Date of Award

2004

Type

Thesis

Major

Business, Accounting

Department

Accounting and Finance Department

Abstract

This thesis is a requirement for completion of the Honors Program at Columbus State University . It is to be completed in the final year of the student ' s undergraduate course work at the institution . Its contents must address a controversial topic related to the graduate' s chosen field of study or major. Each student must present his or her argument to a hearing board, which consists of three professors from the related department and the chair of the Honors Program . In order to achieve successful completion of the thesis, the committee must deem that the student ' s research and arguments are reasonable and that the student has provided adequate support for his or her argument within the body of the thesis. This thesis addresses an accounting issue that has just recently surfaced as a dominant theme in the accounting profession , independence and the applicable Sarbanes-Oxley Act of 2002. The body of this thesis begins with an explanation of fraud and several ways that it can occur in financial reporting. Although fraud has been an issue for as long as businesses have existed, it was a series of recent events that led to an increasing controversy within the accounting profession. Before the year 2000, the revelation of a major fraud scheme would only emerge about as often as a national census; however, the turn of the century yielded a more frequent discovery of corrupt business practices than ever before. From the year 1999 to the adoption of Sarbanes-Oxley in 2002, there were hundreds of major fraud cases in the United States (Vernich 7) . Many business experts attribute the higher frequency of misstatements to the dwindling economy. They believe that business owners/managers are trying to cover up the fact that their companies may be either financially unstable or at a profit maximization standstill, so they will overstate their earnings or assets (Vernich 8) . This theory may hold true for many of the guilty parties, but on occasion, companies have also understated their financial statements for one reason or another. Several possible reasons for both overstatement and understatement and cases of each treatment are discussed in sections II and III of the thesis . Following the introduction to fraud and misrepresentation of financial statements, the focus shifts toward auditor independence and how the lack thereof can prove to be an underlying contributor to dishonesty within a corporation. First, this section explains what exactly is auditor independence, what it requires, and what types of actions or relationships can affect it. Then, it explains why the lack of independence is the main reason that material misstatements can seem to slip through the cracks unnoticed. These auditors often play an extensive role in both the fraud as well as the degree to which the business covers up its deceitful business practices. Several of the cases mentioned in the misstatement sections of the thesis provide examples in which the auditors were not only aware of the fraud, but were also key players in the unsuccessful attempts to cover it up. These cases along with other important information in this section will provide a detailed explanation as to why independence has become such a controversial matter among all business professions and how it led to the adoption of Sarbanes- Oxley in 2002. The fifth section of the thesis focuses on the contents of the Sarbanes-Oxley Act of 2002. The main purpose of this part of the thesis is not only to introduce the details of the Act, but also to establish why it was created and what purpose it is supposed to serve to the accounting profession as well as audited corporations. The Sarbanes-Oxley Act was signed into law by President George W. Bush on July 30, 2002, and it took effect immediately. It was established as a reaction to the increasing fraudulent financial reporting, which eventually led to the bankruptcies of several large U.S. corporations and the demise of one of the world's leading accounting firms. In all, the Act has eleven titles with sixty-nine total sections, and it is sixty-six pages in length. Since the first proposal was made on June 14, 2002, over seventy-five proposals passed through Congress virtually unopposed. The need for change was so urgent that the entire Act took less than two months to complete, pass in Congress, and be signed into law. Its main purpose is to establish more strict standards for both auditors and their clients in hopes to decrease fraudulent financial reporting in the future { www. nlcpi . org/books/pdf /BRIEFLY Apr03 (Bost) .pdf ) . Section VI of the thesis expands on details of the Sarbanes-Oxley Act and establishes a basis for the argument that some of the standards and responsibilities set forth in the Act need to be removed or changed for one reason or another. In addition, some issues have been overlooked in the creation of Sarbanes-Oxley, and section VI also addresses these concerns. Of the eleven titles in the Act, eight contain information relevant to the incorporation of new rules and regulations for either businesses or auditing firms. Section six discusses several of these titles and acknowledges several arguments that can be made to refute some of these new restrictions. After each argument has been presented to dispute a particular section of the Act, then the issues that have been either overlooked or disregarded in the generation of Sarbanes-Oxley are addressed. Furthermore, this section expands on these issues by providing evidence to support their relevance to the auditing profession. The primary purpose for section VI of the thesis is to dissect the Sarbanes-Oxley Act of 2002, expose the controversial topics that it entails, and provide a basis for the proposed amendments in section VII. The seventh section of the thesis deals with the suggested solutions to the problems mentioned in section VI. Originally, section VI and VII were supposed to be combined into one section; however, after finding so many problems with Sarbanes-Oxley, one section was devoted entirely to pointing out the problems and another was devoted to solving them. In section VII, there is not only a discussion of the revised Sarbanes-Oxley Act, but also an explanation as to why these changes are important. Although making a revision to something like that seems like it would be a rather straightforward and simple process, it is actually a very complicated and lengthy procedure. For this reason, we rarely ever see changes made to laws or bills that have already passed through Congress. Section VII provides the framework for the final section, which includes both the overall assessment of the findings and a personal synopsis of the thesis as a whole. As mentioned previously, section VIII is the overall conclusion/summary of the experiences involved with writing this thesis. This section discusses not only the amount of research required and what is found in such research, but also why writing this thesis can prove to be helpful in someone's chosen field of study. Writing a thesis proved to be a difficult task, which requires countless hours of research and preparation. Because of the numerous weeks put into the creation of such a project, it certainly prepares the author for similar projects in the future. In all, reading this should be both entertaining and educational. The arguments should prove to the reader that mistakes are made at every level of the business world, and that politics are no exception. The adoption of the Sarbanes-Oxley Act of 2002 was founded on good intentions, but before the government can eliminate many of the fraudulent business practices that occur in our society today, some new changes must be made.

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