1. Chapter 8 – Sarbanes-Oxley, Internal Control, and Cash
ACTG 2110
Chapter 8 – Sarbanes-Oxley, Internal Control, and Cash

2. Sarbanes-Oxley Act of 2002
Enron, Worldcom, Tyco, Xerox, Adelphia and many more companies suffered massive corporate scandals, losing billions of dollars of shareholder value
Worldcom lost $11 billion; the largest corporate fraud in history. CEO Bernard Ebbers was found guilty of all nine counts on March 15, He is currently serving a 25 year sentence.

3. Sarbanes-Oxley (SOX) Act of 2002
President Bush signed SOX into law on July 30, 2002.
Imposes new responsibilities on companies and their executive staffs
Imposes significant penalties for non compliance by executives, auditors, attorneys and securities analysts.

4. Corporate Responsibility
CEO and CFO must certify annual and quarterly reports delivered to the SEC
It is unlawful for companies to provide misleading or untrue information about the company to the accounting firm performing an audit for the company
Mail and wire fraud penalties have been increased from five to twenty years in prison
It becomes a CRIMINAL OFFENSE for corporate officers to certify financial reports they know do not comply with SOX.
Fines imposed up to $25 million for violations of the Securities Exchange Act of 1934

5. Enhanced Financial Disclosures
Annual reports must now include an internal control report
The effectiveness of the company’s internal controls must be reported
Companies must reveal if they have adopted a code of ethics for their senior financial officers and if the audit committee includes at least one “financial expert”.

6. Internal Control
The organizational plan and all the related measures than an entity adopts to accomplish four objectives:
Safeguard assets and use for business purposes
Ensure accurate, reliable accounting records
Encourage employees to follow company policy and comply with laws and regulations
Promote operational efficiency

7. Guidelines for Achieving Strong Internal Control
Competent, reliable, and ethical personnel
Good to rotate duties if possible
Make vacations mandatory
Establish clear lines of responsibility
Have routine procedures for processing each type of transaction
Separation of duties
Separation of operations from accounting
Separation of the custody of assets from accounting

8. Guidelines for Achieving Strong Internal Control
Internal and external audits
Have proper business documents and records
Electronic devices and computer controls
Physical controls
Fidelity bonds

9. Limitations of Internal Control
Collusion – two or more people work together
Fraud
Employee fraud
Principles discussed earlier
Ethics training
Train employees to recognize fraud
Make it easy for employees to report fraud without fear of retribution from their supervisors or coworkers
Have an employee hotline
Management fraud
Management needs to have better ethics
Should have to follow the same rules and controls as their employees do
DO NOT TRUST ANYONE!!!!!!!!!

10. Fraudulent Schemes Asset Misappropriation Corruption Schemes
Expense reports
Non-existent employees (look for no taxes or FICA deductions, check for duplicate social security numbers)
Fake invoices
Corruption Schemes
Kickbacks
Fraudulent statements
Recording expenses as assets
Early revenue recognition
Outright distortion (recording inventory when you don’t have it)

11. Fraud Triangle
Incentive pressure – incentives or pressures on management to misstate financials
Opportunity – circumstances present that allow for misstatement
Attitude/Rationalization – an attitude, character or set of ethical values that allow persons to commit or rationalize committing a dishonest act
WHEN THESE THREE EXIST, THE DOOR IS OPEN FOR FRAUD!!!!!

12. KPMG’s Fraud Survey 2003
75% of surveyed companies had experienced fraud
Employee fraud was most prevalent
Financial reporting fraud and medical/insurance fraud are the most costly
Types of fraud
Theft of assets 49%
Check fraud 40%
Expense account abuse 36%
Credit card fraud 20%
Payroll fraud 12%
Conflict of interest 12%
Inventory theft 11%
Kickbacks 9%
Financial reporting fraud 7%

13. KPMG’s Fraud Survey 2003 Averages
Overall internal fraud costs $600 billion a year or $4,500 for every worker.
Costs of particular types of fraud:
Financial Reporting Fraud $258M
Medical/Insurance Fraud $34M
Consumer Fraud $2.8M
Vendor-related fraud $759K
Employee fraud $464K
Misconduct $432K
Computer crime $67K

14. KPMG’s Fraud Survey 2003 Factors contributing to fraud:
49% Collusion between employees and third parties
39% Inadequate internal controls
31% Management override of internal
controls
15% Collusion between employees and management
12% Lack of control over management by
directors
11% Ineffective or nonexistent ethics or compliance program

15. KPMG’s Fraud Survey 2003 Warning signs: Unexplained losses
Poor internal controls
Decline in employee morale
Change in employee lifestyle
Unusual expenditures
Internal audit findings being ignored

16. KPMG’s Fraud Survey 2003 How fraud detected: 40% Internal controls
35% Specific investigation
34% Employee tip
29% Internal audit procedures
18% By accident
9% Member tip

17. KPMG’s Fraud Survey 2003 Preventative Actions Taken/Planned
Improve existing internal controls
Segregate critical duties
Investigate employees
Bond employees
Train management
Strengthen code of ethics

18. Cash Controls over Cash
Cash Management
Control of Cash Receipts
Separate the functions of cash handling and recordkeeping
Create a control listing of cash receipts
Make daily deposits into the bank
Reconcile daily deposits with control listings
Control of Cash Payments
Use a checking account with pre-numbered checks
Approve all expenditures before payment is made
Use a voucher system
Separate the functions of approving expenditures and signing checks

19. Bank Checking Accounts
Control features
Reconciling a Bank Account
Bank statement
Differences between bank statement and accounting records
Procedures for reconciling a bank account
Deposits in transit
Outstanding checks
NSF Checks
Bank charges
Bank receipts
Errors

20. Petty Cash Funds Cash fund set up for small purchases
Make journal entry to set up the fund:
Petty Cash XXX
Cash XXX
Have petty cash vouchers for every expenditure made
Total of vouchers + cash remaining in fund must equal the amount for which petty cash was set up
To replenish petty cash, record the expenditures from the vouchers, do not debit petty cash (only to increase the fund.)