The Role of Sarbanes Oxley Act in Curbing Corporate Fraud

The Accounting Information Systems (AIS) plays a central part in the business computing structure of any organization. AIS deals with the classification, collection, storage, monitoring, and conversion of the company’s data into information utilized for internal control and reporting (Smith, 2016). Once an organization adopts an Accounting Information System, they can keep accurate records, and manage the assets of the organizations properly. The management utilizes AIS to guarantee that there are suitable access and separation of duty controls. With such restrictions, the administration can hold the employees responsible for their interaction with the system. This paper delves into how the components and functions of Tesco’s accounting information system contributed to the 2014 fraud scandal.

Tesco is popular grocery retailer with its head office in Welwyn Garden City, Hertfordshire, U.K. (Colson, 2017). Globally, it is ranked at position nine regarding revenues and third position regarding profits. It is the leading grocery store in the U.K and has outlets in 12 nations across Europe and Asia. In 2017, Tesco’s store portfolio included Tesco Extra, Superstores, Express, Metro, One Stop, online Stores as well as Petrol Stations (Colson, 2017). With some growth in budget rivals and the reduced non-food spending from consumers, Tesco appeared to have lost appeal to some of its customers. The company’s shares even lost its value by 49 percent as it continued to struggle in the competitive market with rivals Lidi and Aldi (Colson, 2017).

Eight Tesco executives were suspended in October 2014 due to Fraud claims after the discovery was made on the company’s inflation of its profits by £250 million (Colson, 2017). Consequently, the stock market value of the company was reduced by £2.2 billion (Colson, 2017). Among the executive suspended were Chris Bush, the Managing Director in the United Kingdom and Kevin Grace, former director for commercials. Following an investigation by Deloitte, the accountancy firm, the exaggeration of the profit was reviewed up to £263 million (Colson, 2017). Moreover, Tesco failed to pay the suppliers to enhance its performance in sales and hence the inflated profit figure. It was also determined that the company encourage the suppliers to pay if they needed to have a better control of where their products were placed on the shelves or give them a competitive advantage over their main rivals (Colson, 2017). Furthermore, several days before their presentation of the company’s results, Tesco encouraged buyers to ask suppliers to agree to postponements in payments to make the figure representing the sales made look flattering.

In October 2014, a criminal investigation began as confirmed by the Serious Fraud Office (Colson, 2017). In the aftermath of the scandal, investors sued the company claiming that they lost significant amounts of money since they bought shares on misleading accounts basis. After the scandal broke, the company lost almost half of its value. John Scouler, Christopher Bush, and Carl Rogberg, who were the former commercial director for food, managing director, and finance director respectively, were accused of financial fraud while in their professional capacity which was considered abuse of office (Colson, 2017).

The company’s management failed to maintain a system of internal controls to ensure reliable and accurate financial reporting. Ideally, after financial transactions are obtained aptly, they must be scrutinized for precision (Young, 2013). The cash receipts, cash disbursements, and job cost reports all must be revised to ascertain the accuracy of the quantities that the paperwork provides. If incorrect figures are forwarded into the Accounting Information System, accounts reconciliation should be done to detect errors in the financial transactions.

While financial transactions may satisfy the accounting needs of validity, precision, and timeliness, some companies like Tesco engage in fraud deliberately to uphold a company’s economic health. In as much as the AIS software was created to be computerized which makes it difficult to manipulate, such companies find a way to alter the system (Wells, 2017). Tesco possibly used special accounts to hide transactions or created separate entities to hide debts particularly considering they failed to pay the suppliers. Failure of Tesco’s internal controls included:

Segregation of Duties
The company had a limited number of employees working in the accounting department which resulted in combining all vital duties and delegating them to only a few of them (Wells, 2017). The management failed to segregate the duties properly and get an independent individual from out of the accounting department to check the reports without bias and maintain a strong control system.

Balance Account and Balance Sheet Reconciliations
Tesco failed at reconciling the balance accounts and balance sheets accurately. The company was under immense pressure to keep performing better and did not consider including proper auditing, as they knew their move would not pass muster with strict auditors. Tesco did not execute its financial reporting as per the established accounting principles regarding valuation, measurement, obligation, occurrence, existence, and completeness.

Supervisory Controls and Governance
During the proceedings, one of the executives stated that the financial misrepresentation had been going on for so long since Tesco was keen on covering the growing accounting gap in a short-term although they were well aware of possible future problems. The company created separate entities to hide its debts, and without proper governance and supervisory controls, the process went on for several years.

Accounting Information Systems
Tesco willfully manipulated the companies AIS to allow it to perform the accounting fraud. The accounting team was given the responsibility of concealing the useful information to make it look like the company was making a profit even when it was not (Wells, 2017). The team went ahead to falsify the figures in a practice that they knew was contrary to the proper accounting principles and standards. Chances are Tesco’s computer audit trail failed because there is no any other better way to explain how such transaction misrepresentations were missed.

In the contemporary corporate environment, outsourcing is commonly practiced, and the situation in the accounting department is not any different (Young, 2013). Outsourcing is largely preferred because of the numerous advantages it presents including less expensive since the development and training costs are reduced, and the company does not have to deal with the accounting concerns (Wells, 2017). However, it is the company’s responsibility to guarantee accurate accounts and not shifting the burden to the service provider. Although the clerical tasks in outsourcing can be transferred, the management is still answerable.
While an outside organization has access to very confidential information, it does not have suitable internal controls (Young, 2013). Therefore, the service provider’s incompetency may produce fraud and material errors. Furthermore, when an outside company performs another company’s inside duties, it gets information about it that the party may use for its benefit, for instance, buying shares when the prices are projected to fail or rise. Outsourcing is also risky, particularly especially when the same company is contracted for both accounting and auditing purposes due to the possible conflict of interest (Wells, 2017). The independence of the auditing report will be compromised since the company will be more keen on projecting the performance in the best light possible. The ethical concerns in outsourcing the service provider relates to whether they have any other interest in the company. The company should always remember that while auditors have an opinion on the financial reports, it is not their responsibility to prevent or detect fraud within the company.

During the case, it was determined that Tesco has been preparing artificial financial records, book, and statements that were inaccurate and there was an absence of proper internal controls in the company through the years (Wells, 2017). The company deliberated created loopholes in the accounting systems to allow it to maintain profits that were not reflected in the true sense of sales. The auditing team also failed at delivering accurate analysis of the accounting statements because no other methods can be sued to explain how the fraud went on for several years. The auditing trial system should have detected the loopholes in the accounting system earlier enough (Smith, 2016). The auditing team should have thoroughly scrutinized the accounts, and the independence of their function maintained to prevent fraud at Tesco.

The auditor failed to reveal the company’s affairs and disclose any details regarding the financial misrepresentation in the statements (Wells, 2017). The Sarbanes Oley Act insists on the impartiality of the auditing team. The auditors must be adequately competent in postulating an unbiased opinion on financial statements and must not have any relationship with the company. Auditors at Tesco should have employed continuous compliance monitoring and ability to detect real-time fraud and AIS user misconduct. Continuous accounting utilizes algorithms and other models to assess both less severe and high impact risks (Smith, 2016). With compliance monitoring, processes update regulatory changes as soon as they happen and assist in ascertaining that companies comply with the regulations.

Listed within the Title VIII of the Corporate and Criminal Fraud Accountability, SOX, 2002 focuses on penalties imposed when on alters financial documents (Wells, 2017). The penalties include up to twenty years imprisonment for fabricating, covering, damaging, destroying, or changing documents, records or concrete entities with the objective of manipulating, obstructing, or blocking a legal inquiry. It also imposes fines of up to 10 years or fines for an accountant who violates the requirement of maintaining all review or audit papers for five years willfully or knowingly.

The Act has led to increased expenses since it needs several committees to be established and there is an increase in the costs for compliance requirements (Wells, 2017). It contributes significantly to companies going public, which makes it hard for hiring and retaining of highly qualified directors. Setting various committees is costly or organizations that are changing to the public from private because they will compensate for failing to meet the legal requirements and establishing committees (Wells, 2017). The public companies’ responsibilities have been increased since they hold the investments of the shareholders and investors in their business. Therefore, the strict corporate systems regulations are necessary, and this Act restored the shareholders’ confidence in businesses.

The Act has made the CEOs and directors responsible for the company’s financial affairs and statements. Moreover, the CEOs sign the financial statements making them legally responsible for the corporations’ affairs and must use their influence and authority to detect and stop all forms of fraud within the organization (Wells, 2017). It is not only directors who can commit fraud but also the other workers in the company. However, it is the CEO’s responsibility to ascertain that proper controls are put in place to protect the corporation from financial misrepresentation or fraud.

The auditing setting assists in the maintenance of the internal auditing purpose and assists in coordinating it with the external audit function to ensure independence and objectivity (Young, 2013). The internal auditors meet hurdles in reporting on the challenges in the system or any cases of fraud or misrepresentation particularly with involvement from the management team, but an audit committee facilitates its functions (Wells, 2017). The audit committees report to the company’s directors and the manager do not have an unwarranted effect on the internal audit department.

SOX presents that several committees must be established including remuneration and audit committees that ensure independence in both remuneration and audit function (Wells, 2017). While directors may set high remuneration for themselves, the formation of committees helps them hold shares and obtain performance incentives for their performance as well as their salaries. The remuneration committee works on the hiring and retention of a company’s executive and non-executive directors. The non-executive directors’ functions are primarily at information level while executives ones oversee company’ day-to-day functions. Introducing the board of directors structure functions as a preventive approach to ensure financial manipulation and reporting does not happen.

SOX and other laws should ensure consistency between all governing agencies. Therefore, the Public Company Accounting Oversight Board’s registered auditing firms will audit privately owned companies (Wells, 2017). The Act provides that it can only scrutinize audits of publicly owned companies. Consequently, reviews of private firms are not covered under the law. This subjects them to inspection by the board but excluded from disciplinary action in this regard. The segregation between private and public companies is unnecessary since when fraud happens in business, its nature is always notwithstanding (Young, 2013). As such, it is important to design an equivalent process for both private and public companies with similar standards. While SOX has made significant strides in improving corporate focus on a healthy ethical culture in publicly owned businesses, so much more can be done to integrate private companies as well as improving the performance of audit firms as well as the processes of evaluating financial statements and reporting them.