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