The purpose of this article analysis is to identify situations that may lead to unethical practices and behavior in accounting. Brooke Corporation and founder Robert Orr are an example of how Sarbanes Oxley (SOX) laws have not been as effective as most want to believe as based on the article, “Eight Years after the Fact is SOX working? A Look at the Brooke Corporation” by Beth Hazels.
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Brooke Corporation was, “once the largest franchisors of property and casualty insurance in the United States” (Hazel, p. 19) until both company and founder filed for bankruptcy in 2008. Robert Orr and Brooke Corporation committed fraud on their financial statements as well as misappropriated commissions and funds due to their franchisee agents, customers and lenders during their 24-year reign of deceit. Lawsuits alleging anywhere from “fraud and civil racketeering to business valuations and financing were brought up against Brooke corporation and most were dropped.
Brooke was also in violation of several SOX laws that have yet to be raised against them” (Hazel, p. 23). Brooke Corporation handled everything from financing their franchise agents to selling them office space through several of their own entities all owned by Robert Orr. Insurance agencies were then directed to pay Brooke Corporation directly to a master account instead of their Franchise Agents where Brooke would then dole out agent commissions, rent and utilities payments to vendors and landlords.
The only problem was “for years Franchise Agents would complain that Brooke would not send them commission reports from the insurance companies showing the total commissions earned…and that while payments for utilities and rent were withheld from commission checks those payments were not made to the landlord and utility companies” ( Hazel, p. 20). Company integrity and trust was lost albeit never built between agents and Brooke Corporation even though ethics laws were not violated.
The Sarbanes Oxley Act of 2002 Section 302- Corporate responsibility for financial statements requires that the principal executive officer or officers…reviewed the financial report(s) [and] that based on that officer’s knowledge, the statements contain no fraudulent or misleading information that the financial statements and…that the signing officers have disclosed any fraud, material or not, to auditors, and the audit committee (Hazel, p. 3). Bank of New York (BNY) believes that, “Brooke falsified its financial reports in order to conceal misappropriation of funds where Robert Orr himself and those under him were directed to continue to deposit funds into the wrong accounts…” thus blatantly breaching section 302 of the SOX Act of 2002 (Hazel, p. 24). All funds and revenue were redirected into accounts at Orr’s Brooke Savings bank.
Paperwork and financials were so complicated that the money intended for the master account was somehow lost and during bankruptcy proceedings it was alleged that, “Robert Orr intended the money to go to his family” instead of being captured to pay off the franchisee agent debt (Hazel, p. 25). Beth Hazel’s article sums this situation up best,
What seems more disturbing is that [SOX] laws seem to have failed to do what they set out to do…Not only has Brooke not been found liable, but also these laws have not been raised against Brooke…It seems hard to imagine that any company or its executives would feel threatened by imprisonment and fines if the law is never enforced (Hazel, p. 27). Question for class: “Do you believe that SOX works and why? ” I personally believe that SOX works internally as long as you have separation of duties and compliance is followed thoroughly by the entire company, which was not the case of Brooke Corporation.
Integrity is a big part of the equation when complying in a big for-profit corporation. Ethical conduct may get lost in the midst of events such as a company’s hostile take-over and restructuring. I believe a separate Human resources department plays an integral role for internal control and employee representation.
