses were based on the inflated earnings (SEC, 2003).
Althoughthe scandal was instigated before Sarbanes-Oxley Act was enacted, theinvestigations took place after the law was enacted. These are someprovisions of Sarbanes-Oxley Act which were violated by the CEO andthe organization. According to the act, the senior executives inevery public organization should take individual responsibility forthe financial reports prepared by the company. Thus, the CEO had aresponsibility of ensuring that the financial reports were completeand accurate. The CEO violated the specific limits on how executivesof public organizations should behave and ensure that the financialreport comply with the minimum accounting standards. The organizationalso violated the provision of the act by not establishing systemsthat ensures auditor independence. The CEO was able to influencetheir findings and promote inaccurate reporting. Additionally, thestructures that enhance financial disclosure such as internalcontrols were inexistence (Barr, 2012).
Sarbanes-OxleyAct has had significant impacts on the accuracy and completeness offinancial reports in public organizations. This has significantlyincreased public and investors’ confidence. However, it is evidentthat preventive measures can not completely eliminate accountingfraud. People will always find a way of committing financial crimes.High profile scandals in the modern economy are mainly instigated bythe top executives in the organizations. Thus, the internal controlscannot effectively deal with mega accounting scandals because thefrauds are designed to override them. Therefore, the most importantrecommendation would be enhancing accountability, ethics and moralityamong top executives (Kennedy, 2012). Promoting ethical andresponsible leadership is the most important preventive measure thatcan deter high profile financial crimes. Another importantrecommendation is adequate legal protection of whistleblowers. Anorganization can report inaccurate or incomplete financial reportsfor several years until a whistleblower provides information. At theorganization should establish structures that ensure that there areadequate channels that whistleblowers can share information withoutbeing exposed or victimized. Although Sarbanes-Oxley Act has theseprovisions, the regulators such as the security and exchangecommission and other government agencies and institutions should alsoestablish adequate structures that encourage whistle blowing. Thiswill significantly deter financial misreporting and accountingscandals (Kennedy, 2012).
Barr,R. (2012). HealthSouthCorporation Case Study,http://www.bobbarr.biz/pdf%20Files/HealthSouth%20Corporation%20Case%20Study.pdf
Bartlett,D. (2005). "WallStreet Medicine". Critical condition: how health care in Americabecame big business–and bad medicine.New York: Broadway Books.
Kennedy,K. A. (2012). AnAnalysis of Fraud: Causes, Prevention, and Notable Cases.Honors Theses. Paper 100.
Matulich,S. & Currie, D. (2008). Handbookof Frauds, Scams, and Swindles: Failures of Ethics in Leadership.CRC Press. ISBN 978-1-4200-7285-3.
Markham,J. (2005). AFinancial History of Modern U.S. Corporate Scandals: From Enron toReform.Armonk, N.Y: M.E. Sharpe.
SEC(2003). SECCharges HealthSouth Corp., CEO Richard Scrushy, with $1.4 BillionAccounting Fraud,Securities and Exchange Commission, Litigation Release No. 18044 /March 20, 2003,https://www.sec.gov/litigation/litreleases/lr18044.htm