The Sarbanes Oxley Act

The Sarbanes Oxley Act is a United States federal act which was brought into existence from 30th July, 2002 as a result of several corporate and accounting scandals. This law enhanced the standards of U.S. public company boards and accounting firms and this law was not applicable to the private companies initially. This legislation was first applied to the health care industry in America and had long term implications for corporate governance and accounting reforms not only for public companies but also for the private and non-profit healthcare organizations. Sarbanes Oxley Act has put greater responsibility on the senior management and board of directors of hospitals and other health care organizations to comply with ethical practices and failure to do so will result in severe undermining of the health care provider’s eligibility for compliance credit. The sentencing guideline amendments which impacted the senior management of health care are:

The directors and senior management are responsible to practice and have an oversight of ethical practices in the organization. They must take leadership actively. Small organizations will act no differently from large organizations and they are also required to be committed to the ethical conduct and compliance with the law.

The governing authority is responsible for training senior officials, identifying and assessing the areas of risk and providing sufficient authority to the compliance officers to carry out their responsibilities.

Individuals in the organization will be assigned with operational responsibilities on daily basis and will be provided with adequate resources to carry out their duties.

The organization will be sentenced if the senior management is found to be involved in illegal activities and the organization fails to self report its misconduct in any form, in timely manner.

Failure of an organization to adhere to the industry regulations is weighed against its capability to do so and penalty is imposed accordingly.

The failure to detect or prevent an instant offence will not result in immediate sentence for the organization but if the misconduct is found to occur frequently, it means that the organization has failed to take reasonable steps to meet the requirements of guidelines.

The guidelines impose a mandatory fine on those organizations who fail to take effective steps in order to adhere to ethical conduct and compliance with the guidelines.

The new sentencing guidelines have made this very clear that not only the public companies but private and non-profit health care organizations also require financial scrutiny. The allegations of executive abuses on Health Midwest and Allina Health System are an example that financial control is not limited only to the public companies, but non-profit organizations also fall under purview of it. In fact non-profit and private companies may avoid sentencing by proactively holding their financial officers to the higher standards of Sarbanes Oxley Act. In order to comply with the act, organizations are required to exercise internal control on financial information released to government agencies and create an audit committee comprising of all independent directors where the committee will be directly responsible for the appointment and payment of the outside auditor and at least one financial expert must be there in the committee. The director of the committee is liable to receive payments only for his services offered to the committee and he can not have any material relationship with the company. The committee is responsible to establish accounting standards, investigate and regulate them as per the requirement. The committee must also have a mechanism to receive and respond to complaints of auditing and accounting matters and it must conduct regular corporate governance trainings so as to streamline corporate lines of reporting. The Sarbanes Oxley Act has successfully tightened the financial control over the health care organizations so that the corporate and accounting malpractices can be curbed down and a powerful check can be imposed on the frauds in the health care industry. The appointment of an independent auditor particularly in a health care organization is very critical because any deviation of actual reimbursement from the bill charged by the health care service provider may result in government audit and retroactive adjustments in financial books. Many health care organizations have started complying with Sarbanes Oxley Act by forming committee comprising of independent auditors who are not the executives of the organization and also the Chief Financial Officer are required to verify and certify organization’s Medicare cost reports in order to maintain internal financial control. The act requires the senior management to certify their internal control mechanisms and severe criminal penalties will be imposed in case it is found that false certifications have been filed. The report filed must be complete and accurate and any failure to do so will be considered as breach of law. Civil penalties along with criminal penalties have also been increased which include an expanded statute of limitations for securities fraud claims and protection through federal bankruptcy laws which will clearly declare that the organization is not in position to discharge any settlement in bankruptcy occurring due to securities related transactions. Because of the Sarbanes Oxley Act, many states avoid loans from nonprofit organization to its directors, employees or any other corporation if the directors or other employees hold a substantial financial interest in the organization. All these legislations have made the reach of Sarbanes Oxley Act much broader and have enabled it to evaluate the completeness of financial statements of a company.

Reference:-

HYPERLINK “http://www.eapdlaw.com/files/News/bedbaa26a58a4af885858cc423b55cb9/Presentation/NewsAttachment/b00d49fb-5358-4197-bb8b8d84e6dd238f/media.282.pdf”http://www.eapdlaw.com/files/News/bedbaa26a58a4af885858cc423b55cb9/Presentation/NewsAttachment/b00d49fb-5358-4197-bb8b8d84e6dd238f/media.282.pdf

HYPERLINK “http://mosessinger.com/articles/files/NYLJ-Potential%20Impact%20of%20Sarbanes-Oxley.pdf”http://mosessinger.com/articles/files/NYLJ-Potential%20Impact%20of%20Sarbanes-Oxley.pdf

HYPERLINK “http://www.greatboards.org/newsletter/2010/Great-Boards-reprint-Sarbanes-Oxley-and-quality-Spring-2010.pdf”http://www.greatboards.org/newsletter/2010/Great-Boards-reprint-Sarbanes-Oxley-and-quality-Spring-2010.pdf