Using the Internet, Strayer databases, or the Securities and Exchange Commission’s Website, located at, perform a search on several U.S. health care publicly-traded companies and choose a health care organization that has been accused of committing health care fraud.

Write a five to six (5-6) page paper in which you:

Evaluate the level of SOX regulations that applies to for-profit and not-for-profit health care organizations, indicating whether or not mandating SOX requirements for non-profits might reduce fraud and increase corporate governance. Provide support for your rationale.

Determine whether SOX has been effective in regulating ethical behavior of for-profit health care organizations. Defend your position.

Review the audit report issued by the external auditing firm from the company’s Website for the year it was accused of fraud. Then, determine whether the external auditors were negligent in preparing the audit report for the company. Formulate an opinion regarding which Internal Control was deficient or what GAAP was violated. Defend your position.

Determine what provision(s) of SOX was / were violated in the health care fraud case in question. Indicate whether or not SOX adequately provides sanctions to deter the behavior or if changes are needed to the regulations to remedy the issue(s) and thus ensure compliance.

Based on the fraudulent activity that occurred, recommend two (2) improvements to the internal control environment to reduce those occurrences. Provide detailed recommendations.

Use at least four (4) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length


Accounting and Audit Enforcement

Accounting and Audit Enforcement


Organizations have in place cultures that are meant to guide the employees on how to handle day to day business and transactions with customers in order to avoid illegal activities, reduce fraud and also increase corporate governance. This shows the right image to all the business stakeholders both internal and external including customers, government and the investors. Organizations need to ensure that they provide a conducive environment for all the employees to ensure that they perform their duties without pressure, especially for the for-profit organizations. Publicly traded healthcare organizations have had their fair share of fraud controversies that range from misrepresentation of location, provider and dates of service to providing bills of services not rendered, corruption and false issuance of prescription drugs. This report will analyze an Out-patient surgery provider located in the United States, HealthSouth Corporation, and how they were involved in fraud instances in the past, and how the issue was handled by department of justice and the government. Analysis of SOX regulations as they apply to both for profit and not-for-profit organizations and their effectiveness in promoting ethical organizations. Recommendations on how to improve the internal control environment to reduce instances of fraud has also been done.

SOX regulations application to for-profit and not-for-profit health care organizations

The SOX regulations basically good business practices. The Sarbanes-Oxley Act was passed in the year 2002 by the congress in which their main aim was to combat the fraudulent activities perpetuated by publicly traded companies and to ensure that they conduct their businesses in the most transparent manner possible (Hassan, Nassar & Whitherspoon, 2019). These regulations apply to all the public traded companies and their subsidiaries more so the accounting and auditing firms. These regulations were passed in order to protect investors in the publicly traded companies, from falling into misrepresentation and fraudulent transactions. This meant that companies needed to present their financial statements free from any misrepresentation or fraudulent nondisclosure. Companies therefore had to strengthen their internal auditing controls, improve their audit committee by hiring only competent and ethical personnel who would ensure that the information put forward in the public domain represented a true and fair view of the business financial statements. The SOX regulations also provided hefty punitive fines and criminal penalties for public companies engaging in fraudulent activities (Crabb, 2019). This section has played a good role in countering illegal activities such as fraud in public companies.

Non-profit organizations rely on funds from donations, foundations, grants and sponsorships. This means that they need to provide accurate accountability of these funds to perform functions that they promise to do. For instance, the SOX requires that the audit committee of public companies should not have conflict of interest in the business. This can be borrowed by the nonprofit boards of auditors to ensure transparent in their functions. Nonprofits should also change the auditor’s board members often to prevent conflict of interest. Therefore, mandating the SOX requirements for non-profit organization will ensure that the grants and donations are well utilized and for proper functions (Hassan, Nassar & Whitherspoon, 2019). This will definitely bring about accountability for all the money given to the organization and reduce chances of misappropriation and embezzlement and increase corporate governance.

SOX effectiveness in regulating ethical behavior of for-profit health care organizations

The Sarbanes-Oxley Act has been very successful in ensuring proper ethical behavior in companies and this has really helped improve the corporate governance. It has helped several parties including board management, employees and managers, investors and other external stakeholders such as the government and department of justice. For instance, the punitive measures put in place by the act ensures that employees are not so easily manipulated into entering unethical practices and whistleblowers have come forward to report instances of fraud in companies. For example, in 2009, Linda Almorte, an employee of JP Morgan Chase at that time, came forward to report corruption cases that were ongoing in JP Morgan Chase Company (Crabb, 2019).

Companies board of directors have also been forced to facilitate proper supervision of the roles of employees in preparing sound financial statements and this has ensured that no fraud and other irregularities can occur unnoticed. These regulations have also ensured that there is close relationship between the internal auditor and the external auditor. This collaboration has led to companies filing financial statements that represent a true and fair view of their financial position. The SOX regulations have therefore brought confidence to the investors (Crabb, 2019). Public companies strive to provide high quality financial statements. Investors can rely fully on these audited financial statements of companies that they would like to invest.

In order for the Sarbanes Oxley (SOX) Act of 2002 to be effective, there is need for organizations to change their organizational culture. This means that the management must instill proper code of ethics (Hassan, Nassar & Whitherspoon, 2019). There should also be consequences of material misstatement for employees in an organization which should be administered by the supervisors. There has been a steady decline in the number of reported misstatements of financial statements since the implementation of the Sarbanes Oxley Act in 2002. Auditors should also uphold ethical principles that will help them detect fraud and report it to management for proper action and avoid colluding with management to misguide the users of the financial statements.

Review of the audit report for HealthSouth Corporation

The company was accused of presenting false financial information in their annual statements which mislead and misinformed investors and creditors. They were specifically accused of overstating the revenues and assets in the previous years by almost $2.8 billion (Reed & Neubert, 2017). This was in order to meet the expectations of Wall Street earnings. The 2003 audit report provided by their then auditing firm, Ernst & Young, gave an unqualified opinion. One of the main areas where the fraud occurred was in the double entry system of revenue and expense recognition in financial statements. The GAAP require that revenue and expense changes must be accompanied by corresponding change in assets or liabilities. However, under the instructions of the CEO, the accounting experts opted for manual entries in a computerized accounting system rather than the computerized system which would first create a report forcing a check for payment. This system would not give time for review by the internal controls of the company. The fact that the top management were aware of the GAAP, made it easy to hide the transactions and balance the books of accounting by overstating the assets so that they coincide with the increase in earnings. Therefore, the external auditors did not detect these misstatement since the alterations did not leave much paper trail. There was no irregularities in the internal controls or the internal audit reports. It was therefore difficult for the auditing firm to detect these misstatements. This discovery of the fraud cases, lead to the auditing firm and the chief executive officer, Richard Scrushy, being removed from office.

Provision(s) of SOX that was violated in the health care fraud case

Companies are required to hire competent accountants and auditing team in order to ensure that financial statements are well prepared and that they indicate a true financial position for the company. HealthSouth Corp was found to have committed several fraudulent activities in the years prior to 2003. They had intentionally deceived the investors, creditors and the Wall Street. One sanction provided by the SOX that was violated is that, “any CEO or CFO will not “recklessly” and willing fully violates his or her certification of the company’s financial statements,” (Zhemin, Zhijun & Sophia, 2009). Anyone found to have violated this rule would be subject to a fine of up to $1 million and up to 10 years imprisonment. Another sanction is that, “any person will not “corruptly” alters, destroys, conceals, etc., any records or documents with the intent of impairing the integrity of the record or document for use in an official proceeding,” (Zhemin, Zhijun & Sophia, 2009). If any party in an organization is found to have violated this rule, he or she will be subjected to a fine and up to 20 years imprisonment. Both of these sanctions were violated. The SOX therefore provides enough measures to deter the commission of fraud and ensure compliance within public companies.


The internal control system of HealthSouth Corporation had permitted the commission of fraud in line of business. This means that it has some loopholes that facilitated these. These loopholes can be fixed by implementing the following recommendations. The first recommendation that would improve the internal control environment would be to eliminate all the manual entries into the system. Removing the manual entries would mean that all computerized entries would be subject to review and checks by the authorizing party. If there is no alternative to the manual system, approval should be given by the senior officer in charge of finance in the organization.


Secondly, there need to be in place separation of duties and responsibilities. In this case of HealthSouth Corp., the accountant was the one to take the financial documents to the chief executive officer and was still the one to make the required changes which were not approved by his senior supervisor who was the chief financial officer. This means that the accountants can make mistakes and alterations that could reflect badly to the company. Therefore there is need to supervise the accountant especially when making alterations to the financial statements.


It is evident that the Sarbanes xylene act of 2002 had the much needed effect in both public and private organizations. The generally accepted accounting principles (GAAP) also ensure that financial statements are prepared in an honest manner and stakeholders can make informed decisions based on these statements. Organizations must be able to cultivate an environment that is both productive and encourages all employees to work hard while avoiding committing fraud and other illegal activities. Therefore, organization culture should be cultivated by the top management and backed by the shareholders and directors. Punitive measures of SOX play a very important role in ensuring that employees and organizations at large do not commit fraud in their businesses.


Crabb, J. (2019). PRIMER: Sarbanes-Oxley. International Financial Law Review.

Hassan, M., Nassar, R., & Whitherspoon, A. (2019). IMPACT OF INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER THE SARBANES-OXLEY ACT ON A FIRM’S STOCK PRICE AND STOCK VOLATILITY. International Journal of Business, Accounting, & Finance13(1).

Reed, M. M., & Neubert, M. J. (2017). HealthSouth Rehabilitation CFO: How Can You Turn the Wagon Around?. Journal of Business Ethics Education14, 315-326.

Zhemin Wang, Zhijun Lin and Sophia Ju, (2009). Healthsouth Corporation: The First Case Against A Company Under The Sarbanes-Oxley Act. Journal of Business Case Studies. Vol. 5 no. 1.

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