The World of Sarbanes Oxley

Trust, but verify - The Bernard Madoff Fallout

2009-01-04T09:21:00Z

Trust, but verify - The Bernard Madoff Fallout

We have all heard the phrase "Trust, but verify." With the Bernard L. Madoff fallout, it is hard not to ask, "when did we stop verifying?" When did word-of-mouth become the norm for verifying whether a financial deal is in your best interest? When did friendship supersede the need to do additional checking when your financial future is involved?

The Madoff situation was not just segregated to New York or Florida, but has affected many individuals, funds and organizations on a global basis. I will not speculate about the mental state of Mr. Madoff and whether he feels remorse - I will leave that to the experts in the field of psychology. But, I am curious about the various players who kept this scheme going for such a long time…

If something sounds too good to be true - then it probably is

We are learning that Mr. Madoff continued to produce positive financial returns for his clients year after year, without having a slow or down period.

Sir Isaac Newton's Law of Gravity: what goes up must come down...

This law alone is not only a "red-flag" but it falls into the "common sense" category, and should have gotten the attention of more than just a few brave individuals who spoke up years ago. We now know that this scheme could have been shut-down if Mr. Madoff’s firm had been investigated sooner. The following are just a few red-flags:

Lack of segregation of duties
Oversight lacking
Conflict of interest
Nepotism
Returns that are impossible to independently replicate

Testing methods that might have been used by the auditors to detect these red-flags include:

Reperformance - This testing method is used to independently verify a control, a report, a query, or a calculation - independent of the source system. The Madoff formula for continuous positive returns could not be replicated.

Benford’s Law (CAAT) - Running a batch of transactions through this algorithm could have alerted the auditors that something was amiss.

A few months back, I had the opportunity to train an individual on how to be an auditor and what makes a good auditor. Among my training materials, I chose footage of the Enron congressional hearings, and one book in particular that I used was Blink: The Power of Thinking Without Thinking. In selecting this material, my goal was to talk about real-life examples of red-flags, peer pressure, and how the promise of making lots of money might cloud a person’s judgment. We all know about Enron, so I will not comment further, but I found that the recurring theme from Blink was ‘instinct‘. As an auditor, we must use common sense, use CAAT tools, ask whether something is ethical and sometimes following our instincts. If something does not feel right - dig deeper until you are comfortable before you walk away from an audit.

The Madoff scheme will be studied and taught to future auditors so that this type of scandal does not go undetected.

Auditors function as an independent, objective source that companies rely on to tell the real story about whether proper controls and practices are in place and functioning.

Sometimes we are not popular.
Sometimes we are branded as the bad guys/gals.
Sometimes we have to communicate the bad news.

But at the end of the day, the auditors are just doing their job. If companies cannot trust the auditors, then who can they trust to verify internal controls and practices?

According to Reuters, members of the House Financial Services Committee will be looking at the Madoff situation as a case study for regulatory reform of the financial markets.

Content: Vashti Horvat, CISA
Email: Info@orrconsulting.us
Blog: http://LHVblog.orrconsulting.us/
Stamp: January 4, 2009_1021

Blink: The Power of Thinking Without Thinking can be purchased on Amazon.com. Click here to buy.

For more information on the Bernard Madoff $50 Billion dollar scheme, here are a few sources:
No questions asked from the Financial Times
Compliant: United States of America vs. Bernard L. Madoff
Foxnews Ex-Nasdaq Chair
Financial Times - Madoff Scandal
Austria takes control of Bank Medici
Accountancy Magazine.com

Auditor resources:
American Institute of Certified Public Accountants (AICPA)
Bendford’s Law
Following Benford's Law, or Looking Out for No. 1 by Malcolm W. Browne - The New York Times published: August 4, 1998
ACL data Analysis Software (CAAT tool)
Idea Data Analysis Software by Audimation (CAAT tool)
The Institute of Internal Auditors

Created on ... January 04, 2009

What is the Sarbanes-Oxley act of 2002?

2008-12-31T10:00:00Z

The Sarbanes-Oxley Act of 2002 (Public Law 107-204) from the 107th Congress, was established to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.It was enacted by the Senate and House of Representatives of the United States of America and signed on July 30, 2002. This act is also referred to as SOX.
The act is named after its sponsors Paul Sarbanes and Michael G. Oxley, in response to a number of accounting irregularities at public companies.
Key Provisions are:

Section 302: Internal control certifications

Section 404: Assessment of internal control

For a copy of the act with associated details, go to: http://www.sec.gov/about/laws/soa2002.pdf
Source: Sec.gov

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Che cosa è l'atto di Sarbanes-Oxley di 2002?

2008-04-30T12:37:00Z

Italiano

Cos'è il Sarbanes-Oxley Act del 2002? Il Sarbanes-Oxley Act del 2002 (Legge 107-204)del 107° Congresso è stato emanato per proteggere gli investitori attraverso il miglioramento dell'accuratezza e dell'affidabilità dell'informativa aziendale resa in conformità alle leggi garantiste. La legge è stata approvata dal Senato e dalla Camera dei Rappresentanti degli Stati Uniti d'America e promulgata il 30 luglio 2002.

Tale legge è anche nota come SOX, ed ha preso il nome dai suoi propositori, Paul Sarbanes e Michael G. Oxley, in risposta ad una serie di irregolarità contabili nelle aziende pubbliche.

Le disposizioni chiave sono:

Paragrafo 302: Certificazioni sul controllo interno

Paragrafo 404: Valutazione del controllo interno

Per una copia della legge completa dei relativi dettagli, consultare: www.sec.gov/about/laws/soa2002.pdf

Fonte:Sec.gov

Enron Execs Dodge Questions

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What is CSOX?

2008-04-29T07:12:00Z

CSOX, also known as "Bill 198" or "the Budget Measures Act" is Canada's response to the U.S. Sarbanes-Oxley Act of 2002.

Sarbanes-Oxley introduced sweeping changes to the corporate governance and disclosure obligations of publicly traded companies on U.S. markets. The need to maintain compatibility and competitiveness with the United States has forced Canadian regulators to adopt similar provisions.

While the changes that have been adopted in Canada largely emulate the Sarbanes-Oxley Act of 2002 and related rules, the Canadian response has been shaped by the significant structural and philosophical differences between the two countries’ financial markets. Taking a more measured approach to implementation has also allowed Canadian regulators to learn from, and build upon, U.S. experiences.

In Canada, most new rules and regulations arising from the reforms came into force in mid-2005, with the remainder to be phased in over the following few years. A key item of Bill 198 is the creation of the Canadian Public Accountability Board (CPAB).

The CPAB's mission is to contribute to public confidence in the integrity of financial reporting of reporting issuers by promoting high quality, independent auditing. It is responsible for implementing an oversight program that includes regular and rigorous inspections of the auditors of Canada's public companies.

Sources: (see below)

Library of Parliament at: http://www.parl.gc.ca/information/library/PRBpubs/prb0537-e.htm

Or,

The CPAB at: http://www.cpab-ccrc.ca/

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La CSOX

2008-03-25T03:51:00Z

La CSOX, également connue sous le nom de « Loi 198 » ou « Loi sur les mesures budgétaires » est la réponse du Canada à la Loi américaine Sarbanes-Oxley de 2002.

La Loi Sarbanes-Oxley a apporté des changements radicaux à la gouvernance d’entreprise et à l’obligation de divulguer des sociétés cotées en bourse sur les marchés américains. Pour maintenir la compatibilité et la compétitivité avec les États-Unis, les organismes réglementaires canadiens ont dû adopter des dispositions similaires.

Les changements adoptés au Canada s’inspirent largement de la Loi Sarbanes-Oxley de 2002 et de la réglementation connexe, mais la réponse canadienne a été adaptée en fonction des différences structurelles et philosophiques considérables qui existent entre les marchés financiers des deux pays. L’approche plus mesurée du Canada à l’égard de l’application de ces mesures a aussi permis aux organismes réglementaires canadiens de tirer des enseignements de l’expérience américaine.

Au Canada, la plupart des nouvelles réglementations découlant des réformes sont entrées en vigueur au milieu de l’année 2005. Les autres seront progressivement mises en place au cours des prochaines années. La création du Conseil canadien sur la reddition de comptes (CCRC) est un facteur clé de la Loi 198.

Le CCRC a pour mission de contribuer à la confiance du public envers l’intégrité de l’information financière publiée par les émetteurs assujettis en favorisant une vérification indépendante de haut calibre. Il est chargé de la conception et de la mise en application d’un programme de surveillance prévoyant des inspections périodiques rigoureuses des vérificateurs de compagnies publiques au Canada.

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