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QUESTION 2

Use the Internet to conduct research related to whistleblower processes. Prepare a report summarizing key characteristics for the operation of an effective corporate whistleblower hotline. Be sure to highlight potential pitfalls that should be avoided.

According to Association of Certifies Fraud Examiners (ACFE) in Figure 1, almost 45 percent of the frauds are detected through tips (ACFE, 2013). So, this hotline will be an advantage against management override of internal control for intention of engaging in fraud if implemented effectively. Under the Sarbanes-Oxley Act 2002, a company’s audit committee is responsible for developing an effective hotline program but they are not in charge of receiving and handling each complaint (Selden, A. D., 2008).

QUESTION 2 Use the Internet to conduct research related to whistleblower processes. Prepare a report summarizing

Figure 1 Initial Detection of Occupational Frauds (ACFE, 2013)

Small companies implement this hotline by directing all the complaints to the attention of one designated person who will then promptly address the complaints and inform to the audit committee. Usually large companies will hire third-party vendors to manage the whistleblower hotline and prepare reports about any tips received to the audit committee. This will ease employees’ fears about confidentiality and anonymity as these vendors offers a wide range of communication alternatives such as email, web

forms and telephone hotlines for reporting complaints. Some companies elects the internal audit or other departments to manage this hotline such as General Electric for example, directs all complaints to the presiding director and chairman of the audit committee.

Corporate culture plays a large role in the success of a whistleblower hotline. Audit committee can assist each employee to view whistle blowing as a good contribution to a workplace of integrity (AICPA, 2005). An effective hotline must demonstrate anonymity and confidentiality so that any whistleblower will be more confident in giving out information. At the same time, they know that their concerns will be considered and will not be subjected to retaliation. The protection of whistleblower is stated in Sarbanes-Oxley in which all the employees must be trained to understand the whistleblower hotline program and the protection given to them. So, audit committee should provide strong leadership values in the development and maintenance of the hotline in order to increase the level of trust and confidentiality among the employees (AICPA, 2005).

When an employee looses trust in the whistle blowing process due to lack of confidentiality and anonymity, they will no longer feel comfortable in submitting any complaints as they fear any harassment or retaliation may occur. This is a pitfall that should be avoided. There are cases where complaints on fraud related cases were not taken any action and that matter was just remain silent. Therefore, employees must believe that actions will be taken whenever any complaints are submitted. There are possibilities that a personnel or management will filter out complaints received such as management fraud in the company before submitting to the audit committee and this matter can leak out to the affected group. Lastly, information sent to third-party vendors can be discoverable. Companies can’t control the behaviors of the vendors in the event of government investigation in which the company may be liable in the event of errors by the vendor, who is less familiar with the company's business (Selden, A. D., 2008).

(471 Words)

QUESTION 4

Conduct an Internet search to locate a copy of the Sarbanes−Oxley Act of [4] 2002 and summarize the requirements of Section 406 of the Act. Then, search the SEC’s web site (www.sec.gov) to locate the SEC’s Final Rule: “Disclosure Required by Sections 406 and 407 of the Sarbanes−Oxley Act of 2002 [Release No. 33-8177]. Summarize the SEC’s rule related to implementation of the Section 406 requirements?

In summary, the requirement of the Section 406 of the Sarbanes-Oxley Act of 2002 states that the SEC should issue rules that require a public company to disclose whether the company has adopted a code of ethics or not. If the company has not, the reasons for no adoption of code of ethics should be disclosed. Section 406 also requires that the SEC should revise its regulations concerning matters requiring prompt disclosure on a Form 8-K regarding any change in or waiver of the code of ethics for senior financial officers (U.S. Securities and Exchange Commission, 2003). Next, the term “code of ethics” in Section 406 refers to standards that necessary to promote:

a) Honest and ethical conduct, including ethical handling of actual or apparent conflict of interests between personnel and professional relationships; b) Full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer; and c) Compliance with applicable governmental rules and regulations.

Later on, the SEC adopted its final rule, “Disclosure Required by Sections 406 and 407 of the Sarbanes−Oxley Act of 2002 [Release No. 33-8177] in March 2003 which requires the public companies to disclose whether it has adopted a code of ethics that applies to their company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Companies that have not adopted a code of ethics applicable to these officers must explain why they have not done so. A public company also will be required to quickly

disclose amendments to, and waivers from, the code of ethics relating to any of those officers (Chadbourne & Parker LLP, 2003). (264 words)

REFERENCE LIST

American Institute Of Certified Public Accountants (AICPA), 2005. Management

Override of Internal Control: The Achilles’ Heel of Fraud Prevention. [pdf] New York: American Institute of Certified Public Accountants. Available at:

<http://www.aicpa.org/ForThePublic/AuditCommitteeEffectiveness/Downloadable Documents/achilles_heel.pdf> [Accessed 30 April 2013].

Association of Certified Fraud Examiners (ACFE), 2003. Dispatches from the War on Fraud. [online] Available at: <http://www.nycfe.org/articles.php?id=2> [Accessed 30 April 2013].

Chadbourne & Parker LLP, 2003. Audit Committee Financial Experts and Codes of Ethics. [pdf] Available at:

<http://www.chadbourne.com/files/publication/5be0b7b8-23d0-4018-ba3b-

9eba472b6278/presentation/publicationattachment/eefc60d9-8cdf-4d3e-985c-

0088974eec8e/secadoptsfinaldisclosurerulesregardingauditcommittee.pdf>

[Accessed 30 April 2013]. Selden, A. D., 2008. Practical Solutions for Dealing with Whistleblowers. [online]

Available at: <http://corporate.findlaw.com/human-resources/practical-solutions- for-dealing-with-whistleblowers.html> [Accessed 30 April 2013].

U.S. Securities and Exchange Commission, 2003. Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. [online] Available at:

<http://www.sec.gov/rules/final/33-8177.htm> [Accessed 30 April 2013].