Effectiveness Of Regulatory Reforms As Deterrent To Frauds And Unethical Actions

1924 words - 8 pages

After a decade since implementation of Sarbanes-Oxley Act, people begin to discuss its effectiveness as deterrent to unethical and fraudulent activities. This paper analyses the effectiveness of regulatory reforms, and whether it is better using regulation and legal reforms or through ethnical teaching to prevent recurrence of fraudulent cases.

Analysis on Effectiveness of Regulatory Reforms as Deterrent to Frauds and Unethical Actions in Audit
What is Fraud Auditing?
Fraud auditing is an intentional misinterpretation to obtain benefit. (Mintz and Morris 2008, p.53) It includes financial reporting frauds and misappropriation of assets, which are best represented by misstatement of debts in Enron scandal and theft of assets in Tyco International Scandal respectively.

What are Unethical Actions?
Ethics in business environment is core values and standards to guide one’s decision-making. (Mintz and Morris, 2008) Maxwell (2003) introduces “Golden Rule” to decide what constitutes to be ethical by asking one “How would I like to be treated in a particular situation?” Hence, unethical behaviours include allegedly inflating earnings to meet stockholders expectation in Healthsouth Scandal in 2003.

Enhancement after Reforms
Changing Culture in Auditors
The United States Congress enacted the Sarbanes-Oxley Act in 2002 after major scandals revealed loopholes in accounting policies. As Arthur Anderson LLP has double duties in Enron scandal, auditors are limited to types of auditing to maintain independence under SOX Sec.201. Sec. 10A of Securities Exchange Act of 1934 is amended by requiring audit partners to rotate after five years of service.
Lynn Turner, former chief accountant at SEC, reports significant decrease in number of fraudulent financial reporting compared to 1990s. (Drawbaugh and Aubin, 2012) Partly feared by heavier penalties, audit committees enforce stricter rules in financial reporting. Audit Analytics also revealed the number of restatements has escalated initially but stabilized after 2010 in a twelve-year report. (Usvyatsky, 2013)

Strengthening Corporate Governance
Regulatory reforms usually require corporations to disclose whether directors adopt code of ethics. Under SOX s.406 and 407, corporations which do not comply have to provide explanation. Corporations applying these rules show their corporate responsibility in willing to be under public surveillance. Separating board of directors from management team shows independence by avoiding conflict of interests. (Maleske, 2012) The SEC also adopted these rules to promote transparent organizational culture with integrity.

Restoring Public Confidence
One of the major objectives of most reforms is to boost public confidence in auditors and corporations. A decade after SOX implementation, positive feedback from lawyers and analysts has proved salutary effect of reforms in reshaping the image of auditors with impartiality and...

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