Accounting and Audit Enforcement
1. The Sarbanes-Oxley Act applies to publicly-traded companies. Thus, it does not apply to non-profit entities. Nor does it apply to for-profit entities that are not publicly-traded. This is because SOX was passed specifically to address instances of accounting fraud in publicly traded companies that were undermining consumer trust in the capital markets (101.com, 2018). A publicly traded companies has a variety of different obligations under SOX that will help to reduce the opportunities and incentives for accounting fraud. Both opportunity and incentive are components of the fraud triangle – one needs to have a perceived need to commit the fraud and the circumstances with which to do so (ACFE, 2018).
Non-profit organizations have no obligations under SOX. However, there is a school of thought that holds that non-profit entities can benefit from some of the recommendations and mandates that SOX contains. Fritz (2016) writes that "non-profits are under tremendous pressure to be financially responsible and transparent" and that because of this "the Sarbanes-Oxley Act, while meant for the business world, provides a blueprint for non-profit financial clarity as well."
Some of the practices that nonprofits have adopted in order to shore up their own finances are to have a financial expert on an audit committee, and the recommendation to have an outside auditor is something that many larger nonprofits have adopted (Fritz, 2016), and nonprofits have also been encouraged by this practice. As such, SOX truly does provide a blueprint for financial transparency – these practices were often not commonplace until the law mandated them for some companies. It was only then that other entities started to examine these practices and their outcomes, and have evaluated the suitability of SOX-type practices in their organizations, even if those organizations are not typically obligated to follow those practices by law.
As such, it is recommended that where not unduly burdensome, non-profit organizations should adopt some of the practices mandated in SOX. While these practices would be strictly optional, the reality is that SOX provides the most robust framework for audit best practices and fraud prevention in the canon of American law. As such, it provides a valuable framework for organizations of all types, including those that are not otherwise obligated to follow SOX. Even without the enforcement mechanisms, a commitment to follow the prescriptive measures contained in Sarbanes-Oxley should...
There are still stakeholders for those types of organizations, including financial stakeholders, and those stakeholders will certainly receive benefit from knowing that management has a commitment to best practices in fraud prevention, including the use of external auditors.
2. The relative effectiveness of SOX is definitely the subject of debate. Some people argue that even if it has prevented fraud, it has also cost business an incredible amount of money in compliance costs, some estimates over $1 trillion (Coenen, 2018). Some of the other criticisms, such as that SOX would reduce risk-taking, have proven unfounded . The reality, however, is that most benefits are indirect (Hanna, 2014). Indeed, there is no direct way to measure whether a law has prevented fraud because a) not all frauds are detected and b) prevention of fraud relies on knowing exactly when someone would have committed a fraud but thought twice because of the risks created by the law. The only real measure that can be undertaken is the percentage instances of fraud that have occurred before and after. It does not appear that many studies have been conducted on this subject, and none that have focused on the health care industry.
Such a study would have to examine the rates of accounting fraud among publicly traded healthcare companies before and after Sarbanes-Oxley. Without that data, it is merely speculative to determine whether or not SOX has been effective in regulating ethical behavior in for-profit healthcare organizations. Indeed, it is not "for profit" that is important; the population for this study has to be publicly-traded, because those are the company for which data is available and the companies that are directly governed by the Sarbanes-Oxley Act.
3. The case chosen is Tenet Healthcare, which the SEC examined in 2007. KPMG were the auditors of record for that year of the fraud, 2002. The SEC found that Tenet had "exploited a loophole in Medicare's reimbursement system, which had a material impact on its financial performance. The exploitation of the loophole was never disclosed to investors. The company changed a number in its outlier revenue, which in turn increased that outlier revenue figure significantly over the course of three years, where outlier revenue tripled. This revenue accounted for over 40% of the company's earnings per share in 2002.
The KPMG report for that year contains the usual boilerplate statement that "such…
