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The Sarbanes Oxley Act (SOX) was a results of the Enron/WorldCom scandal era. Many are questioned why SOX, with its emphasis oncontrols and risk, did not reveal the potential financial crisis.Many believe it must have been a failure in risk management. How doyou see the role of auditors in ERM (Enterprise RiskManagement)?

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Jamar Ferry
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28 Sep 2019

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Required: After reading the Bye, Bye SOX? Article comment on the issue of small business compliance with Section 404 of SOX

Bye, Bye, SOX?
The Sarbanes-Oxley Act (SOX) SOX compliance has been extended
may be declawed by upcoming four times, but they won’t need to
U.S. Congress and comply at all if the Garrett-Adler
Supreme Court decisions. amendment makes it to the Senate
The House of Representatives floor as a standalone bill.
recently voted to approve the SOX also established the
Garrett-Adler amendment, which PCAOB to oversee and regulate
would exempt small companies audit firms. PCAOB operates under
from SOX Section 404 provisions, the supervision of the Securities
while the Supreme Court is considering and Exchange Commission (SEC),
the constitutionality of the which also appoints PCAOB members.
Public Company Accounting Oversight It is funded by fees charged to
Board (PCAOB). audited firms. When it was established,
These developments may have Congress wanted the board
long-term implications for SOX, the to be separate, with its own funding
2002 legislation passed in the wake stream, and outside normal civil
of the Enron, WorldCom, and Tyco service laws so it could attract
scandals. The outcomes may also highly qualified specialists. PCAOB
have implications for records managers, members’ salaries are more than
information technology specialists, $500,000 and are reviewed by the
and compliance officers SEC.
who devise and implement company Pro-business advocates, represented
controls. by the Free Enterprise
Section 404 of SOX requires Fund, argue that the PCAOB’s governance
company auditors to attest to the structure is unconstitutional
soundness of the firm’s internal because it is an independent
controls and financial statements. agency that does not allow for the
Internal controls may include anything president to appoint members. Additionally,
from transaction approval authorizations because only the president
to records retention can remove SEC commissioners
programs. This provision is widely for cause, and because
blamed for an increase in auditors’ the SEC can only remove PCAOB
fees, as well as increased expenditures members for cause, some court
to ensure that proper internal members believe this is a formerly
controls are in place. unrecognized limit of the president’s
Small firms – those with powers that may contradict
less than $75 million in the constitution.
market capitalization The Supreme Court will take up
– have protested that the issue soon, and some legal experts
compliance with SOX 404 would believe that SOX could be
cost them a disproportionate share abolished completely if the court
of their earnings. The complaint is rules the PCAOB unconstitutional.
supported by an independent study
conducted at Pennsylvania State
University, which showed that
firms just over the $75 million
mark paid nearly $700,000 more in
audit fees and had average earnings
of negative $1.4 million in 2004

The following is a transcript of a video

This video explores the vital role of accounting in one of the world's largest firms. Aon is a reinsurance broker, insurance broker, and employee benefits consultant operating in more than 120 countries. Its goal of being the world's most responsive and client-focused insurance company means it must integrate thousands of professionals in hundreds of disciplines in many countries.

Many view accounting as a primary business language. It is of little use, however, unless you know how to "speak" it. Fortunately, the fundamentals—the accounting equation and the double-entry bookkeeping system—are not difficult to learn.

0:01Clearly, in the financial world,

0:03if you want to be an effective accountant,

0:05you just can't be a numbers person.

0:07You also have to understand people.

0:09You need to know how to debate and hold your

0:11position on the arguments that you take.

0:14♪♪

0:34-Narr: You might not have heard of Aon.

0:36They've brokered deals between clients

0:38and more famous insurance companies.

0:40They often even insure

0:42those insurance companies.

0:45In fact, the only building taller than the

0:47Aon building in Chicago is the Sears Tower.

0:50With over 550 offices in 130 countries,

0:55there's a lot of money involved

0:56and a lot of numbers to keep straight.

0:58So who does all that math?

1:00Well, that's easy.

1:01The pencil pushers, the number crunchers,

1:03bean counters, right?

1:05Accountants are traditionally thought of as

1:07humorless people who type into

1:09pocket calculators all day.

1:11Nothing could be farther from the truth.

1:13Accountants are actually some of the most

1:15important and influential people in business,

1:18and Joe Prochaska is probably

1:20the most important accountant at Aon.

1:23Accounting is the process of recording,

1:25categorizing and interpreting financial

1:28transactions, but there are more creative

1:30aspects to accounting than mere bookkeeping.

1:32That's why Joe is usually smiling.

1:35-Oh, yeah, and my staff is learning to smile.

1:37It's very rarely that they see

1:39me frown, okay, but there are

1:40different kinds of smiles.

1:42-At Aon, managerial accountants interpret

1:46financial data for a company's internal use.

1:49Financial accountants such as CPAs summarize

1:52that information for outside parties

1:54like potential investors.

1:56At the end of the year, Joe uses

1:58a tax accountant to assure that

2:00Aon is in full compliance with

2:02changing tax laws, and to assure that Aon is

2:05taking advantage of the best tax strategies.

2:08But Joe gets the lion's share of the duties

2:10when it comes to Aon's financial information.

2:13-The role I play in the process of handling

2:16all these inputs is reviewing all the reports

2:20that come in so that when our management

2:22takes a look at those financial statements,

2:24they can have some assurance that they're

2:26looking at this as our shareholders will be

2:30looking at it when we

2:31present the information.

2:34-Did you know that every book

2:35you've ever read,

2:36every comic strip, poem and Web page,

2:39has its roots in accounting?

2:40That's because the earliest

2:42written languages were created

2:44to keep track of financial transactions.

2:46Every world culture engages

2:48in some form of trade,

2:49and Aon operates in most of those places.

2:53-The information we get

2:54on a monthly and a quarterly basis

2:56from our different operations around the globe

2:59is stated in a variety of currencies,

3:01yet Aon is a U.S.-based company that publishes

3:05its financials in U.S. dollars.

3:07There's a requirement for some assurance from

3:11a party outside the management

3:12of the company that you've done

3:15a fair job in presenting your financials,

3:17that they've been presented reasonably

3:20and in a consistent manner.

3:23-That's why the

3:24Financial Accounting Standards Board created

3:26the Generally Accepted Accounting Principles,

3:29to help everyone get on the same page

3:31with their accountant.

3:32The Generally Accepted Accounting Principles

3:34and the interpretation are one

3:36of my key functions at Aon.

3:38The Securities and Exchange Commission makes

3:41sure that companies stay on that page.

3:44-In its most adverse reaction,

3:46the SEC also is capable of doing

3:49what they would call an enforcement action.

3:52Many of you have heard of Enron,

3:53okay, and WorldCom.

3:56-The core of those principles is

3:58the six-step accountant cycle.

4:00Pretend you're on Joe's staff for a moment.

4:02First, a hundred different people

4:04send you transaction records

4:06from a dozen different departments.

4:08You collect and organize that pile of

4:10receipts, invoices, bank statements and

4:12purchase orders, account by account,

4:15into a book called a journal.

4:17Now divide all those

4:18transactions into purchases, sales,

4:21investments and so on, in a ledger.

4:24When that's done, do a trial balance

4:26to check your work.

4:28If it's off, go back and find the error.

4:31If it's okay, you can now begin

4:33the real task of accounting,

4:35reporting and analysis.

4:36-The mechanics of doing the accounting,

4:39that doesn't excite me too much.

4:41But going through the philosophy

4:42of what you're trying to accomplish

4:44and how you match revenue and expenses,

4:47which is really the underlying philosophy behind

4:50Generally Accepted Accounting Principles,

4:52to make sure when you recognize the revenue,

4:54you recognize the proportion of the expense.

4:57There's a lot of judgment and

4:58interpretation of what goes into

4:59an individual company in doing that.

5:05The two most basic reports you'll do are the

5:07balance sheet and income statement.

5:10The balance sheet contains the

5:12fundamental accounting equation.

5:14Assets are all the things Aon owns,

5:16like furniture and investments.

5:18Liabilities are how much the company owes

5:21others in the form of loans,

5:22bonds or unpaid bills.

5:24Equity is a little trickier to understand.

5:27Say that Aon owns $100,000, although we can

5:30pretty much guarantee they made a lot more.

5:33If they owe $70,000 in bills and loans to

5:36run the business, the $30,000 difference

5:39is called owners' equity.

5:42That's the amount of actual value

5:43that Aon's stockholders divide up

5:45between them to see how much their

5:47investment is worth at the moment.

5:49The income statement covers a specific period

5:52such as a quarter or year.

5:53It starts with revenue, which is all

5:56of Aon's earnings for the period,

5:58including sales, licensing fees

6:00and gains on investments.

6:02By subtracting the cost of goods sold,

6:04which is the amount of money applied

6:06to producing and distributing a product,

6:09you come up with a gross margin,

6:11or the profit and loss for the period.

6:18Okay, we've been throwing a lot of terms

6:20around, so let's take a break and learn a

6:22little bit more about what Aon does.

6:25One particularly interesting service

6:27has to do with extreme weather.

6:28-For instance, we do catastrophe modeling

6:32for hurricanes so that some of our insurance

6:35clients that may insure a whole lot

6:36of homes along the Gulf Coast to Florida

6:39what happens if a certain hurricane comes?

6:41What type of insurance or reinsurance

6:43protections do they need to make sure

6:46that they're still financially solvent

6:47if a big wind blows and takes out a

6:49lot of their clients' homes?

6:53In addition to that,

6:54one of the things that we innovated,

6:55we were one of the first people

6:56to provide a terrorism model.

7:00And you may be aware that Aon lost

7:02its major operations in New York,

7:04and we lost 175 of our associates

7:06in the World Trade Center disaster.

7:08That certainly spurred us into taking a look

7:11at what can we do to help companies manage

7:14and monitor their exposure to terrorism acts,

7:18and we've done a - have a strategic

7:20partnership with Rudy Giuliani and his group

7:23to try and help companies

7:25prevent and prepare for

7:27if a disaster like that would ever occur again.

7:34Okay, back to the income statement.

7:37Subtract the operating expenses of the company

7:39- that's salaries, electricity and stuff -

7:42from the gross margin to reveal

7:44net income before taxes.

7:46Then, obviously, subtract the taxes,

7:48and you get Aon's net income or net loss.

7:52That figure is what's known as

7:53the bottom line.

7:54If these two reports seem similar,

7:58just remember that the balance sheet is

8:00like a snapshot of the business at any

8:02particular moment, while the income statement

8:05is more like a movie of the company's

8:07performance over a certain period of time.

8:09Now you're at the final and most important

8:12step of the accounting cycle, analysis.

8:15A good example of analysis is budgeting,

8:18which looks at Aon's history to

8:19find ideas for the future.

8:22The budgeting and the planning process

8:23help us analyze and understand that

8:25and create a consensus among management

8:28of what are reasonable expectations

8:30for the coming years,

8:32and it also helps us to give some guidance to

8:34our shareholders on what they should expect

8:36for earnings from our company, which then

8:39I think also helps give people guidance

8:41on what reasonable valuations of our

8:43companies are for our shares.

8:45There are a host of other analyses

8:47you can do, financial ratios

8:49and activity ratios and liquidity tests.

8:52Of course, you don't have to do

8:53all of this math in your head; these days,

8:56most of it can be done by computer software.

8:58I can't think of anybody in our

9:01financial shop that doesn't have a computer

9:03on their desk, and I'm probably one of the

9:04biggest dinosaurs in that I can read all these

9:07financial reports and I can manipulate them,

9:09but I'm too far away from them

9:11to actually create them anymore.

9:13But clearly, the analysis and

9:15the financial reporting is definitely enhanced

9:18by the reporting tools that exist in computers.

9:22Well, your first day as an

9:23accountant went pretty well.

9:25You made a few decisions and learned a little

9:27about how Aon functions financially.

9:29If you're interested in learning more about

9:31accounting as a career,

9:32talk to your instructor.

9:34On the other hand, if accounting isn't for you,

9:36don't worry; your day hasn't been wasted.

9:39Understanding and applying the

9:41basic fundamentals of accounting is a skill that

9:43will help you in almost any

9:45business endeavor you pursue.

9:47Clearly, if you want to do

9:48anything in business - and I am biased,

9:51but there is no better foundation than

9:53having an accounting background,

9:55because that's how businesses are

9:57measured at the end of the day, and the

10:00intrepretation of those numbers are critical.

Question:

The value of the owners' interests is the same as

short-term liabilities.

equity.

revenue minus costs.

liabilities minus assets.

profits plus revenue.

Study the case that starts on page 2 carefully. Then writeconcise answers to the following questions regarding the internalcontrol system of Duarf, Inc. Clearly label your responses withproper headings and subheadings. Be very specific and precise.Answers that appear to be beating around the bush will not get anycredit.

1. What are the controls in place that under normal conditionsshould function well to prevent embezzlements or frauds? Identifyand list (enumerate distinctly) at least 5 strengths and explainwhat potential problem(s) each control helps to prevent. (You mustseparately identify each to get proper credit.)

2. What are the additional control strengths of the system that mayhelp uncover problems or deter frauds? Identity and list (enumeratedistinctly) at least three. Did they work?

3. What are the weaknesses in the system? Identify and list(enumerate distinctly) at least three. For each control weaknessyou have identified, suggest a way to overcome.

4. From the human behavior perspective, why did the system fail?Give at least two distinct reasons. What lesson can you learn fromthis failure? Feel free to add any additional comments concerningthe fraud.

5. Search the Business Source Complete database in the UMD onlinelibrary to find a fraud case involving employee misappropriation ofassets. The case must be published within the last four years. (Theselected article must have a case as the focal point. An articlewith a general discussion of fraud will receive no credit.)Concisely and clearly tell the story. Explain how the fraudoccurred and why the fraud scheme was possible. Then compare yourfindings from the case with those in the Duarf, Inc. case in anyway you see fit. Attach the fraud case you found with yourpaper.



Page 2


Note: Be specific in supporting your points. For example, simplystating that the company’s segregation of duties appearsatisfactory as a strength will receive no credit. You must clearlyarticulate which duty is segregated from what other duties and howthis segregation helps to strengthen the company’s internalcontrol. Page limit is 5, standard margin, Times New Roman 12font.

Sandy’s initial success at embezzlement prompted him to try itagain. What led Sandy to jeopardize his career and personalwell-being, knowing full well that what he was doing was wrong?

ABSTRACT Businesses today rely heavily on computers to cut costs,increase transaction speed, create competitive advantages and storevital information. This embrace of computer technology often meansmoving to large systems and networks. Although these systems andnetworks come with built-in controls, such as segregation ofduties, they can never replace honest management. In this case, amanager under financial pressure used his influence over hisemployees to bypass the system controls. He was able to embezzlemoney until one employee courageously stood up to his questionableprocedures.
BACKGROUND Duarf, Inc. owned several media businesses, such asnewspapers, radio stations and magazines. It operated in many ofthe largest markets in the United States and Canada. The companyhad grown primarily through acquisitions over the past ten yearsand still used several of the acquired business systems.

Last year, the company decided to centralize all of its accountspayable processing, such as purchase orders, vendor maintenance,invoice processing and check printing. To accomplish thiscentralization plan, the company purchased the latest technology.Following the purchase, training sessions were held to ensure allprocessors and management could use all of the system'sfunctions.

This technology included a robust database software package. Thesoftware provided internal controls, including matching invoices topurchase orders and receiving reports, signature dollar limits,segregation of processing duties and a controlled vendor list. Allof the internal controls associated with the software wereadequately designed. They were tested and found to be functioningproperly within the system.

Before the centralization, Duarf, Inc. had eight separate accountspayable departments throughout the subsidiaries that processedapproximately 7,000 transactions per month. At month-end, eachdepartment had to submit a consolidation package to corporateaccounting. After the centralization, the accounts payabledepartment was processing approximately the same number oftransactions but was staffed with fewer full-time employees. Also,the consolidation process had been reduced to one package eachmonth instead of eight. Duarf, Inc. had realized the planned costsavings and management was delighted with the results.



4
THE PROBLEM Sandy Blanquet was a senior manager supervising theaccounts payable process at Duarf, Inc. Sandy started at CloudyNews, a mid-size newspaper, about ten years ago. When Duarf, Inc.acquired Cloudy News two years ago, Sandy was the accountingcontroller. As a result of the acquisition, Sandy was offered theopportunity to take part in centralizing the accounts payableprocessing for all of Duarf, Inc.'s subsidiaries. After thecentralization process was completed, Sandy took on theresponsibility of overseeing the entire department, from openingmail to processing payables to cutting checks. He managed 20employees through four supervisors. In addition to managing thedepartment, he was a check signer.

Sandy's system access only allowed him to view accounts payabledata. He could not process any transactions, edit the vendor listor print checks. However, he did review all voucher packagesrequiring a second signature. All checks had a facsimile signatureprinted by the computer system's check printers. Checks over $5,000required a second signature (in other words, Sandy's signature).Checks over $50,000 required a third signature (i.e., vicepresident or above).
FINANCIAL PRESSURE Sandy had always enjoyed the high life. He drovea new sports car. He lived in an upscale home. He took greatvacations. Some might have said he lived just barely within hismeans. Having just returned from an extended vacation to Hawaiiwith his credit cards closing in on their limits, Sandy found thatthe advertising market had taken a turn for the worse. A couple ofmonths later Sandy was in trouble because most of his savings wereinvested in Duarf, Inc. stock. He was overdue on his car paymentand his mortgage. "If I can just get some money, a loan orsomething, for a couple of months, I could get ahead," he thought,sitting at his desk on the fourth floor at Duarf, Inc.'sheadquarters. He rubbed his eyes. "Think," he murmured, knockingthe side of his head with his knuckles. Then it dawned on him. "Ah.Maybe I can borrow some money from Duarf. A check. No one will missit and I will repay it as soon as I can." He turned to his computerscreen and started to form a plan.

Employee 1

Jack Cross started at Duarf, Inc. three years ago as a corporateaccounts payable associate. His primary responsibility was toprocess invoices paid by the corporate headquarters. His work ethicand knowledge of the process were valuable assets to Sandy duringthe centralization process. After the centralization was completed,Jack was promoted to senior associate responsible for maintainingthe approved vendor list.

"Hey Jack, this 'Designing Pluz' invoice was just overnighted to mewith a rush on it from some vice president at our Los Angelesprinting site. Is this an approved vendor?" asked Sandy, sounding alittle irritated. Jack looked up, slightly startled to see Sandyenter his cubicle.

"No, I don't see them in here," Jack said, fumbling with thekeyboard. "Do you want me to add them to the vendor list?"



5

"Yeah, could you do that right now? I am going to walk this over toMabali for processing. Don't bother with the verification form, itwill take too much time," Sandy added somewhat curtly, knowing thatif Jack completed the verification form, he would call thetelephone number on the invoice to verify the vendor's information.Jack quickly added the vendor to the list.

Employee 2

Mabali Smith recently returned from her honeymoon. She had spentthree weeks in India, touring and visiting relatives. Mabalistarted with Duarf, Inc. at the time of the centralization and wasan accounts payable associate with invoice processingresponsibilities. Chris Topper, a senior associate, reviewed hervouchers for posting.

"Mabali, I have a rush invoice here from the L.A. printing site.Are you busy?" Sandy asked as he approached Mabali's desk. Mabali,who was talking to her husband on the telephone, quickly hungup.

"Oh, hi, Sandy. Uh, no, I'm not busy. Who's it from?" sputteredMabali, obviously surprised by Sandy's presence.

"It's from some V.P. over there. He thinks he can just send me aninvoice and expect it to be processed immediately. Here is hissignature." Sandy pointed to the invoice. "Are you sure you are nottoo busy?"

"Oh no. I'm not too familiar with this signature. Should I look himup in the authorization limits file to make sure he can approvethis invoice?" asked Mabali.

"Don't worry about it. If he's a V.P., he's authorized up to$50,000," counseled Sandy. Mabali entered the invoice into thesystem.

"I can put this in Chris's in-box and let him know it's a rushjob." Mabali suggested.

"Actually, I'm going to have Juan post it. I have to talk with himanyway." Sandy took the invoice and walked towards Juan's cubicle,knowing that Juan had authority to override the purchase ordermatching process.

Employee 3

Juan Namkaps started with Cloudy News five years ago, and had knownSandy for most of those years. When Cloudy News was acquired byDuarf, Inc., Juan was offered a supervisor position in the accountspayable department. His primary responsibilities were to review allof the purchase order matching exceptions and to supervise fiveassociates.

"Juan, what going on?" Sandy announced as he approached Juan'scubicle. Sandy sat down across from Juan.



6
"Hey, Sandy. What's up?" Juan said.

"Some V.P. at the L.A. printing site overnighted me an invoice anddemanded that I run it through ASAP," Sandy explained while tossingthe invoice across Juan's desk. Juan picked it up. "Can you postit?" Juan attempted to post the invoice, but it did not match anypurchase orders in the system.

"No P.O., Sandy." Juan looked up and saw Sandy's face starting toget red.

"What? You have got to be kidding me! He overnights me an invoiceand there's no P.O. in the system," Sandy blurted, looking pastJuan at the computer screen. "Well, just override it and I'll havea chat with our L.A. friend." Juan overrode the matching exceptionand posted the invoice for payment. Sandy grabbed the invoice andstomped back to his office.

Employee 4

Darlene Beau was primarily responsible for printing the afternooncheck run. She was hired only three months ago but had experiencewith the system Duarf, Inc. used to process payments. Knowing thecheck for this Designing Pluz invoice would require his signature,Sandy telephoned Darlene. Sandy explained to her that there wouldbe a special check in the afternoon run and, since it would requirehis signature, he would save her time by reviewing the voucherpackage himself. She willingly accepted and even thanked him forhis thoughtfulness.

Getting the check out the door

The check was printed, signed and mailed following the normaloperating procedures. However, it was mailed to a post office boxowned by Sandy and he deposited the $32,450 into his new businessaccount-"Designing Pluz."

Repeating the job

Although the money did help alleviate Sandy's financial pressures,he found himself wanting to try it again. He realized that with thefake Designing Pluz account already on the approved vendor list, hecould easily push another invoice through the process. Less thantwo weeks after the first phony invoice was paid, he attempted itagain.

Sandy created another Designing Pluz invoice for $12,945. He wascareful to keep the amount low enough that both checks combinedwould not stand out on the L.A. printing site's monthly budget foractual analysis. He decided to use different accounts payableassociates to process the payment but to tell the same story.

Employee 5

Rachel Nicki had been with Duarf, Inc. for two years. She was anassociate whose primary responsibility was processing supplyinvoices, such as paper, ink and press materials. Most people didnot know that she was married to one of Duarf, Inc.'s seniorinternal auditors



7
because she did not take his last name. Her husband had beenworking on implementing a fraud hotline for the company and spoketo her often about it.

"Rachel, I have a rush invoice here from the L.A. printing site.Are you busy?"

"No, not too busy. Hold on, just a second," Rachel said. Sandy hadinterrupted her in the middle of processing an invoice. Shefinished up with what she was doing and asked, "Why therush?"

"Some V.P. over there wants it processed ASAP. Here is hissignature." Sandy pointed to the invoice as he handed it to her.Rachel studied the invoice and the signature. She began to open theauthorization limits file on her computer, but Sandy stopped her."Rachel, I really don't have time for that now. He's a V.P."

"I'm sorry Sandy. I have to check him out to see if he's authorizedto approve invoices," Rachel explained, looking curiously at Sandy.She found the file and began to scan it for the name. She lookedback at the signature and asked, "Is this Sandman orZachvan?"

"Look, I appreciate your insisting on processing this by the book,but I really need this processed now. Take my word for it, he'sauthorized." Sandy said.

Somewhat shocked by what Sandy had said, Rachel began, "When Iprocess something, my initials are input into the data record and Idon't put my name on anything unless it's by the book." However,Sandy snatched the invoice and walked away before she couldfinish.

Two hours later, Rachel was still puzzled by Sandy's behavior. Shehad a funny feeling about that invoice and decided to call thecompany's fraud hotline. The operator was pleasant and let her knowshe could remain anonymous. The operator inquired about thesituation, then thanked her for the information. He explained thathe would recommend an internal review of the Designing Pluzvendor.
DISCOVERY Two months later, Rachel received a department-widee-mail saying that Sandy was leaving the company. The e-mail addedthat Sandy would be prosecuted for allegedly embezzling over$40,000.

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