DQ1 One of the inherent limitations of internal control is the people factor. In the Enron Scam the combination of the Enron executive management andinternal and external accountants’ collusion enabled a bypass of all the internal controls. The use an internal auditor is a technique that can be used to detect and prevent unethical behavior. A second limitation of internal control mechanisms is cost. A lot of small companies cannot afford to implement internal control practices due to the large implementation costs. Public companies are paying a hefty price to comply with section 404 of the Sarbanes-Oxley Act.
DQ2 Fraud is a behavior by humans in which they conceal the truth to profit financially. In the infamous Enron scandal the executives cash out hundreds of millions of dollars in equity prior to the collapse based on insider information. Inside trading is illegal and forbidden by the Securities and Exchange Commission (SEC). I think that fraud occurs when employees are unhappy and underpaid. The employee’s start thinking that he deserves more and will go to any measure to rob from their employer to obtain personal gain.
A criminal mastermind is needed to perform a fraudulent scheme. 3. I agree with you that management override contradicts the purpose for the existence of internal controls. In a way management override gives the managerial absolute power over the corporate governance initiatives of the company. The quote you mentioned in your response proves that managerial override can be used to perpetrate a fraud. The amount of bankruptcies in the United States is one the rise. Many of these bankruptcy cases occurred due to bad management of cash flow and assets.
In a lot of the multibillion dollars bankruptcy cases the managers have paid themselves millions of dollars in bonuses. 4. I agree with the professor that SOX has placed a barrier that limited the incentive of managers to defraud a company. Section 802 of the Sarbanes-Oxley Act imposes severe penalties for violation of SOX. If I am not mistaken the maximum penalty is 20 years of prison. Accountants as well as managers are liable if the financial statements are full of fraud. During the past decade the most impacting and game changing law that was passed in the accounting and financial world is the Sarbanes-Oxley Act.
Despite the high cost of implementation I feel SOX is a complete success. 5. I agree with you that one of the inherent flaws of internal control systems is the human factors. The story you mentioned is a bit funny, but sad at the same time. I can not believe that a grandma working in a library could pull off such a scam. It appears as if the profile for a person that is willing to break the law is not clearly defined.
Fraud can occur at any level and sometimes the person you least expects is corrupted. 6. I liked your post because it describes a typical scenario in which upper management colluded with each other to pull off a scam. Managers have the greatest opportunity to pull off a scam due to their access to privileged information. The Sarbanes-Oxley Act realized that managers are the top candidates for collusion. Section 802 of the Sarbanes-Oxley Act imposes penalties of up to 20 years in prison for violators of SOX.
The severe penalties associated with SOX have made lots of executives think twice before entering in fraudulent behavior. 7. I tend to agree with you that when employees see an opportunity to bypass an internal control they might be tempted to doing so. Corporate America has to get back to its roots when the employee and the people were more important to the company than any other stakeholders. Today companies often do not care much about their employees evidenced by the massive layoffs that occurred during the recession of 2008.
Overall fraudulent activity in Corporate America has gone down during the past decade largely due to the implementation of the Sarbanes-Oxley Act. 8. I agree with your response that economic necessity is one of the reasons that people are tempted to commit fraudulent activity. People today do not believe in their government like they use too. They are seeing how the government has spent over $3 trillion dollars since 2002 in a war that seems to have no end. Obama claimed he would end the war, but he has not done so.
People are more willing to commit white collar crimes such as cheating on their tax returns more than ever before. The amount of foreclosures on homes in recent years is staggering. 9. It is sad to admit, but the ethical standards of employees in the United States have gone down a lot since our grandfathers use to work the factories in America. There is a lack of loyalty in the corporate world from both sides. Employees are more willing than ever to leave a company for another job if they get a better financial offer.
Companies do not care about the well-being of its workers and they will incur in mass layoffs at the first chance of saving a buck. Many companies in America have closed down and move to emerging economies.