...Economic Consequences of the Sarbanes-Oxley Act of 2002 Ivy Xiying Zhang* William E. Simon Graduate School of Business Administration Carol Simon Hall 4-312 University of Rochester Rochester, NY 14627 zhangxi@simon.rochester.edu February 2005 I am grateful for the guidance of my dissertation committee, Bill Schwert, Charles Wasley, Ross Watts, and especially Jerry Zimmerman (Chairman). I also appreciate comments from Jim Brickley, Philip Joos, Andy Leone, Jerry Warner, Joanna Wu, Yan Cao, Ling Lei, Laura Liu, Tao Kuang, and workshop participants at the University of Rochester. All errors are my own. * Abstract This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion. I then examine the private benefits and costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results are consistent with the hypothesis that shareholders consider both the restriction of nonaudit services and the provisions to enhance corporate governance costly to business. The results also show that Section 404 of SOX, which mandates an internal control test, imposes significant costs on...
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...peaked at $64.50 in 1999. During the second quarter of 2002 (June 25, 2002), WorldCom announced that line costs totaling $3.9 billion had been improperly capitalized in five preceding quarters which overstated pre-tax earnings by the same amount. The SEC filed fraud charges against WorldCom the next day. WorldCom shares fell to less than to $1. In July 2002, WorldCom filed for Chapter 11 bankruptcy protection, the largest bankruptcy in U.S. history. Subsequently, former WorldCom chief financial officer Scott Sullivan and controller David Myers were arrested on securities fraud and conspiracy charges. Ebbers was indicted on federal charges in the accounting scandal. In March 2005, Ebbers was found guilty on all charges and was sentenced for 25 years in prison. Required: - Submit a hard copy of the case assignment in the beginning of class on the due date (Monday, September 14). Include a cover page with your section number (Track 1 or Track 2) and assigned team number. Every team member shall sign the honor pledge on the cover page. - Submit an e-copy of your assignment via Blackboard by 10:00am on the due date. The filename should include your track and group numbers: Track#_Group#_Case1.doc Refer to the WSJ article at the end of the first lecture notes (Introduction to Accounting). 1. Create a summary timeline of the WorldCom debacle....
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...On April 14, 2008, Bayou Management, LLC’s founder and CEO, Samuel Israel, III, was sentenced to 20 years in prison and ordered to pay $300 million in restitution for defrauding investors out of more than $450 million over nearly 10 years. Prior to this, in January, 2008, Bayou's former CFO, Daniel Marino, and Bayou co-founder James G. Marquez, had also been sentenced to 20 years and 51 months in prison, respectively. (WSJ) On June 9, 2008, on the day he was to begin his prison sentence, Mr. Israel’s car was found abandoned on the Bear Mountain Bridge, about 40 miles north of New York City, with “Suicide is Painless” written in the dust on the hood of his car, and with a suicide note left inside his car. He had told his girlfriend, Debbie Ryan, that he was driving himself to a federal prison in Ayer, Massachusetts. She was later also arrested and charged with helping him escape. On Wednesday, July 2, 2008, Israel turned himself in to police (USA Today). On October 28, 2008, Israel avoided prison once again by pleading an addiction to painkillers, making him incompetent to enter a plea. He is ordered to undergo 90 days of psychiatric evaluation in a medical prison facility in North Carolina. (NYDailyNews.com) Bayou Management, LLC, which was headquartered in Stamford, CT, is a group of companies and hedge funds founded in 1996 and managed by Samuel Israel, III and co-founder, James G. Marques. They raised funds from investors with the goal of investing in short...
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...is believed that it deepened after Japan’s March 2011 earthquake, tsunami and nuclear disasters because Toshiba supplied two of the reactors affected at the Fukushima Daiichi plant. After this event, Japan shut down the remainder of the nuclear operations at the site, and the demand for nuclear energy around the world was reduced. Toshiba, having a large stake of its business in the nuclear energy production, became affected by the events in 2011, so management at Toshiba set aggressive sales and profit targets across the company to offset the decline in the energy division. As a result of this decision, the rivalry across the divisions became intense; therefore triggering a number of accounting schemes. According to publications in the WSJ, Toshiba overstated its profit by inaccurately applying the percentage of completion for some of its energy projects, underreporting expenses, and...
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...Goodwill Goodwill is an intangible asset and is the difference between a company’s total value and current market value of their tangible assets (Buying a Business). For example, a company purchases another firm for ten million and the tangible assets of that firm are worth one million; nine million would be the company’s goodwill. There are many things that make up the value of a company’s goodwill; such as customer loyalty, reputation, copyrights, patents etc. Most of the value of a company does not come from the hard assets, but in the intangible asset. Because reputation has an affect on a company’s goodwill, a publicly traded company’s goodwill can be affected more than a private company’s; therefore publicly traded companies have to be more careful about their decisions and ethics. One way goodwill could go down is if a company’s reputation were to be damaged. When a company’s reputation goes down it can cause their stock prices to go down; therefore, reducing their market value. When the market value of a company goes down, their goodwill goes down as well, and this is called impairment. Impairment is when the carrying amount of goodwill is greater than its implied fair value (ASC 350-20-35-2). According to the Financial Accounting Standards Board (FASB), Impairment must be tested annually anytime during the fiscal year as long as it is done the same time every year by using the two-step process and if impairment exists, the impairment losses are put in the income statement...
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...to cheat the company blind. They used company funds to buy back Adelphia stock and reserve other family enterprises, including a golf course, vacation homes, apartments on the upper east side of Manhattan, corporate jets, a fleet of cars, production of a film by John's daughter, and even ownership of the Buffalo Sabres hockey team. On an earnings conference call, Merrill Lynch analyst Oren Cohen wanted to know how the family could afford to buy back more than a billion dollars of the company's stock. Caught by surprise, CFO Tim couldn't come up with a decent response. Adelphia Communications Corp. founder John Rigas and his son Timothy were sentenced of conspiracy, bank fraud and securities fraud for looting the cable company and cheating its investors.The two were convicted of all 15 securities fraud charges against...
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...NAME: HAMZA .S. MAKANDE STUDENT NUMBER: TP027192 INTAKE CODE: UC2F1501IBM BM061-3.5-2-BEG MODULE NAME: BUSINESS ETHICS GOVERNANCE TOPIC: BANK OF AMERICA’S MOST TOXIC ASSET (CASE B) INDIVIDUAL ASSIGNMENT LECTURER: FARAHIDA BINTI ABDUL JAAFAR DATE ASSIGNED: 06th MARCH 2015 DATE DUE: 17th APRIL 2015 Table of Contents INTRODUCTION. 3 Summary. 3 Ethical Dilemma. 3 Affected Stakeholders. 4 ANSWER FOR QUESTION 1. 4 ANSWER FOR QUESTION 2. 5 ANSWER FOR QUESTION 3. 6 ANSWER FOR QUESTION 4. 7 ANSWER FOR QUESTION 5. 8 ANSWER FOR QUESTION 6. 8 CONCLUSION. 9 REFERENCES. 10 BANK OF AMERICA’S MOST TOXIC ASSET (CASE B). INTRODUCTION. Summary. Ken Lewis was a Chief executive officer of Bank of America, he was appointed as American Banker’s "banker of the year "after purchasing Countrywide Financial and Merrill Lynch. The bank acquisition of Merrill Lynch in 2008 made Bank of America the world's largest wealth management Corporation and a major player in the investment banking market. The deals were applauded and made Ken Lewis even more worth being named as American Banker’s “banker of the year” During first week of January 2009 both Countrywide Financial and Merrill Lynch were bankrupt with assets in their balance sheet which set a new standard for toxicity in financial market, resulting in forfeiture for the bank and requiring financial assistance from the Federal Government. Bank of America was forced to welcoming U.S. taxpayers as the company’s largest...
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...Assignment 2: Review of Business Fraud ACC 565 – Accounting Information Systems July 28, 2012 Summary of United States vs. Bo Zhang Bo Zhang, a Chinese computer program, was a contract employee assigned to the Federal Reserve Bank of New York (FRBNY), between May 2011 and August 11, 2011, to work on further developing a specific portion of the Government Wide Accounting program (GWA) source code (FBI, 2012). Mr. Zhang was not a United States citizen and was here on a VISA. The United States had spent approximately $9.5 million to develop the GWA code. The FRBNY was given the task of moving the Government Wide Accounting program, developed to help track the billions of dollars the United States government transfers daily, from an antiquated IBM mainframe computer to the Internet, according to a person familiar with the project (Chicago Tribune, 2012). In the summer of 2011, Zhang stole the GWA Code and, without authorization from FRBNY, copied it onto his hard drive at the FRBNY and an FRBNY-owned external hard drive. He then transferred the code to his private office computer, his home computer, and his personal laptop (FBI, 2012). Zhang used the GWA code to access the government system and submit fraudulent documentation to immigration authorities to help foreign nationals obtain visas to enter and work in the United States. Zhang falsely represented to immigration authorities that certain foreign nationals worked full-time for his...
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...1. Perform an initial ratio analysis with Enron’s 2000 10-K Report, using the “Irrational Ratios”, the “Key Ratios for Investing” and the “Emerging Ratios”. Irrational Ratios Days Sales in Receivable Index | 1.376 | *This could be a red flag because this comes in closer to the mean manipulators index than the non-manipulators index. | | | | Gross Margin Index | 2.144 | *This is definitely a red flag because it is much higher than the average manipulators index of 1.193. | | | | Asset Quality | 0.7714 | *Not a red flag because it is smaller than the mean non-manipulators index. | | | | Sales Growth Index | 2.513 | *This is also a red flag because it is much higher than the mean manipulators index. | | | | Total Accruals to Total Assets Index | -0.0121 | *TATA is not a red flag because it is very close to the non-manipulators index. | Key Ratios for Investing Price/Book | 5.597 | | | | *Red flag because industry average is only between 2 and 3. | Price/Earnings | 71.429 | | | | *Red flag because average is between 20 and 25 which is significantly lower. | Price/Sales | 0.637 | | | | *Not a red flag because this falls below the benchmark of 1.9. | Price/Cash Flow | 13.433 | | | | *Not a red flag because this falls below the benchmark of 15.1. | Profit Margin | 0.9713% | | | | *Red flag because this does not fall within the benchmark of 4%-8%. | Top-Line Growth | 151.269% | | | | *Red flag because...
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...FINA 465: Commercial Bank Practice and Policy Spring 2013 MW 2:30 – 3:45 Section 001 BA 401 MW 4:00 – 5:15 Section 002 BA 401 Professor: Dr. Allen N. Berger Office: Room 452, Moore School of Business Phone: (803) 576-8440 Email: aberger@moore.sc.edu Office Hours: MW 10:00 AM – 11:00 AM and 5:30 PM– 6:30 PM; and by appointment Extra office hours will be available before each of the three tests. Course Overview: This course is structured around the theme of risk management in banking. You will examine how banking institutions generate earnings and the nature of risks assumed in their operations. The focus of the subject matter is risk management. Topics to be covered: Why are financial intermediaries special? the role of depository institutions; financial crisis; risk of financial intermediation including interest rate risk, credit risk, off-balance sheet risk, liquidity risk; management of risks including liquid asset management and liability management, deposit insurance and other liability guarantees, capital adequacy, product and geographic diversification, and loan sales. The objective of this course is to provide the student with the conceptual framework necessary to analyze and comprehend the current problems confronting managers of commercial banks and other depository institutions. The course materials do not dwell on the development of financial theories. It is assumed that the student comprehends the basic theoretical concepts...
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...| ACCOUNTING CHANGES | | | Sabrina Whitehead | Dr. M. Austin ZekenAccounting Undergraduate Capstone Acc 499 | 4/26/2012 | | Discuss the primary reason for the restatement and the impact to the financial results for the Company. Dell computers has delivered technology solutions for more than twenty-six years and has transformed countries, communities and the private sector to help achieve their goals at work, home and school. Michael Dell created PCs Limited but later changed the name to Dell Computer Corporation in 1984, as a freshman attending the University of Texas. The young entrepreneur purchased computer parts from wholesale distributors, installed them in his version of the IBM, and then began selling the custom-built person computers from his dorm room. After one year of successful business Michael Dell left college and incorporated his business and the Dell Company went public, selling stock market shares for $8.50 per share. After years of financial accomplishment in 2006 the Securities and Exchange Commission (SEC) made inquiries of Dell internal accounting and Dell Inc. was investigated after a review of past accounting and reporting practices and company eventually disclosed wrongful conduct for deferring revenue coming from software sales, errors and irregularities which took place from 2003 through 2007. The investigation concluded that a number of adjustment were improper, including the creation and release of accruals and reserves...
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...The Fraud of the Century: The Case of Bernard Madoff The fraud perpetrated by Bernard Madoff which was discovered in December, 2008 is based upon a Ponzi scheme. Madoff took money from new investors to pay earnings for existing customers. The greater the payout to retiring and withdrawing customer, the more revenue or clients he would need to start and “investment relationship” with Madoff. The Ponzi scheme was named after Charles Ponzi who in the early 20th Century, saw a way to profit from international reply coupons. International reply coupons were a guarantee of return postage in response to an international letter. Charles Ponzi determined that he could make money, legally, by swapping out these coupons for more expensive postage stamps in countries where the stamps were of higher value. While making a significant profit with this system, Ponzi got the idea of enticing investors to provide him more capital to trade coupons for higher priced postage stamps. His promise to investors was a 50% profit in a few days. Touted as a financial wizard and the ‘Warren Buffet’ of his day, Ponzi lived outside Boston, he had a fairly opulent life bringing in as much as $250,000/day. Part of Ponzi’s success came from is personal charisma and ability to con even savvy investors. The promised payout was supported by the new investors anxious to take advantage of these robust returns because he appeared to create an image of power, trust, and responsibility. In July of 1920...
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...The Fraud of the Century: The Case of Bernard Madoff The fraud perpetrated by Bernard Madoff which was discovered in December, 2008 is based upon a Ponzi scheme. Madoff took money from new investors to pay earnings for existing customers. The greater the payout to retiring and withdrawing customer, the more revenue or clients he would need to start and “investment relationship” with Madoff. The Ponzi scheme was named after Charles Ponzi who in the early 20th Century, saw a way to profit from international reply coupons. International reply coupons were a guarantee of return postage in response to an international letter. Charles Ponzi determined that he could make money, legally, by swapping out these coupons for more expensive postage stamps in countries where the stamps were of higher value. While making a significant profit with this system, Ponzi got the idea of enticing investors to provide him more capital to trade coupons for higher priced postage stamps. His promise to investors was a 50% profit in a few days. Touted as a financial wizard and the ‘Warren Buffet’ of his day, Ponzi lived outside Boston, he had a fairly opulent life bringing in as much as $250,000/day. Part of Ponzi’s success came from is personal charisma and ability to con even savvy investors. The promised payout was supported by the new investors anxious to take advantage of these robust returns because he appeared to create an image of power, trust, and responsibility. In July of 1920...
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...Home Depot Data Breach Background on the 2014 Home Depot Data Breach Home depot was the target of a cyberattack on their information system infrastructure that lasted from April of 2014 to September of 2014. As a result of the attack and following data breach, 56 million credit-card accounts and 53 million email addresses were stolen. (“Home Depot Hackers Exposed 53 Million Email Addresses”) The cyberattack involved several steps. First, the attackers gained third party credentials allowing them into the system. Next they exploited an unknown weakness in the system that allowed for the attackers to elevate their own access privileges. Finally, they installed malware on Home Depot’s self-checkout systems in the U.S. and Canada, allowing for the data to be stolen. Because this was a multistage attack, there were several stages of failures. While this shows that there were multiple lines of defense, the fact that there were multiple failures as well is a large issue. It demonstrations that even with multiple lines of defense Home Depot was still not adequately protected. The first failure was that the attackers acquired credentials from a third party vendor. This may not have been Home Depot’s fault directly, but there are still governance processes they could’ve employed to prevent it. Once the attackers were in the system they exploited yet another vulnerability that allowed themselves to elevate their access rights. The third vulnerability that was exploited was the lack of...
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...Chapter 2 THE AUDIT MARKET Revision: 11 September 2012 2.1 Learning Objectives After studying this chapter, you should be able to: 1. Distinguish between different theories of audit services including agency theory. 2. Understand drivers for audit regulation. 3. Understand the role of public oversight. 4. Distinguish between different audit firms. 5. Identify some current developments in the audit market. 6. Portray the series of industry codes of conduct and guidance 2.2 Introduction The emergence of today’s auditors happened during the Industrial Revolution that started in Great Britain around 1780. This revolution led to the emergence of large industrial companies with complex bureaucratic structures and, gradually, the need to look for external funds in order to finance further expansion: the separation between capital provision and management. Both developments resulted in demand for the services of specialists in bookkeeping and in auditing internal and external financial representations. The institutionalization of the audit profession was then merely a matter of time. Management Controls Operations and Communications Management has control over the accounting systems and internal controls of the enterprises that auditors audit. Management is not only responsible for the financial and internal control reports to investors, but also has the authority to determine the precise nature of the representations that go into those reports. However, management...
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