Accounting and Audit Enforcement

Q1. Evaluate the level of SOX regulations that applies to for-profit and not-for-profit health care organizations, indicating whether or not mandating SOX requirements for non-profits might reduce fraud and increase corporate governance. Provide support for your rationale.

The Sarbanes-Oxley act, signed into law in mid-2002, is meant to restore public trust in the American corporate companies after the scandals of Enron, Tyco and other smaller companies between 2001 and early 2002. The Act is meant to ensure the accuracy in the financial records of publicly traded companies by making the Chief Executive and Chief Financial Officers legally accountable for any wrongful reporting, and regulating the selection of auditors as well as provisioning the auditing of company finances (GuideStar, 2015). Although the act is specifically targeted at publicly traded, for-profit companies, it is expected that the corporate governance practices that have emerged as a result of the act will contribute to its adoption among the non-profits in the healthcare industry.  Non-profit health care organizations have traditionally been held to higher standards of conduct than publicly traded companies (GuideStar, 2015). The reasons for these differences stem from higher levels of public benefit interests in the companies and their charitable status. Also, these non-profits are often times associated with religious bodies, and are mainly exempt from tax. Due to their public benefit nature, it is likely that Government regulators will push for the inclusion of non-profits under SOX regulation. State Attorney Generals are likely to cite public policy considerations when justifying the reasons why the SOX Act should apply to non-profits as well as publicly traded companies. The state would probably also point to the requirement to protect charitable donors as further impetus to push for financial reporting for non-profits. Financial integrity considerations are, therefore, just as important for for-profits as they are for non-profits. The SOX Act has three main provisions with the first being the institution of an independent audit committee composed of board members with at least one member being a financial expert. The Act also defines the responsibility for auditors and adds the stipulation that copies of financial statements for the non-profit company should be signed and certified by the CEO and CFO (Independent Sector, 2006). The Act stipulates that the two officials should bear legal responsibility for purposefully misleading reports. As previously stated, the SOX regulations do not apply to non-profits, and as such the non-profit choose if and how to implement them (Independent Sector, 2006). However, statutory laws in the different states may force partial compliance in non-profit organizations. Mandating compliance to the SOX Act may reduce cases of fraud among non-profits. The reason for this, is that it will force the non-profit organizations into exercising financial integrity. Of the main provisions of the SOX Act, two are at least partially implemented by non-profits. Some non-profits already have audit boards for investment and accounting which are responsible for looking into and vetting company finances. For the vast majority of non-profits, they do not have any similar structure and this provision will ensure there is a committee that ratifies the budgetary allocations for the institution. Similarly, the change of Business Auditors at least once every five years is a sound business practice that would improve financial reporting in non-profits. Also, the requirement that auditors should not provide any non-audit related services to the organization will encourage financial integrity. The imposition of a limit on the tenure of auditors will ensure there are less chances of familiarity and collusion with internal employees to fix books or perpetuate fraud. However, the provision that is most likely to effect change in the non-profits in the health care sector is holding the CEO and CFO accountable for declared results. The principal financial reporting forms for non-profits, the 990 and the 990-PF are usually answered erroneously. This provision of the SOX Act will ensure that the documents are signed in a timely manner, and are accurate and complete. The CEO and CFO are unlikely to tolerate fraud under such circumstances since they will be held legally responsible for any misrepresentation of facts in the records.

Q2. Determine whether SOX has been effective in regulating ethical behavior of for-profit health care organizations. Defend your position.

SOX has done a commendable job for both for-profit and non-profit entities. It should be seen that before the enactment of the SOX requirements, many companies were going under due to lack of mechanisms of detecting and alerting the public about elements of fraud that were taking place in given companies. Since the passage of the SOX regulations, it can be seen that a code of ethics is supposed to be prepared by any accounting firm for its employees. The code of ethics should also meet some specific requirements. With the code of ethics, the auditing firm is responsible for checking on how its employees carry out their work. Another thing that shows that SOX has succeeded has been the mandate given to whistle-blowers. Employees of a given firm are mandated to report any cases of financial impropriety at their organizations without any fear of being reattributed (Jackson & Fogarty, 2006). The reason is that the law protects such employees. Following the guidelines of SOX, both for-profit and non-profit healthcare institutions are prohibited from engaging in activities that would lead to conflict of interest among themselves. One of the regulations is that a CEO who had been an employee of an auditing firm should not allow his former employer to audit his books if he had been an employee of the said firm in the last one year. Such mechanisms are used to show that conflicts of interest are avoided at all accosts. The establishment of internal controls that an organization uses to ensure that whatever is being reported is correct is also an achievement that has come due to SOX requirements. It means that before any organization makes any report, it must be sure that whatever that is being presented is the true picture of the firm. The reason is that many people will have gone through the report and in so doing; the final report is the most accurate report that is given to the public. It should also be seen that these internal mechanisms must regularly be examined to show how effective they are. The reason is that some internal controls can be compromised.  In so doing, the report that is released at the end of the year is normally not accurate. To defend this stand, it should be known that SOX recommendations have played a significant role in reducing billing scams that were being experienced in many healthcare facilities and wrong advertisements about the services that were being offered in a given facility.

Q3. Review the audit report issued by the external auditing firm from the company’s Website for the year it was accused of fraud. Then, determine whether the external auditors were negligent in preparing the audit report for the company. Formulate an opinion regarding which Internal Control was deficient or what GAAP was violated. Defend your position.

A review of the report shows that the external auditor was not negligent in carrying out his mandate. It is in fact the external auditor who pointed out the issue of financial impropriety at the said healthcare. What this shows is that the internal mechanism of the healthcare facility were not sufficient to carry out their mandate as expected of them. It can be seen that there was interference in the manner of preparing the internal reports. The senior managers of the health facility compromised the internal mechanisms that acts as controls so as to come up with a report that would portray something that was very different from what was on the ground. All this was done with the intention of painting a positive picture about the organization. In so doing, the investors or shareholders were being given figures that were not accurate. Those who were interested in investing in the health facility may have done so and in the end they lost a lot of their money. To me, I have a feeling that the internal controls were a big let-down to this organization. The reason for defending this statement is that if they had performed their work in the expected manner, it could not have been possible for the fraud not to have occurred. The fraud could have been stopped by a whistle-blower who could have been protected by the law.

Q4. Determine what provision(s) of SOX was / were violated in the health care fraud case in question. Indicate whether or not SOX adequately provides sanctions to deter the behavior or if changes are needed to the regulations to remedy the issue(s) and thus ensure compliance.

The provisions that were compromised are those that are provided for by section 302, 303 and 404. Section 302 talks about the establishing the authenticity of financial report from all subsidiaries before making it public. The person in charge should ensure that whatever he is reporting is the realty that is being postulated by all the subsidiaries of the given organizations. It is the mandate of the Chief Finance officer to ensure that this provision is followed to the latter. It can be seen that from the look of things, this was not followed. The report that was made did not capture the true aspects of the financial position of the subsidiaries. Under section 303, those who were hell bent in coming up with a report that they had influence were to be punished according to this provision. It was illegal for those in authority to influence the way the financial records were being prepared. Another provision that was interfered was section 404. Section 404 talks about putting in place mechanisms that would ensure the internal controls are effective (Jackson & Fogarty, 2006). It means that these mechanisms were not effective as they were easily compromised and they gave in to the pressure from those in authority. Had they been effective, they could have detected this fraud and prevented it from taking place. It should be seen that SOX has tried in preventing fraud from taking place in organization. It is the people who are in charge of implementing the SOX requirements which are a let-down to this firm. If they were dedicated people, the fraud that took place in this firm could not have taken place. In this case, SOX should not be blamed but the implementers of the SOX regulations.

Q5. Based on the fraudulent activity that occurred, recommend two (2) improvements to the internal control environment to reduce those occurrences. Provide detailed recommendations.

Recommendations on how the above can be avoided include putting in place an officer’s code of ethics that should be followed by all persons working in the finance department. It should be noted that an officer’s code of ethics would give direction to what was expected of each person as he carried out his duties. The repercussions that one would get if he failed in following the code were well articulated in the code of ethics. Without this code of ethics, people may just carry out their tasks in a manner that they like, without following the laid down procedures.  Another recommendation would be recruiting people of integrity to work in the finance department. The reason for this is so that they can report diligently what they come across. People of integrity will not be compromised when it will come to reporting fraudulent activities in the firm.

References

GuideStar,. (2015). The Sarbanes-Oxley Act and Implications for Nonprofit Organizations. Guidestar.org. Retrieved 22 November 2015, from https://www.guidestar.org/rxa/news/articles/2003/sarbanes-oxley-act-and-implications-for-nonprofit-organizations.aspx

Independent Sector,. (2006) (1st ed., p. https://www.independentsector.org). Independent Sector.

Jackson, P.M., Fogarty, T.E. (2006). Sarbanes-Oxley and Non-Profit Management Skills, Techniques, and Methods. New York. John Wiley and Sons

Kohn, S.M., Kohn, M.D., Colapinto, D.K. (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. New York. Praeger Publishers.

Lubin, J.S. (2004) “Compensation at other Non-Profits Examined”. The Wall Street Journal.

Peregrine, M., Schwatz, J.L.  (2004). “Key Non-profit Corporate law developments in 2003” Health Law Reporter 13(4)

Shakespeare, C. (2008). “Sarbanes-Oxy Act of 2002 five years on: What Have We Learned?” Journal of Business Law and Technology 333