In: Accounting
A question for everyone--do you think SOX has been effective or not in reducing financial statement fraud?
Ans. Yes,SOX has been effective in reducing financial statement fraud.
The Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted to prevent frauds in the sale of securities.Statement on Auditing Standards No. 99 lists three conditions generally present at the occurrence of frauds: incentive, opportunity, and the rationalization of fraud commission. All of these are addressed in SOX.In contrast, private litigation appears to be a better proxy because it includes both the omission and the misstatement of financial information and covers more fraud cases than SEC legal actions.The main objective was to get evidence whether reforms in the board and audit committee composition- main characteristics of corporate governance- reduced the probability of fraud reported.The implementation of SOX 2002 has been effective in preventing corporate fraud through an enhanced structure of corporate governance.the implementation of effective Internal control systems stipulated by SOX 2002, has been effective in preventing fraud. The same logistic analysis was completed to test this hypothesis. The results showed that the effectiveness of internal controls have a significantly negative impact on the probability of fraud events.
For example, SOX increases criminal penalties to discourage accounting manipulations; it strengthens internal audit procedures to reduce opportunities of accounting manipulation; it also requires additional officer and director certifications of financial statements to enhance managers’ integrity and ethics.
So,SOX has been effective in the prevention of financial statement fraud.