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Accounting and Audit Enforcement
Evaluate the level of SOX regulations that apply 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
Sarbanes-Oxley Act of 2002 (SOX) refers to the law that concerns the disclosure of finances by public accounting firms in the U.S. There are different laws that are used for both profit and non-profit organizations in the healthcare field. SOX is one of the laws and the healthcare organizations are expected to comply with the law. Healthcare organizations should ensure that they are SOX compliant through analysis and strengthening of the internal controls, developing and implementing strong computer security policies, and defining and addressing the potential conflicts of interest issues. The SOX law practices include internal reporting control, programs for whistleblowers, audit committee, the majority of independent directors and code of conduct and business ethics (Zajac, 2014). If the provisions of SOX are implemented properly, it can be beneficial for both profitable and non-profit organizations in the healthcare sector.
The requirements of SOX are implemented in a careful and complete manner since the results are beneficial for the company. It covers issues concerning corporate governance making sure that the functions of the audit are performed effectively and the financial statements reflect the accurate position of the organization (Viacava, Gordon, Goldstein, & Nelson, 2005). It would not be correct to indicate that the application of principles of SOX to the non-profit organizations can result in favorable results, for instance, reducing fraudulent practices and enhancing the corporate governance of the company. This is only possible through application of the law necessitates the organization to change their principal audit partners, forming a new audit committee, and pre-approving the fee structure of the audit. These are what increases the level of fraudulent activities and improving on these areas can be beneficial for an organization.
Determine whether SOX has been effective in regulating the ethical behavior of for-profit health care organizations. Defend your position.
Yes, SOX has been effecting in the regulation of ethical behavior for-profit healthcare organizations. This is because it emphasizes the compliance with the code of conduct and business ethics for the organization. Therefore, it encourages the management to carry out activities according to the law and get rid of any unethical activity. SOX law has ensured that the management within the organization is strong to enable them to report all the fraudulent activities and any misleading information with no fear of termination. Aside from that, the benefits connected to the implementation of the success of the law is indulged with fraud. There are different advantages that are linked to the law. One, the management is able to accurately disclose the correct financial statement of a company. Two, it ensures that there is an elimination of the conflict of interest between agents and the principal hence facilitating corporate governance. Three, it improves the internal control of the organization in addition to encouraging self-regulation. Four, SOX law enables the management to be directed towards performing in accordance with the code of conduct and ethics. Lastly, it monitors and encourages the concept of due diligence.
The advantages mentioned are inter-related and results in effective monitoring and performance of ethics within the organization. The law reflects more attention to the ethical conduct of an organization because of the increased number of unsuccessful companies because of unethical practices. The mitigation of the unethical practices has been successful in profit healthcare organizations due to the billing of fraudulent cases as well as working on issues relating to patient care and analysis and advertisement of companies with unethical practices.
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.
The company that will be discussed is The HealthSouth Corporation. It was involved in fraudulent practices of window dressing the revenue and manipulation of the figures to be used by their investors. This was a way that the company used to attract more investors and portraying a positive image for the company to increase the price share in the market. The earning during that period had inflated to $1.4 billion as well as inflating of the total assets of the company. This significantly raised the net worth and net profits of the company, but the drawback indicated that high taxes were paid. Looking at the external audit reports it was clear that there was negligence while it was prepared since they failed to identify the fraudulent activities from the management. The external auditors were also not able to provide an unfavorable opinion which is what was required in this case. This is because there was fear of losing the market reputation and investors. Failure of the external audit to perform his duties and responsibilities leads to the inability to implement and highlight the fraudulent activities (Weil & Bryan, 2003).
GAAP indicates that there should be a link between the matching principles and the accounting principles which indicate any change in the company’s earnings (GAAP, 2010). This technique helps a company to balance the funds of shareholders. In the case of The HealthSouth Corporation, the management altered the earnings for the company and further changed the value of the total assets. This resulted in an incorrectly stated value of the liability. The contractual adjustment account on the statement of income reflected the different value of gross billing of patients and costs of reimbursement. The violation of the matching principle associated with the revenue and the expenses indicate a violation of the GAAP.
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.
In the case of The HealthSouth Corporation, there was a different violation of the SOX law. These include poor internal controls, lack of independence for the company’s external auditor, lack of following of code of ethics, lack of audit committee to facilitate honest activities and lack of provision of consultancy. SOX ensures that there are authorities that discourage the behavior and different changes are required to ensure that there are regulation and solution regarding the issue. There are penalties and punishments that come with violation of SOX law. These include, fine is imposed on the company which is worth millions or imprisonment of up to 20 years if the member of the company is involved in fraudulent activities. Another punishment is that there are provisions for any individual who violates the SOX law through destroying, falsifying, and altering the financial statements of a given company.
Based on the fraudulent activity that occurred, recommend two (2) improvements to the internal control environment to reduce those occurrences. Provide detailed recommendations.
Those involved in the fraudulent activities should be severely punished since they violated the SOX laws as well as the GAAP. This will help the firm as other employees who would think of taking part in these fraudulent practices will not do it as they will understand that there are punishments that awaits them. Not taking an action towards those who took part in the falsifying of the company’s values is a way of encouraging the others to also do it. Interactions between auditors and employees help the firm as there will be no segregation. Severe punishment for auditors and all those involved in working against professional ethics is critical. Their membership as certified public accountants should be revoked. This is because auditors should work to ensure that the financial statements of a company are correct before they are released to the public. Therefore, they should not jeopardize the investors and the public in general because they want the company to gain profits and market share. The duty of being watchdogs is to ensure that the interests of the general public are protected and thus should not perform their duties in a negligent manner. Therefore, in-depth investigation is necessary, and the techniques of auditing should be adopted to avoid accounting entries that are fraudulent.
The second recommendation is that the accountants and the management team should not be allowed to take part in the window dressing of the company’s accounts. The entries in the system should be protected by passwords and there should be a prohibition of any backdate entry. Heads of accounting should be able to predetermine and pass entries through them only. This is to mean that even the management should not be allowed to be involved in matters that are not within their scope of work. Any additional or suspicious accounting heads should be investigated to ensure that any cases of fraud within the company are prevented.
- Draz, D. (2011, March 28). Fraud prevention: Improving internal controls. Retrieved from CSO: http://www.csoonline.com/article/2127917/fraud-prevention/fraud-prevention–improving-internal-controls.html
- GAAP. (2010). Ch 1: Fraud Cases: Violation of Generally Accepted Accounting Principles (GAAP). Washington DC.
- SOX. (2003). Increased Penalties Under The Sarbanes-Oxley Act Of 2002. United States Sentencing Commission.
- Viacava, D. F., Gordon, B., Goldstein, L., & Nelson, J. (2005, June 21). Governance of Not-For-Profit Healthcare Organizations. Retrieved from https://www.healthlawyers.org/Archive/PG%20Email%20Alerts/050817soa/050817soa_governance.pdf
- Weil, J., & Bryan, C. (2003). HealthSouth’s Audit Panel Only Met One Time in 2001. The Wall Street Journal, 12-26.
- Zajac, M. B. (2014, Sep 21). How “SOX-Like” Compliance Can Benefit the Healthcare Industry. Retrieved from Feature: http://www.plantemoran.com/services/audit-accounting/enterprise-risk-services/documents/how-sox-like-compliance-can-benefit-healthcare-industry.pdf
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