Sarbanes-Oxley

7 Pages   |   1,619 Words
 
How do GAAP, corporate compliance, and Ethics combine to prevent Fraud & Abuse in health-care organizations?

Table of Contents
 
Introduction. 2
Description of Core Terminologies. 3
Relationship of Core Variables in Fraud & Abuse Prevention. 4
Fraud & Abuse prevention in Health Care System.. 5
Conclusion. 6
 

Introduction

Fraud and abuse of company resources was one of the major reasons that the Sarbanes Oxley act of 2002 was put in play. The act enforced significant changes to the roles of top management, corporate functions and audit functions. More rules and regulations were brought into play along with transparency, which would curb the incidence of fraud and abuse in a corporate environment.
This report shall start with explaining core concepts of GAAP, corporate compliance and ethics. These core concepts would then be linked to the incidence of fraud and abuse, and finally the prevention of such incidences would be discussed with special reference to the health care sector.
 

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Description of Core Terminologies

Accounting principles are based on a predefined set of rules or principles. Each accounting technique has its own unique features. GAAP or generally accepted accounting principles follow the accruals basis of accounting while following those rules and procedures, which are generally accepted by professionals (Carlson Advisors, n.d.). GAAP is usually a pre requisite for almost every company because of its accuracy or portrayal of results. Banks and all other financial institutions insist on GAAP based reports from their corporate customers. GAAP is defined as a rule based approach (Meulen, Gaeremynck, & Willekens, 2007).
Corporate Compliance consists of those regulations that are in line with the legal requirement and the core values of the company. These rules and regulations are put in play to mitigate the legal risk, which may arise due to malpractice by one employee, and the firm as a whole is liable. All companies have effective compliance programs to ensure that their employees adhere to the limitations set forth by the corporate (National Center for Preventive Law, 1996). Compliance is following a set of rules that do not hurt the reputation of an organization. Moving in line with the long term objectives of the company is another feature of corporate compliance. Compliance also consists of following the code of ethics, which shall be discussed in the next paragraph.
Ethics is described by some as the ‘right’ thing to do. It is generally the moral values that ought to be followed voluntarily (Sidgwick, 2011). Ethics is the code of conduct that a rational person would follow. General topics covered in any code of ethics are integrity, objectivity, competence, professionalism and confidentiality. These are covered with almost every organization. Further details are company specific; accounting firms, for example, might add the fee structure, audit programs, conflict of interest and other variables (International Ethics Standards Board for Accountants, 2012). Smith and Friedman are the forefathers of the code of ethics. Adam Smith discussed the benefits of allowing an individual to discover their own path. Friedman, on the other hand, presented a moral code to be followed by an economy (Keller, 2007).

Relationship of Core Variables in Fraud & Abuse Prevention

Fraud and abuse have received reasonable consideration in recent times following the high profile public cases of fraud by huge corporations. There are many terms associated with fraud. Manipulation, alteration, falsification, deliberate misrepresentation and omission are some of those terms (Rezaee, 2005). Billions of dollars were lost by investors and other corporations due to the incidence of fraud and abuse. The incidence of fraud by the top executive had raised questions about corporate governance, ethical conduct, internal controls and reliability of financial reports. Sarbanes Oxley act (SOX) of 2002 was placed for the same reason, which was a fraud and abuse prevention by top executives (Ugrin & Odom, 2010).
The purpose of SOX was ‘to protect investors by improving the accuracy and reliability of corporate disclosures’ (Ahmed, McAnally, Rasmussen, & Weaver, 2010). This would only be possible if the reputation of good corporate governance is restored. Ethical conduct is followed, and accounting standards that provide little or no room to maneuver are used. SOX has been specifically effective in the US to enhance corporate governance, however, its effects were not felt significantly in other countries such as Canada (Kryzanowski & Zhang, 2013). 
The focus on prevention of fraud in accounting activities has brought about drastic changes in the scenario of financial reporting. Stringent accounting standards have been imposed by accounting bodies, with GAAP or any of its modified versions being the best result. GAAP is a rule based approach to reporting, which is in line with the rule based SOX. Its basis of accrual does not allow for management to cook the books like Enron or some other big corporations did before the enforcement of SOX. Recent accounting scandals have also put a question mark to the ethical standards being followed by the big corporations giving a bad reputation to corporate governance and compliance (Low, Davey, & Hooper, 2008). This proves the link between GAAP, ethics and compliance. Disbelief in any one of the factors would bring about the downfall of the whole system, and conversely. If one of the factors is restored and proved, then with time every factor would heal and the system would go back to normal. One argument is to introduce the concept of corporate governance and ethics to students who have not entered the professional environment yet. These students can be groomed to bring about favorable change and belief in the corporate system (LaGrone, Welton, & Davis, 1996).
Fraud and Abuse occur in faulty systems where the accounting standards are not up to date, the ethical and corporate compliance is at a minimum, and there are no rules to regulate the controls. An accounting system such as GAAP together with the backing of SOX to control the code of ethics and corporate compliance by watching the top executives and taking them to the front line shall definitely result in a bare minimum incidence of financial fraud.

Fraud & Abuse prevention in Health Care System

Health care sector is not immune to fraud and abuse, and an average of US $ 120 billion per annum is the cost of health care fraud (AAOMS Committee on Healthcare & Advocacy, 2011). It is, therefore, imperative that health care institutions and administrators become educated on the incidence of fraud.
Almost all health care institutions are required to prepare annual reports. A stringent accounting standard such as GAAP can prevent fraud cases due to the lack in loopholes to avoid detection. Extraordinary income or cooking the books can be detected easily is GAAP is applied in the preparation of the financial reports.
Ethical codes such as Compliance with laws and regulations, insider trading, confidentiality, discrimination and harassment are to be actively followed. Compliance of rules, which might include the obligation to report any illegal activity and the compliance of the ethical code might also reduce the risk of fraud and abuse. Acts such as SOX and False Claims act allow the provision of whistle blowers, which would share the financial incentive in case they help in identifying and proving a frauds and abuse case.
SOX has also imposed a strict penalty for those who are caught in a fraudulent activity that it has discouraged major stake holders, which are usually the top management, who have the means and resources to commit fraud.

Conclusion

Sarbanes Oxley Act takes GAAP, ethics and corporate compliance together to mitigate the risk of fraud and abuse. A hole in one variable will lead to the collapse in the whole system. It takes time to mend the broken; however, proper education at the grass root level can curb the incidence of fraud and abuse, which are already at the low following the SOX and other stringent rules and regulations introduced by the government.

References

 
AAOMS Committee on Healthcare & Advocacy. (2011). A Review of Healthcare Fraud and Abuse in America.
Ahmed, A. S., McAnally, M. L., Rasmussen, S., & Weaver, C. D. (2010). How Costly is the Sarbanes Oxley Act? Evidence on the Effects of the Act on Corporate Profitability. Journal of Corporate Finance (no. 16), 352-369.
Carlson Advisors. (n.d.). Generally Accepted Accounting Principals (GAAP) and Why They Matter. USA: Carlson Advisors LLP, Certified Public Accountants Management Consultants.
International Ethics Standards Board for Accountants. (2012). Handbook of the Code of Ethics for Professional Accountants. New York: International Federation of Accountants.
Keller, A. C. (2007). Smith versus Friedman: Markets and Ethics. Critical Perspectives on Accounting (no. 18), 159-188.
Kryzanowski, L., & Zhang, Y. (2013). Financial Restatements and Sarbanes–Oxley: Impact on Canadian Firm Governance and management turnover. Journal of Corporate Finance (no.21), pp. 87-105.
LaGrone, R. M., Welton, R. E., & Davis, J. R. (1996). Are the Effects of Accounting Ethics Interventions Transitory or Presistent?TRANSITORY OR PERSISTENT? Journal of Accounting Education , vol. 14 (no. 3), 259-276.
Low, M., Davey, H., & Hooper, K. (2008). Accounting Scandals, Ethical Dilemmas and Educational Challenges. Critical Perspectives on Accounting (no. 19), 222-254.
Meulen, S. V., Gaeremynck, A., & Willekens, M. (2007). Attribute Differences Between U.S. GAAP and IFRS Earnings: An Exploratory Study. The International Journal of Accounting (no. 42), pp. 123-142.
National Center for Preventive Law. (1996). Corporate Compliance Principles. Denver.
Rezaee, Z. (2005). Causes, Consequences, and Deterence of Financial Statement Fraud. Critical Perspectives on Accounting (no. 16), 277-298.
Sidgwick, H. (2011). The Methods of Ethics. Jonathan Bennett.
Ugrin, J. C., & Odom, M. D. (2010). Exploring Sarbanes–Oxley’s Effect on Attitudes, Perceptions of Norms, and Intentions to Commit Financial Statement Fraud from a General Deterrence Perspective. Journal of Accounting and Public Policy (no. 29), 439-458.

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