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WorldCom. This fraud occurred in a major public company and went undetected for 3-4 years. How could this occur? Why did this occur? Was Betty Vinson a victim or a villain?. Sarbanes-Oxley 2002. Passed in July 2002 in response to accounting failures at Worldcom & Enron

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WorldCom

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WorldCom

  • This fraud occurred in a major public company and went undetected for 3-4 years. How could this occur? Why did this occur?

  • Was Betty Vinson a victim or a villain?


Sarbanes-Oxley 2002

  • Passed in July 2002 in response to accounting failures at Worldcom & Enron

  • Expanded the rules for corporate governance, reporting, and disclosure

  • Impact on CEO’s, directors, auditing firms, & whistleblowers


Company Audit Committees

  • All need to be independent/outside members

    • No affiliation with the company other than audit committee

    • Staffed by at least one financial expert (knows GAAP & has prior auditing and financial statement preparation experience)

      • If not, must explain why

    • Establish procedures for complaints regarding internal controls, accounting & auditing matters

    • Appoint and oversee work of auditors


Executives

  • CEO & CFO must personally certify the accuracy and completeness of financial reports and accuracy of internal controls

    • Up to 20 years in jail for willfully/knowingly certifying noncompliant financial reports


Companies

  • Report on internal controls

  • Disclose whether code of ethics adopted for senior financial executes – if not, say why not

  • Minimize loans to directors/officers

  • Whistleblowers

    • Company must reinstate with back pay, pay attorney fees, special damages to whistleblowers retaliated against for assisting in an investigation


Public Accounting Firms (outside auditors)

  • Rotate lead partner every five years

  • Strict limitations on non-audit services that can be provided to clients

    • Such as bookkeeping, outsourcing of internal audit, financial information systems, valuations

  • Pay fees to the PCAOCB

    • Public company accounting oversight board

  • Clients CEO, CFO, controller, chief accounting officer could not have been employed by the auditor within the prior year


Federal False Claims Act (1986 amendment)

  • False claim

    • Falsified reports, “hot stamping” (stating product has met qualifications, yet it has not been tested or in fact failed to meet government specifications)

      • Medicare & Medicaid (Columbia)

      • Defense contracts (Hercules example)

    • Applies ONLY when federal government money is involved


  • Financial incentives for the whistleblower

    • Whistleblower may receive between 14% and 25% of the amount of the amount recovered by the government

    • Recovery amount:

      • Triple the amount of the false claims, plus a penalty for of $5,000 to $10,000 per occurrence, plus everyone’s attorney’s fees


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