Term Paper On Sarbanes Oxley Masters Thesis Evaluation Matrix

"Although material-weakness reports mostly reflect accounting errors and portend revelations of fraud only infrequently, the fact that they precede almost 30% of the instances where fraud does, in fact, come to light should lead investors, regulators, and legislators to take notice," comments Matthew Ege of Texas A&M University, who carried out the study with Dain C. Given the criticism of SOX and discussion in favor of its repeal or curtailment, this benefit is an important consideration alongside the costs of internal control reporting." Whether material weakness in internal controls is connected to fraud has been a hotly debated issue in accounting.

At the time SOX was implemented, SEC commissioners expressed strong confidence that requiring internal-control assessments would deter the kind of massive fraud that had recently been exposed at Enron and other companies.

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This section also revises the sentencing guidelines that were in existence before to deal with people who defrauded companies of billions of dollars.

It finds "a statistically and economically significant association between material weaknesses [in internal controls] and the future revelation of fraud...driven entirely by instances where the internal control issue reflects a general opportunity to commit fraud." According to the new research, the incidence of fraud disclosures at companies previously found to have material weaknesses is about 80% or 90% greater than it is among the general run of firms.

Further, of the 127 fraud cases identified by the study, 36 of them, or almost 30%, were preceded by auditor reports of material weakness in internal controls. Or, in the words of the study, "SOX Section 404(b) provides a potential benefit of an early warning system for future fraud revelation.

The paper takes note of earlier research which found that only a minority of firms made timely reports of material weaknesses in their financial statements and which took regulators to task for failure to penalize companies for not doing so. Ege: “Our study may very well suggest a reason, at least in some instances, for firms’ reluctance to report material weaknesses.

In any event, it certainly should provide some further incentive for regulators to penalize such omissions.” As for whether their findings argue for saving Section 404(b), the authors demur. Ege explains, “Much of the criticism of the provision has to do with the cost it imposes on companies, an issue that our research doesn’t engage.

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