HealthSouth SOX Violations - Research Paper Example

 HealthSouth SOX Violations Question One: SOX Regulations For-Profit and Not-For-Profit Health Care Organizations Sox Regulations for Profit Health Care Corporations The SOX (2002) protects against the occurrence of fraud malpractices at public corporations regardless of the industry. The SOX (2002) has six key sections, which mandate the accounting regulations that organizations within the health care industry must follow (Volonino, Gessner & Kermis, 2004). Sox Regulations for Not for Profit Health Care Corporations The Sarbanes Oxley act (2002) is developed specifically for public listed corporations within US security markets. Whereas there are no standard guidelines that mandate nonprofits to undertake the full audit, the partial implementation of the SOX (2002) would immensely improve the accounting operations of these organizations particularly large nonprofits (Green, 2004). Evaluation on whether SOX requirements for not for profit corporations will reduce fraud. The mandating of not for profit corporations to utilize the SOX (2002) will improve their operations significantly towards the reduction of fraud. The SOX (2002) provides for ethical management practices. For that reason, whereas profit corporations do not have shareholder protection, there is a need to protect donors of nonprofits (Dalton & Dalton, 2011). Question Two: SOX (2002) Effectiveness in the Regulation of Ethical Behavior of For–Profit Health Care Organizations The SOX (2002) prohibits the occurrence of corporate fraud among public companies. The bill was enacted after the occurrence of corporate scandals prior to 2002 such as Enron and WorldCom. The scandals resulted in billions of dollars of losses in investor value due to the collapse of these companies as well as the overall negative effect to the stock exchange of the United States. In the establishment of the SOX (2002), the goal was to promote ethical behavior among corporate executives across all industries. Hence, in the evaluation of the SOX (2002) in the healthcare industry, the assessment is a reflection of the performance of the SOX (2002) generally. In the health care industry, the SOX (2002) has promoted the reduction of the excesses of financial fraud. The full implementation of the SOX (2002) improved the internal controls of organizations in the healthcare industry. As a result, it improves the audit trails, data integrity, policy and procedures of organizations. Overall, investors within the industry could now enjoy better accountability from the executives of healthcare organization. The health care executives had high ethical standards to meet in light of the SOX (2002) with fines and jail terms providing sufficient deterrents against the occurrence of financial fraud (Coates, 2007). Question Three: Assessment Of Deficiencies In The IT Environment Of HealthSouth (2002). Deficiencies that existed in the IT environment at Health South The organization had multiple deficiencies that increased the opportunities for fraud. The lack of the full automation of the operating information technology infrastructure of the outpatient division and the surgery division accounting system created opportunity for fraud malpractices (Bedard & Graham, 2011). Ways to Improve Audit Trails The organization improved the segregation of duties at the firm. The segregation of duties at HealthSouth was to reduce the role a single employee had over the accounting system. This objective was implemented in the improvements of the information technology for the accounting systems. This was able to improve the audit trails of the system significantly. The further integration and enhancement of the information technology of the whole system further sealed audit trail loopholes (Romano, 2005). Ways to Improve Data Integrity The firm upgraded the surgery center division’s patient accounting system in 2002. Additionally, the firm sought out to complete the modernization of the computing infrastructure of the outpatient division. Hence, the overall automation of the patient accounting systems was able to create data integrity of the information systems (Damianides, 2005). Ways to Improve Policies and Procedures Along with information technology enhancements of the Health South in the process of the improvements of the internal controls, the organization sought to improve the policies and procedures. The improvement of the corporate culture to reflect the increase of the emphasis on integrity, transparency, accountability and regulatory compliance drove the policy and procedure changes at HealthSouth (Li et al. 2010). Question Four: Negligence of Auditors at Health South The auditors of Health South at the time of the 2002 violation of the case were negligent in given areas that perpetrated the fraud in the organization. In 2009, the shareholders were able to get a $109 settlement in a securities class action against Ernst & Young owing to the negligence of the firm in handling the internal audit. The issues raised include the perpetration of fraudulent and improper accounting practices that were directed by the former employees and chief officers of the company, which Ernst & Yong oversaw. The role of the officers and management employees of the organization within the accounting system perpetrated the occurrence of fraud. Key officers and management employees had a significant role in the accounting system with minimal oversight. Hence, it reduced the ability of the accounting system internal controls from sufficiently reducing fraud improprieties (Arens & Elder, 2006). Question five: Sarbanes Oxley Act 2002 Sarbanes Oxley section 902 and section 906 are the major violations of the Sarbanes Oxley act of 2002 that were committed by the organization. The Sarbanes Oxley act of 902 describes the attempts and conspiracies to commit fraud offenses. The section develops enforcement against fraudulent activity, as per the accusations of the former CEO. Secondly, the Sarbanes Oxley section 906 regards the corporate social responsibility of the financial reports. Given the fraudulent activity at Health South, the authenticity of the financial statements as well as the lack of fraud and financial misstatements was certified by the chief executive officer. For that reason, given the chief executive officer intentionally misguided the firm shareholders while authenticating false information to the tune of $1.4 billion. Further, the chief executive officer sought to benefit from the process through selling $100 million of his shares, when the company was facing a financial downturn in 2002 before the breakout of the scandal. The Sarbanes Oxley act comprises of six major sections. The act overall goal is to reduce the occurrence of corporate fraud. In this regard, sanctions to the occurrence of the fraud were the laid out deterrents against the perpetration of the offences. The provision of a jail term of 20 years for the deterrence against the section 906, for example is a sufficient deterrent that should be expanded to other section of the act. In addition, the increase of the fine would increase the deterrent (Aronson, 2002), as the individuals in the executive positions can be able to pay the fine without much strain given the high level of today’s executive compensation. Question Six: Improvement of Internal Controls To improve the internal controls of the organization, the organization first replaced top executives of the firm. These include the replacing of the chief executive officer, chief financial officer and chief operating officer. Other top executives that were replaced also include the chief compliance officer and the general counsel. These individuals selected for the key executive positions were from outside HealthSouth. This created a diversity and independence of the organization operations, and in consequence, minimizing fraud (Ge & McVay, 2005). Additionally, the leadership of each of the operating divisions was replaced to enhance the achievement of the objective. Secondly, HealthSouth reorganized the internal audit department. The senior vice president of internal audit reports independently to the audit committee. Additionally, the staff as well as the overall budget of the department of the internal audit department was added. 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