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The Role of 2002 Sarbanes-Oxley Act | Report

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Added on  2020-03-23

The Role of 2002 Sarbanes-Oxley Act | Report

   Added on 2020-03-23

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The Role of 2002 Sarbanes-Oxley Act | Report_1
Table of ContentsEXECUTIVE SUMMARY.............................................................................................................11. INTRODUCTION.......................................................................................................................11.1 Project statement....................................................................................................................11.2 Research aims and research questions...................................................................................11.3 Research Question.................................................................................................................22. CRITICAL LITERATURE REVIEW.........................................................................................23. METHODOLOGY......................................................................................................................43.1 Type of investigation.............................................................................................................43.2 Research design.....................................................................................................................43.3 Research philosophy..............................................................................................................53.4 Research approach.................................................................................................................53.5 Data collection.......................................................................................................................63.6 Data analysis..........................................................................................................................74. FINDINGS, ANALYSIS AND DISCUSSION...........................................................................85. DISCUSSION............................................................................................................................146. CONCLUSION..........................................................................................................................156.1 Conclusion...........................................................................................................................156.1Limitations......................................................................................................................163.6 Recommendations................................................................................................................177. REFERENCES..........................................................................................................................18APPENDIX....................................................................................................................................21
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List of tablesTable 2: Analysis of Enron............................................................................................................11Table 3: Analysis of Waste management......................................................................................12Table 4: Analysis of AIG after SOX.............................................................................................13Table 5: Financial data of Waste Management.............................................................................21Table 6: Financials of Enron..........................................................................................................21Table 7: Financial data of Enron...................................................................................................21AbbreviationAIG-American International GroupSEC-Security Exchange CommissionSOX- Sarbanes-Oxley Act
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EXECUTIVE SUMMARYThe current research aims to assess the role of 2002 Sarbanes-Oxley Act in reducing theaccounting fraud. This act is an effective measure to tight the internal control of the businesswhich facilitates to present the financial statement effectively and meet the requirement of thebusiness in an effectual. This assists corporation to provide the real time information tostakeholders and ensure the good reputation of the business at the internal or national market.The major objective of the study is to assess whether the act is actually helpful in reducing theaccounting fraud and reason behind less accounting fraud are also assessed. Furthermore, role of whistleblowers in making potential violators think twice beforeplanning for fraudulent activities has also been evaluated. The research was conducted by usingqualitative method in which varied sources were used for the collection of secondary data. Theoutcome derived from the study reflects that 2002 Sarbanes-Oxley Act (SOX) is effective forreducing the fraud because the internal control procedure has been improved along with effectiveauditing procedure. However, it is advisable to conduct the internal audit and display thefinancial statement in the right manner to protect the business from any kind of fraud. In additionto this, companies should apply proactive measures to detect the fraud and make it correct on theright time so as to stay competitive in the marketplace.1. INTRODUCTION1.1 Project statementDoes the 2002 Sarbanes-Oxley Act really work to reduce accounting fraud?The continuous increase in the fraudulent activities of the corporate world an Act toreduce accounting fraud was introduced so the main project statement reflects that whether itworks well or not. This has been proved by collecting data from three companies such asAmerican International Group (AIG), Enron and Waste Management.1.2 Research aims and research questionsAim1
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The main aim of the research study is to find out how far implementation of Sarbanes-Oxley Act helped in reducing accounting fraud. 1.3 Research Question The research question of the current study are listed as follow-1.Does the 2002 Sarbanes-Oxley Act really work to reduce accounting fraud?2.What is the reason behind less accounting fraud recently? 3.How whistleblowers make potential violators think twice before planning for fraudulentactivities? 4.Why accounting fraud has not gone away completely besides so much of improvements,control, detection and incentives?2. CRITICAL LITERATURE REVIEWPompper (2014) stated that Sarbanes-Oxley Act consumed huge cost in itsimplementation but provides the long term benefits by detecting the accounting fraud of thebusiness. Further, this act has provided benefit for the business through increasing awareness ofaccounting department. At the same time, necessary improvements are brought in the auditcommittees and individual accountability so as to enhance the quality of financial reporting(Basile, Handy & Fret, 2015). Kim (2014) asserted that the effect of Sarbanes-Oxley Act can be seen mainly on internalcontrol disclosure and auditing but it is relatively less effective in context of fraud activities. Yet,this helpful for the purpose of reducing overall chances of committing fraud and bring theimprovement under the internal control procedure of the business. This leads to meet theexpectations of stakeholders and assists management to ensure successful operation of thebusiness for longer time span. However, still there will be possibility that management canoverride with the inherent limitation of inherent controls.Basile, Handy & Fret (2015) explained that Sarbanes-Oxley Act aids businesses to reduce thenumber of re-statements; however, it is not certain that whether the existing statements are2
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positive or negative. Currently, earnings revision is more used rather 404 restatements in order tohandle the errors which in turn internal control is questionable. Furthermore, Willits & Nicholls(2014) claimed that Sarbanes-Oxley Act is suitable legislation as it makes the stakeholders feelsatisfied because the financial statements are prepared free from any kind of fraud even if so thenact facilitates to make that fraud public. Therefore, application of Sarbanes-Oxley Act is usefulas companies can proactively prevent the fraud action. This government intervention proves tobe effective to get the detail information related to financial position of the business.Furthermore, proactive companies realized the advantages of using this act whereby necessarychanges can be made on time. It reflects that financial statements are evaluated and analyzedeffectively by using the cited act. Abdioglu et al., (2015) delineated that Sarbanes-Oxley Act covered three major areas such a newaudit committee provisions, assessment of internal control and code of ethics for the seniormanagement. However, overall efforts of this act are directed towards the strengthening theinternal control of the business. Yet, it creates huge cost for the business and management alsoneeds to abide by all its principle. Owing to this, it should be understood properly. Apart fromthis, Basile, Handy & Fret (2015) explained that companies operating at higher level of are moreprone to accounting fraud and it is based on the ability of management to override the effectinternal controls. They aim to increase wealth of the business and promoting their business atinternal level with the increased rate of return.Clark (2006) provided that Sarbances-Oxley has several ill impacts on the performance offoreign companies as companies with market capitalization exceeding $75 million need to abideby this regulation. However, several companies such as BP, HSBC, Sony and Toyota Motor willhave to comply the as earlier it was not following this act. With this effect, approximate 17%European companies are thinking to delist themselves whereas 43% found that cited act will bebeneficial. On the other hand, Asian companies and others related to Latin America also quitereceptive as 81% of Latino Americans and 72% of Asian provided response that overall benefitof the act will be more than incurred cost of the business. This indicates that foreign companiesare getting the advantages of the act and submitting their compliance report on the right time.Primack (2012) stated that Sarbances-Oxley Act is one of the most significantwhistleblower protection law in which employees can easily complaint regarding the unethical3
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