SARBANES-OXLEY: IMPACT ON THE HEALTHCARE SECTOR 2
Sarbanes-Oxley: Impact on the Healthcare Sector
Between 2000 and 2002, the US was riddled with numerous financial scandals, which necessitated the establishment of a bill that would protect investors from financial losses. Some of these scandals included Enron (2001), WorldCom (2002), and Tyco International (2002) (Karpoff, 2010). These frauds cost the investors billions of dollars scenarios, which were triggered by the collapse of the shares of the affected business establishments. Overall, the scandals adversely affected the confidence that the public had towards the country’s security markets (Wagner & Dittmar, 2006). Due to the ensuing public outcry, Congress enacted the Sarbanes-Oxley Act (SOX), which was aimed at revolutionizing the financial practice landscape and corporate governance. Principally, the SOX Act's primary agenda was to combat fraud, enhancing the dependability of financial reporting and restoring the confidence of investors. Since healthcare is a crucial aspect of the economy, the SOX Act works to safeguard the economy by streamlining areas such as governance, internal controls, ethics, and disclosure.
The Sarbanes-Oxley Act was enacted in 2002, aimed at reforming the financial landscape concerning financial practices and governance of corporates. The SOX Act was necessitated by the rampant financial scandals that characterized the period between 2000 and 2002 (“The Sarbanes-Oxley Act 2002,” 2008). The frauds had weakened the confidence investors had with the financial markets. Thus, Congress was bound to find a solution to the financial scandals’ menace. The Act was christened after its principal drafters Senator Paul Sarbanes and Representative Michael Oxley. Although the Act had eleven sections, only six have far-reaching consequences to corporate administration and financial procedures (“The Sarbanes-Oxley Act 2002,” 2008). These sections provide in detail the requirements of the SOX Act.
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Section 302 of the SOX Act provided that CEOs and CFOs have direct responsibilities for the correctness, recording, and submission of all financial reports. Under this section, the CEO and CFO also have the mandate of ensuring that the working of internal controls is in tandem with US Securities and Exchange Commission requirements. SOX Section 401 requires that all information in the financial reports to be accurate and should include data on material off-balance liabilities. Internal controls are factored in Section 404 of the SOX Act and require issuers to publish information on their scope and adequacy, including approaches to financial reporting. Any material changes in the financial conditions by issuers are catered for by SOX section 409. Last, section 802 defines fines and penalties to those who contravene the provisions of the SOX Act (“Sarbanes-Oxley Act Summary and Introduction," 2005). By enacting the SOX Act, Congress endeavored to preempt widespread financial frauds that had threatened the country’s investment landscape. The Act has far-reaching consequences to the health sector with areas such as governance, internal controls, ethics, and disclosure becoming streamlined.
The SOX Act was a response to the many cases of fraudulent activities that were reported in public traded companies that occurred with the help of management. Section 302 of the SOX Act outlines governance requirements that public institutions must follow. In the healthcare sector, the directors have crucial responsibilities of ensuring that their governance structures and processes align with the requirements of the Act (Imperato & Raspanti, 2009). For example, not-for-profit organizations such as United Way are required to answer to the public regarding their governance structures. These organizations source a significant amount of their finances from public donations. The Act has led to an increase in the accountability levels in healthcare institutions. However, the increase in transparency levels in the realm of governance has had its challenges. For example, directors of the institutions in the healthcare sector are subjected to intricate statutory and regulatory schemes instituted by the government (Imperato & Raspanti, 2009). These strict regulatory requirements have a trickledown effect on the suppliers of healthcare, goods, and services. Despite the laws that manage the healthcare industry being specific, they are not clear and may render some actions unlawful, which may not be the case in other sectors (Imperato & Raspanti, 2009). That notwithstanding, the SOX Act has created the need for all institutions in the healthcare sector to be cautious in their compliance endeavors and operations.
Section 404 of the SOX Act provides that managers in a healthcare institution create mechanisms for enhancing the effectiveness of internal controls and their procedures. According to some, this section is the most burdensome since it gives the management the responsibility of maintaining sound internal control structures for financial reporting. The control structures are also required to streamline the management’s effectiveness (Wagner & Dittmar, 2006). Auditors in the healthcare sector are therefore required to prove the dependability of management assessments and give actionable reports on the overall internal control systems. However, adhering to the SOX Act is not legally binding to health organizations in the country. For example, health facilities in New York that lack public equity are not required to abide by the SOX Act principles ( Loubeau & Griffith, 2012 ). Internal control structures are critical for ensuring that hospitals and other institutions in the health sector heighten their scrutiny on financial operations, thus establishing grounds for transparency and integrity in operations. Improving the effectiveness of internal controls helps reduce instances of financial scandals, for example, in the execution of Medicare programs. In such programs, the Act will streamline accounting of refundable fees and evaluation of third-party compensations
Applying the SOX Act to the healthcare sector helps hospital boards lay mechanisms for oversight quality. Public accountability is a fundamental requirement in all sectors, including that of health. SOX Act emphasizes the obligation of corporate leadership to safeguard the welfares of investors (Bader, 2010). Correspondingly, hospital leaders have a fiduciary duty to represent the interests of the public safe and high-quality healthcare. Such responsibility is often documented in policy statements and the boards' position description. Both of these are then made publicly available on the institution’s website. Public accountability is closely associated with a transparency policy. When the board ensures that accountability is entrenched in the organization culture, the rest of management employees will ensure that they are transparent in their related financial decision. In the absence of a clear public accountability policy, transparency issues will be rampant since managers with dubious intentions know that their actions are not tied to the interests of the public. As discussed above, the SOX Act requires hospital boards to exercise transparency when making any financial disclosures.
SOX Act identifies the role of the audit committees in enforcing policies related to financial honesty. Independence is, therefore, a key pillar for this Act. In hospitals that integrate the requirements of the SOX Act in their operations, research has established that such institutions are likely to be high performing (Bader, 2010). Organizations in the healthcare sector that incorporate the SOX Act in their operations are also probable to include quality as a key agenda in their board meetings. During those meetings, they will also spend a significant amount of time discussing quality issues. Such practices are gradually transforming the healthcare sector. Members of audit committees are required to exercise their mandate with absolute independence. The Act requires that in each audit committee, there must be a financial expert. If a board does not have such an expert in the committee, a reason for such a decision must be provided (Bader, 2010). Hospitals in the country are progressively embracing this idea by seeking executives who are highly conversant with audit and finance. The same method is being borrowed to identify and select members with expertise to serve in committees tasked with quality oversight.
In conclusion, following a wave of financial fraud in the US between 2000 and 2002, the Sarbanes-Oxley Act was enacted to combat fraudulent activities in publicly listed corporates. Although the SOX Act was not directly intended for the healthcare sector, the need to ensure financial fidelity has seen its uptake in the sector continually rise. Governance is a crucial provision of the SOX Act, which requires healthcare institutions to align their governance structures with the requirements of the Act. Internal controls and their procedures are the other SOX's provision. Appropriately defined internal controls have helped healthcare institutions to streamline their governance. Closely tied to internal structures are the oversight mechanisms that are immensely benefiting healthcare organizations. Last, healthcare institutions are benefiting from the SOX Act's provisions on financial integrity, which require board members to serve independently.
References
Bader, B. S. (2010). Applying Sarbanes-Oxley to Healthcare Quality. Health Affairs , 29 (1), 182-187.
Imperato, G. L., & Raspanti, M. S. (2009). Compliance and Governance for Health Care Organizations and Marketing and Sales Activities. JOURNAL OF HEALTH CARE COMPLIANCE , 11 (3), 5-16.
Karpoff, J. (2010). The decade's worst financial scandals | Foster School of Business. Retrieved 11 February 2020, from foster.uw.edu/research-brief/the-decades-worst-financial-scandals/
Loubeau, P. R., & Griffith, A. S. (2012). SOME EMPIRICAL EVIDENCE OF SARBANES-OXLEY IMPLEMENTATION IN THE HOSPITAL SECTOR. Coastal Business Journal , 11 (1), 39-47.
Sarbanes-Oxley Act Summary and Introduction. (2005). Retrieved 11 February 2020, from www.soxlaw.com/introduction.htm
The Sarbanes-Oxley Act of 2002. (2008). Retrieved 11 February 2020, from www.soxlaw.com/
Wagner, S., & Dittmar, L. (2006). The Unexpected Benefits of Sarbanes-Oxley. Retrieved 11 February 2020, from hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
