Information Technology Audit Requirements - Term Paper Example

INFORMATION TECHNOLOGY AUDIT REQUIREMENTS COMPARATIVE ANALYSIS OF THE FOREIGN CORRUPT PRACTICES ACT (FCPA) AND THE SARBANES- OXLEY ACT (SOX) name: Institution’s name: Course code: Date of submission: Introduction The late 20th and early 21st centuries witnessed increasing affront on the integrity and reputation of the United States of America due to endless rise in cases of corporate scandals and wanton corruption in the business sector. During this period, the corporate America experienced a rising trend of illegal business practices, bribery, and fraud cases that raised serious concerns among global legal and business experts. These instances provoked the debate on the need for the introduction of legislation that could counteract the adverse economic menace. In response to the increased cases of bribery and other economic scandals of a national proportion, the Congress passed into law two critical Acts, the Foreign Corrupt Practices Act of 1977 (FCPA) and Sarbanes-Oxley Act of 2002 (SOX). The Foreign Corrupt Practices Act 1977 was enacted to enforce precise companies’ record keeping systems, increase accuracy in financial recording, and to reduce bribery and corruption loopholes in the business system. The Sarbanes Oxley Act, 2002 was passed twenty years after the Foreign Corrupt Practice Act with the core objective of reducing bribery and corruption in the America cooperate sector1. Sarbanes-Oxley Act 2002 was projected to ensure that all chief finance officers and public companies’ chief executive officers provide an accurate financial report while Foreign Corrupt Practice Act, 1977 was designed to ensure that, all business financial information was recorded in accordance to the existing financial provisions. In the first twenty years after the enactment of the Foreign Corrupt Practice Act 1977, the American Security and Exchange Commission and the America Department of Justice did very little investigations to necessitate a helpful enforcement of the Act, reducing its impacts in countering corporate bribery and other business malpractices. However, after the WorldCom scandal and Enron scandal in 2002, the United States of American government was forced by the prevailing state of affairs to enact Sarbanes-Oxley Act 2002 to offset the ever-increasing cases of cooperate malpractices as well as to advance global awareness on the harmful impacts of business bribery and other malpractices. The enactment of Sarbanes-Oxley Act 2002 was at that time intended to make bribery penalties extremely severe and to increase public awareness on the need for an accurate financial accounting and record keeping in business operations. Taking into account the level and nature of the outcomes of bribery in global economy, especially in the United States of America, this essay will analyze the Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act 2002 to examine the similarities and differences of the two Acts in addressing business bribery and corruption crises in the United States of America’s corporate sector A Comparison of Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act 2002 Similarities The core purpose of both Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act 2002 was to protect American investors from fraudulent business acts by improving reliability and accuracy in cooperate operations and disclosure. The two acts established effective accounting standards aimed at minimizing bribery, fraudulent practices and corruption cases in American business enterprises. The Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act 2002 were enacted to deal with individuals, local and foreign investors, local, regional and foreign companies that were involved in bribery activities with the aim of minimizing corporate fraud in the American corporate sector. The introduction of Sarbanes-Oxley Act 2002 was as aimed at empowering the under-enforced Foreign Corrupt Practice Act, 1977. The Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act 2002 also seek to improve the United States of America’s financial reporting precision. The two Acts are projected to provide a significant insight into new investors on the need for integrity and honesty in their new investment areas. The Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act, 2002 were endorsed due to the emergence of various large scale scandals in the history of the United States corporate sector. The enactment of Foreign Corrupt Practices Act was passed in 1977 in the aftermath of the Watergate scandal while the Sarbanes-Oxley Act was enacted in 2002 after WorldCom scandal and Enron scandal. Therefore, the two main corporate Acts were all aimed at protecting the United States of America tarnishing economic image in global scene. The Acts were intended to protect future occurrences of such huge and frustrating business scandals that threatened the prosperity of American business enterprises. Additionally, the Foreign Corrupt Practice Act, 1977 assumes that, the responsibility of maintaining proper internal control is the main role of the entire company’s departments while the Sarbanes-Oxley Act, 2002 gives the responsibility of maintaining internal control to the company’s chief executive officers or chief finance officer. However, despite these differences in the allocation of responsibilities, the Department of Justice and Security and Exchange Commission relies more on Foreign Corrupt Practices Act, 1977 requirements in addressing bribery issues especially on international foreign officials. The Department of Justice and Security and Exchange Commission relies more on the provisions of Sarbanes-Oxley Act 2002 in the examination and assessment of record keeping shortfalls and accounting malpractices in the corporate sector. Additionally, through effective Foreign Corrupt Practices Act investigation, the Department of Justice and Security and Exchange Commission are in a position to examine the company’s records and accounts in to identify financial fraud. Company accounts frauds are detected through the identification of any inconsistencies in financial accounts that may be as a result of concealed bribery disbursement. Most of the contents found in Sarbanes-Oxley Act 2002 are also apparent in Foreign Corrupt Practice Act, 1977. Some of Sarbanes-Oxley Act 2002 clauses are modifications of clauses found in Foreign Corrupt Practice Act, 1977 to meet the modern international accounting standards. Some of these common clauses modified from Foreign Corrupt Practice Act, 1977 include: Companies’ Governance Clause, Disclosure of Business Information Clause, and Reporting Rule for Public Foreign Clause. Moreover, some sections in Sarbanes-Oxley Act 2002 are meant to complicate civil and crime penalties for securities frauds clauses found in Foreign Corrupt Practices Act, 1977. Just like Foreign Corrupt Practice Act 1977, Sarbanes-Oxley Act 2002 also requires clear certification of the company’s financial records by chief finance officers or chief executive officers. Additionally, the sections in Sarbanes-Oxley Act 2002 that expounds on the need for maintenance of proper financial records and books are also reflected on Foreign Corrupt Practices Act, 1977. Sarbanes-Oxley Act, 2002 may be presumed a reminder to the Department of Justice and Security and Exchange Commission in the need to fully implement the provisions of the Foreign Corrupt Practice Act, 19772. The Sarbanes-Oxley Act 2002 requires public company’s executives to disclose their annual assessment report on the company’s internal procedure and control structures on financial reporting. Foreign Corrupt Practice Act on the other hand requires all public companies to develop accurate internal controls to minimize bribery and increase accountability in corporate accounting practices. Similar to Foreign Corrupt Practice Act, the Sarbanes-Oxley Act 2002 requires public institutions to institute a committee that will review the company’s accounting and auditing procedures. The review of the company’s accounting procedure should as well have an acceptable responsibility chart and a realistic timeline. Differences The Foreign Corruption Practices Act was enacted in 1977. The aim of the Act was to punish American businessmen, companies, and citizens who were involved in acts of bribing political parties, politicians, or foreign government officials with either money or other valuable materials with an aim of introducing new businesses or maintaining their businesses. The Foreign Corruption Practices Act was expected to be enforced by the Security and Exchange Commission and the Department of Justice. The Sarbanes Oxley Act (SOX) was enacted in July 2002. The Act led to the creation of Public Company Accounting Oversight Board (PCAOB). The board was given the mandate of overseeing public companies financial reports with the core objective of minimizing corporate fraud and increase accounting credibility in the corporate sector. Contrary the role of Foreign Corrupt Practice Act, 1977, Sarbanes-Oxley Act, 2002 was introduced to address fraud and corrupt issues in a technologically modified society. Sarbanes-Oxley Act 2002 was intended to monitor electronic financial reporting and recording taht were not initially envisioned in the Foreign Corrupt Practice Act, 1977 that monitored manual and paper recording and financial reporting. In 2003, it was reported that, over 93% of fraud cases in the United States of America were in electronic form. The emergence of modern technologies was reported to ease the process of falsifying the company records, increasing cases of undetected accounting fraud. The 20th century corporate frauds undermined the ability of Foreign Corrupt Practice Act, 1977 to fully address fraud cases in modern technology and development. Sarbanes-Oxley Act 2002 served as an alternative mechanism for ensuring apt governance and precise financial reporting. Under the Sarbanes-Oxley Act 2002, the Chief Financial Officers and Chief Executive Officers have the core responsibility of ensuring accurate internal controls and financial statements. In Foreign Corrupt Practice Act, 1977, the responsibility of maintaining accurate financial statement is the core responsibility of the entire company departments. Additionally, public Companies chief executive officers and chief finance officers are also expected by Sarbanes-Oxley Act to report all unknown financial facts to the auditors for scrutiny. These unknown facts may involve: internal control faults, severe deficiencies, and corruption involving the managers and employees. Based on Sarbanes-Oxley Act 2002, the public chief executive officer and chief finance officer have personal liability to any financial fraud in a public company. As American companies work towards fulfilling the Sarbanes-Oxley Act 2002 requirements, a good number of these companies are discovering intensive violation of Foreign Corrupt Practice Act, 1977 in record keeping and in their accounting. This means that, Foreign Corrupt Practice Act, 1977 was not as effective as Sarbanes-Oxley Act, 2002 in a good number of American public companies3. Contrary to Foreign Corrupt Practice Act, the Sarbanes-Oxley Act 2002 has offered an opportunity for non-prosecution agreement between the offender and the government. The Foreign Corrupt Practice Act, 1977 did not provide an opportunity for out of court agreements. Every offender was expected to face criminal charges and prosecution for corruption and related economic crimes. However, the agreement is only granted with adequate assurance from company’s chief executive officers of total commitment towards complying with both Foreign Corrupt Practice Act, 1977 and Sarbanes-Oxley Act 2002. Due to favourable terms in Sarbanes-Oxley Act 2002 that are associated with deferred prosecution and non-prosecution, a good number of public corporation officers in United States have disclosed historical violation of various economic crimes with an aim of entering into a non-prosecution agreement with the government4. The Sarbanes-Oxley Act, 2002 provisions are more stringent than provision in the Foreign Corrupt Practices Act, 1977. The enactment of Sarbanes-Oxley Act 2002 was used to demonstrate the commitment of the government in eliminating bribery in the business sector. Many public companies’ chief executive officers prefer Foreign Corrupt Practice Act, 1977 investigation on their own terms as opposed to discovery of bad acts by the Department of Justice or Security and Exchange Commission. Moreover, the penalties of violating record keeping and accounting provision in Sarbanes-Oxley Act 2002 are harsher compared to penalties in Foreign Corrupt Practice Act, 1977. The United States of America’s government was initially reluctant and unwilling to implement Foreign Corrupt Practice Act, 1977 compared to immediate implementation of Sarbanes-Oxley Act 2002. Although the Foreign Corrupt Practice Act, 1977 main aim was to eliminate corruption cases in public entities, the Act was feared to create competitive disadvantages amongst American companies over their competitors. Despite the increased global scandal, the United States of America was reluctant in implementing the Act. However, due to the negative impact of the United States of America’s large scandals including the fall of Enron, the Sarbanes-Oxley Act 2002 was presumed to be economically friendly and was a result implemented instantly5. Compliance with Foreign Corrupt Practice Act placed the United States of America companies at a competitive disadvantage over their global competitors. This was due to the fact that most global companies offered bribes to get better deals in global business operations. However, the introduction of Sarbanes-Oxley Act 2002 significantly advanced the United States of America companies’ competition level. The Act forced international companies to comply with required measures of eliminating bribery in their business transition by imposing sanctions on acts of bribery. As opposed to Foreign Corrupt Practice Act, the Sarbanes-Oxley Act 2002 recognized bribery as a global problem that required immediate action to completely eradicate its impact. Compared to the enactment of Foreign Corrupt Practice Act, the introduction of Sarbanes-Oxley Act 2002 led to increased reduction in corruption cases in the global market. This was due to strict sanctions instituted by Sarbanes-Oxley Act 2002 in comparison to less severe sanction on Foreign Corrupt Practice Act. Conclusion Corruption is one of the greatest impediments to social, political, and economic growth in developed and developing countries. The enactment of Sarbanes Oxley Act of 2002 and Foreign Corrupt Practices Act has significantly reduced corruption and fraudulent cases in United States corporate sector. Additionally, by considering the increased trend of the enforcement of Foreign Corrupt Practice Act and Sarbanes-Oxley Act 2002 in United States of America, it is vital for public companies to take proactive measures to minimize violation of the existing regulations. The public companies, Chief Executive Officers and Chief Finance Officers have a responsibility of ensuring total compliance with the set regulations. To ensure full observance of Sarbanes-Oxley Act 2002 and Foreign Corrupt Practice Act, the United States of America public companies’ Chief Executive Officers should take the two main protective steps, of creating a written agreement and enacting compliance plans. Development of enactment initiatives helps the companies to detect potential frauds on their resources. To effectively implement the compliance program, the company should ensure total cooperation between all players involved in the company’s operations. To minimize the risk of prohibited conducts, companies’ chief executive officers should develop written agreement for international business relationships. The agreement should inform all involved stakeholders on the existing regulations concerning bribery and the importance of maintaining accurate records and accounts. The agreement should also outline the impacts of failing to comply with the existing Acts. By ensuring proper understanding of the existing regulations, the corporate sector is more likely to minimize chances of violating the Foreign Corrupt Practice Act and Sarbanes-Oxley Act 2002, necessitating productive, undisturbed, and profitable operations. However, to holistically address global corruption predicaments, Foreign Corrupt Practice Act and Sarbanes-Oxley Act 2002 should be extended to include more stringent anti-corruption measures. Bibliography Bruce Karpati, The Foreign Corrupt Practices Act: Coping with Heightened Enforcement Risks Fall 2007,” Public Journal Of Cooperates, 69, 76, (2007). Bruce Nearon, Jon Stanley, Steven Teppler and Joseph Burton, Life After Sarbanes-Oxley: The Merger of Information and Accountability, 45, Jurimetrics journals 379, 412 (2005) Carolyn Hotchkiss, The Sleeping Dog Stirs: New Signs of Life in Efforts to End Corruption in International Business, Journals Of Public Policy And Marketing. 17, 108 (1998) Claudius Sokenu, FCPA Insights: A Periodic Review of Recent Developments in FCPA Enforcement and Compliance, 1687 Journals of Public Finance and Corporate 571, 593 (2008). Justin Marceau, A Little Less Conversation, A Little More Action: Evaluating and Forecasting the Trend of More Frequent and Severe Prosecutions Under the Foreign Corrupt Practices Act, 12 Fordham Journals Of Cooperation And Finance, 285, 310 (2007). Read More