Carol, a local interior designer, just joined the XYZ Corporation Board of Direc
ID: 340150 • Letter: C
Question
Carol, a local interior designer, just joined the XYZ Corporation Board of Directors. XYZ Corporation produces cell phones and laptop computers. Carol was very excited about being elected to the Board and planned to work diligently and ethically. The Corporation’s attorney gave Carol a welcome packet that included, among other things, a copy of the complete Sarbanes-Oxley Act of 2002. He told her to review the packet and let him know if she had any questions. Another reason Carol was excited to be part of the Board was that her husband was the Lead Auditor from ABC Corp. ABC Corp was the outside auditing firm that XYZ used. In fact, he had been the Lead Auditor for over 8 years and after the completion of this year’s audit, he was hosting a party for all the officers and directors of XYZ the most expensive restaurant in town. (Secretly he was trying to figure how to bill back a portion of the restaurant’s bill to XYZ Corporation.) Carol, as the newest member of the Board was also asked to serve on the Audit Committee of the Board. (This Committee chooses whether to retain the current outside auditing firm.) She was also asked to serve on the Nominations Committee and the Compensation Committee. The Board meets 10 times a year and each Board member is paid $5,000 per meeting. Each Committee meets between 10-15 times per year (many times after the regular Board meeting.) The payment for attending Committee meetings is $2,000 per meeting.
Do you see any violations to the Sarbanes-Oxley Act? If so, how could they be resolved? What are the other issues that come up in this fact pattern, analyze and how would you resolve?
Explanation / Answer
Answer:
Sarbanes – Oxley Act:
This act was launched to avoid the frauds in the organizations/firms.
This act is defined as the act in which the maker and checker for the business process cannot be same person or related person. Thus the maker and checker person are to be different person so that both cannot execute the personal interest in place of organizational interest in the business transaction.
This act is also known as “Public Company Accounting Reforms and Investors Protection Acts” And also known as “Corporate and Auditing Accountability, Responsibility and Transparency Act”
Yes, we do see the violations to the Sarbanes-Oxley Act here, because the Carol, who has recently joined as the director of board for XYZ corporation. XYZ Corporation is using an outside auditing firm ABC corporation. The lead auditor of ABC firm is the husband of Carol. Thus this is the violation of Sox act, as the wife of lead auditor is in the team of board of directors for the XYZ Corporation. Thus here there is a chance that the fraud can be carried out or there is a chance that fraud can happen here, as the Carol can influence her husband during audit process for the XYZ organization.
Resolution for the Case: This case can be resolved, if the Carol’s husband leaves the position of lead auditor for the XYZ Corporation OR Carol does not participates in the audit process for the XYZ corporations. Then this will become a genuine case for the ABC auditing firm and XYZ Corporation. So as per Sox violation, the relatives should not be in the influencing position to enhance the fraud activities in the organization.
Other issues that come up in this fact pattern, analyze and resolution: Other issues could be the charges for the party should not be charged to the XYZ Corporation by the ABC audit firm. Thus all the other billing cases to be reviewed for compliances with Sox parameters. All the SOX violation cases needs to be resolved by facilitating the suitable changes in the processes and resources allocation for effective accounting process, so that frauds can be avoided.