An Examination of the Effects of Procedural Safeguards on Intentions to Anonymously Report Fraud

2009 ◽  
Vol 28 (2) ◽  
pp. 273-288 ◽  
Author(s):  
Steven E. Kaplan ◽  
Kurt Pany ◽  
Janet A. Samuels ◽  
Jian Zhang
Keyword(s):  
Experimental Study ◽  
Internal Control ◽  
Experimental Studies ◽  
Audit Committees ◽  
Great Flexibility ◽  
Public Companies ◽  
Ancillary Study ◽  
Anonymous Reporting ◽  
Sarbanes Oxley ◽  
Procedural Safeguards

SUMMARY: The Sarbanes-Oxley Act of 2002 (SOX, Sec. 301) requires audit committees of public companies to establish procedures for employee anonymous reporting of concerns regarding questionable accounting, internal control, or auditing matters. Audit committees have great flexibility in their implementation of this requirement. To address this issue, this paper reports the results of two experimental studies. Our first experimental study examines whether an anonymous hotline possessing stronger procedural safeguards, including external administration and related procedural safeguards, increases fraud-related reporting intentions in comparison with one possessing weaker procedural safeguards, including internal administration. Respondents' intentions to report a fraudulent act were greater under the weaker safeguards condition as compared with the stronger safeguards condition. These results were not anticipated, and an ancillary study was conducted examining internal versus external anonymous hotline administration, holding constant other procedural safeguards. The results show that respondents' intentions to report a fraudulent act were stronger under an internally administered hotline. Thus, our results suggest that an externally administered anonymous hotline may not increase fraud reporting. Our findings have implications for those who oversee and evaluate the operating effectiveness of controls.

Under Which Conditions are Whistleblowing “Best Practices” Best?

2013 ◽  
Vol 32 (3) ◽  
pp. 171-181 ◽  
Author(s):  
Jian Zhang ◽  
Kurt Pany ◽  
Philip M. J. Reckers
Keyword(s):  
Best Practices ◽  
Audit Committees ◽  
Behavioral Experiment ◽  
Public Companies ◽  
Anonymous Reporting ◽  
Sarbanes Oxley ◽  
Main Effect ◽  
History Of ◽  
Reporting Channel ◽  
Reporting Intentions

SUMMARY: Public companies are required by the Sarbanes-Oxley Act of 2002 to establish an anonymous reporting (whistleblowing) channel for employee reporting of questionable accounting practices. Corporate audit committees are provided flexibility in implementing this requirement and a controversial choice is the type of reporting channel. Most commentators argue that “best practices” call for an externally administered “hotline.” To examine the efficacy of externally administered versus internally administered channels we conducted a behavioral experiment. Our results reveal a significant main effect with reporting intentions being greater if the hotline is administered externally. We then examine whether this finding is robust across selected environmental and employee-specific conditions and find that it is not. Our results suggest that the primary reporting benefits of an externally administered hotline are for organizations with a history of poor responsiveness to whistleblowing and for employees registering relatively low on the proactivity scale. Specifically, we find that an externally administered hotline obtains higher reporting intentions under conditions wherein a previous incidence of whistleblowing notably failed to achieve a good outcome. Also, this effect is only statistically significant for participants registering as relatively low on a “proactivity” scale.

scholarly journals Corporate governance characteristics of firms reporting internal control deficiencies

2011 ◽  
Vol 8 (2) ◽  
pp. 363-390
Author(s):  
Kathleen Rupley
Keyword(s):  
Corporate Governance ◽  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
High Growth ◽  
Audit Committees ◽  
Market Reactions ◽  
Sarbanes Oxley ◽  
Internal Control Deficiencies ◽  
Nominating Committees

From a sample of firms reporting internal control deficiencies (ICD), I compare corporate governance structures to industry, exchange, and size – matched firms. I examine market reactions to reports of ICDs in 8-K filings. Additionally, I examine shifts in corporate governance characteristics since the Sarbanes-Oxley Act of 2002 (SOX). Results indicate that weaker boards, larger audit committees, less independent nominating committees, and high growth companies are associated with ICDs. Market reaction is negative to ICD disclosures when they are associated with controls over revenue. Firms have made changes post-SOX including reduced non-audit services, more frequent audit committee meetings, formation of nominating and governance committees, creation of internal audit functions, and implementation of corporate governance policies.

Sarbanes-Oxley and Public Reporting on Internal Control: Hasty Reaction or Delayed Action?

2013 ◽  
Vol 27 (2) ◽  
pp. 371-408 ◽  
Author(s):  
Parveen P. Gupta ◽  
Thomas R. Weirich ◽  
Lynn E. Turner
Keyword(s):  
Internal Control ◽  
Public Reporting ◽  
Section 404 ◽  
Wall Street ◽  
Public Companies ◽  
The Public ◽  
Sarbanes Oxley ◽  
Legislative Proposals ◽  
Set Up ◽  
The U.S

SYNOPSIS Since its passage, the Sarbanes-Oxley Act of 2002 has been criticized, and praised, by many on numerous grounds and claims. However, no single provision of this law has come under more attack than Section 404, which mandates public reporting of internal control effectiveness by an issuer's management as well as its independent auditors. Even after 10 years, the opposition to the Section 404 internal control requirements has continued to the point where the U.S. Congress through two separate Acts—the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and the 2012 Jump Start Our Business Startups (JOBS) Act—have permanently exempted the non-accelerated SEC filers and the “emerging growth” issuers with revenues of $1 billion or less from Section 404(b) of the Sarbanes-Oxley Act of 2002. Many of those who oppose the Section 404 requirements rest their claim on grounds that the U.S. Congress acted in haste in mandating the public reporting of internal controls by U.S.-listed companies and that the issue was not well thought out or debated. They also contend that the U.S. Congress acted under pressure because of the public outrage over the bankruptcy filings of Enron and WorldCom. To the contrary, this paper shows that the debate over public reporting of internal control by U.S. public companies is more than six decades old, dating back to the McKesson & Robbins fraud. This paper reviews relevant legislative proposals, bills introduced in both the House and the Senate, regulatory efforts by the SEC, and the recommendations of many commissions set up by the private sector to inform the reader how these efforts were the deliberative precursors to what was eventually codified in Section 404 of the Sarbanes-Oxley Act of 2002.

scholarly journals From Phishing To Advanced Persistent Threats: The Application Of Cybercrime Risk To The Enterprise Risk Management Model

2010 ◽  
Vol 14 (4) ◽  
Author(s):  
John W. Moore
Keyword(s):  
Risk Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Enterprise Risk Management ◽  
Management Model ◽  
Material Weakness ◽  
Public Companies ◽  
Advanced Persistent Threats ◽  
Sarbanes Oxley ◽  
Enterprise Risk

This paper examines the issues of cybercrime in the context of risk to organizations.  In particular, it considers the control frameworks most commonly used by U.S. public companies to benchmark their internal controls over financial reporting.  It discusses the market for stolen identities, looking at the sources from which many of those identities are stolen.  It reviews the available internal control frameworks and explains how a firm’s risk of cybercrime might be classified as a material weakness under Sarbanes-Oxley Section 404.  It models how the use of COSO’s Enterprise Risk Management model could improve an organization’s chances of avoiding a serious incident.

scholarly journals Sarbanes Oxley Act Of 2002: Is It Worth The Price?

2011 ◽  
Vol 5 (8) ◽  
Author(s):  
RamMohan R. Yallapragada
Keyword(s):  
Control Systems ◽  
Internal Control ◽  
Financial Statements ◽  
Internal Controls ◽  
Stock Exchanges ◽  
Public Companies ◽  
Sarbanes Oxley ◽  
Foreign Corporations ◽  
Senior Officers ◽  
Auditor Fees

Sarbanes – Oxley Act (SOX) was hastily passed in July, 2002.  The Act requires public companies to establish internal control systems sound enough to prevent fraud.  Senior officers have to sign-off on the financial statements.  Section 404, dealing with internal controls, resulted in misery to US business firms.  Auditor fees have doubled. Some small-cap companies and foreign corporations are delisting from US stock exchanges.  The provisions of the Act, its impact on US firms, and some of the complaints against the Act are presented in this paper.

Economic Determinants and Consequences of the Proactive Disclosure of Internal Control Weaknesses and Remediation Progress in IPOs

2017 ◽  
Vol 37 (4) ◽  
pp. 1-24 ◽  
Author(s):  
Sudipta Basu ◽  
Jagan Krishnan ◽  
Jong Eun Lee ◽  
Yinqi Zhang
Keyword(s):  
Internal Control ◽  
Audit Committees ◽  
Litigation Risk ◽  
Due Diligence ◽  
Ipo Underpricing ◽  
Going Public ◽  
Economic Determinants ◽  
Sarbanes Oxley ◽  
Internal Control Weaknesses ◽  
Jel Classifications

SUMMARY This study investigates (1) why some IPO firms proactively disclose internal control weaknesses (ICWs) and remediation progress in their prospectuses before going public, despite being exempt from the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act at the time of IPO, and (2) the association of such disclosures with IPO underpricing (i.e., the first-day return). We find that IPO firms that proactively disclose ICWs and remediation progress have higher litigation risk, are audited by industry specialist auditors, and are more likely to have audit committees prior to the IPO, compared with firms that do not disclose such information, after controlling for the ex ante probability of having ICWs. IPO underpricing is lower for firms that disclose ICWs and remediation progress, consistent with the conjecture that the disclosure of ICWs and remediation progress signals extensive premarket due diligence, thus reducing the information asymmetry between informed and uninformed investors. JEL Classifications: G24; K22; M13; M41; M42; M49.

Koss Corporation Case: Trouble in Brew City

2011 ◽  
Vol 26 (3) ◽  
pp. 547-568 ◽  
Author(s):  
Brian Daugherty ◽  
Daniel G. Neely
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Real Life ◽  
Chief Executive ◽  
Securities And Exchange Commission ◽  
Financial Statement Fraud ◽  
President Obama ◽  
Public Companies ◽  
Chief Operating Officer ◽  
Sarbanes Oxley

ABSTRACT This instructional case provides auditing students an opportunity to examine an interesting real-life embezzlement and financial statement fraud occurring at a publicly traded company in the post-Sarbanes-Oxley (SOX) era. The case focuses on independent auditors' and senior management's reporting responsibilities related to internal control over financial reporting involving smaller public companies (nonaccelerated filers). While all public companies are subject to external auditor and management attestation on the effectiveness of internal control over financial reporting following SOX, the Securities and Exchange Commission (SEC) granted nonaccelerated filers numerous extensions for the effective date of required auditor attestation. In 2010, President Obama signed legislation to permanently exempt nonaccelerated filers from auditor attestation. The case also highlights inherent risk assessments by the independent auditor when one individual holds multiple C-level titles (Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, etc.) within the organization concurrent with membership on the board of directors, and requires students to recommend internal control policies and procedures designed to prevent or detect the embezzlement.

scholarly journals Fraudulent financial reporting detection: Corporate governance red flags

2007 ◽  
Vol 4 (4) ◽  
pp. 254-261 ◽  
Author(s):  
Hugh Grove ◽  
Tom Cook
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Boards Of Directors ◽  
Code Of Ethics ◽  
Audit Committees ◽  
Business Strategies ◽  
Stock Exchanges ◽  
Fraudulent Financial Reporting ◽  
Sarbanes Oxley

The recent fraudulent financial reporting by Enron, Qwest, and other companies was facilitated by poor corporate governance. As shown in this paper, ten timeless factors of corporate governance helped detect such reporting. Weak corporate governance facilitated both classic and recent financial reporting frauds, particularly the following factors: all-powerful CEO, weak system of internal control, focus on short-term performance goals, weak or non-existent code of ethics, and questionable business strategies with opaque disclosures. These factors implied ineffective boards of directors and audit committees. New corporate governance guidelines for boards and audit committees by the U.S. stock exchanges and the Sarbanes-Oxley Act appear to have good potential for strengthening corporate governance to help prevent earnings manipulations and fraudulent financial reporting. These new regulations should continue to strengthen strong corporate governance and control systems, especially in relation to the ten timeless factors for fraudulent financial reporting. If corporate governance guidelines are not followed, then, these stock exchanges can delist the offending companies

Is SOX 404(a) Management Internal Control Reporting an Effective Alternative to SOX 404(b) Internal Control Audits?

2017 ◽  
Vol 36 (3) ◽  
pp. 71-89 ◽  
Author(s):  
Yangyang Fan ◽  
Chan Li ◽  
K Raghunandan
Keyword(s):  
Internal Control ◽  
House Of Representatives ◽  
Cost Effective ◽  
Securities And Exchange Commission ◽  
Effective Alternative ◽  
Section 404 ◽  
Public Companies ◽  
Sarbanes Oxley ◽  
Cost Effective Alternative ◽  
Management Reporting

SUMMARY Section 404 of the Sarbanes-Oxley Act (SOX; U.S. House of Representatives 2002) continues to be controversial. Using samples of Securities and Exchange Commission (SEC) registrants with market capitalizations of less than $150 million, we find that non-accelerated filers have a significantly larger reduction in the likelihood of material misstatements, discretionary revenues, and discretionary accruals compared to smaller accelerated filers after non-accelerated filers became subject to the requirements of Section 404(a). Our findings are consistent with the argument that management reporting on internal controls (Section 404(a)) may be a cost-effective alternative to internal control audits (Section 404(b)) for smaller U.S. public companies.

The Public Company Whistleblowing Environment: Perceptions of a Wrongful Act and Monetary Attitude

2017 ◽  
Vol 17 (1) ◽  
pp. 1-30 ◽  
Author(s):  
Alisa G. Brink ◽  
D. Jordan Lowe ◽  
Lisa M. Victoravich
Keyword(s):  
Financial Reporting ◽  
Insider Trading ◽  
Data Availability ◽  
Monetary Incentives ◽  
Fraudulent Financial Reporting ◽  
Public Companies ◽  
Securities Law ◽  
Anonymous Reporting ◽  
Sarbanes Oxley ◽  
External Reporting

ABSTRACT The passage of the Sarbanes-Oxley (SOX) and Dodd-Frank Acts created a unique environment for whistleblowing at public companies. SOX requires public companies to establish anonymous reporting channels, and Dodd-Frank outlines substantial monetary incentives for reporting securities law violations directly to the SEC. In response to these provisions, this study examines whether the type of securities law violation (fraudulent financial reporting versus insider trading), individuals' psychological assessments of the wrongdoing, and individuals' monetary attitude influence intentions to report to an internal hotline and to the SEC. We find internal reporting is driven by increased perceptions of responsibility to report a wrongful act, whereas external reporting to the SEC is driven by increased perceptions of seriousness regarding the wrongful act. Finally, we find that individuals' attitude toward money explains reporting intentions; however, we do not find any evidence that monetary attitude leads to increased reporting to the SEC. Data Availability: Data used in this study are available from the authors upon request.

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