Question

Which of the following rules established by The Sarbanes-Oxley Act addresses the incentive component of the fraud triangle?

a. Companies must adopt a code of ethics covering the top executives.
b. Management can be sentenced to jail terms up to 20 years for violations.
c. Companies must adopt of a whistleblower protection system
d. Companies must establish an audit committee of independent directors.
e. All of the above.

Answer 1

The Sarbanes-Oxley Act rule that tackles the incentive aspect of the fraud triangle is the possibility of management facing up to 20 years in jail for violations, which acts as a deterrent against committing fraud.

Step-by-step explanation:

The rule established by the Sarbanes-Oxley Act that addresses the incentive component of the fraud triangle is 'b. Management can be sentenced to jail terms up to 20 years for violations.' The fraud triangle theory explains that fraud is likely to occur when three elements are present: pressure/incentive, opportunity, and rationalization. By establishing harsh penalties for management violations, the Sarbanes-Oxley Act aims to reduce the incentive for committing fraud. Penalties for fraudulent behavior serve as a deterrent, thereby protecting the integrity of financial reporting and bolstering investor confidence. In contrast, creating an audit committee, adopting a code of ethics, and whistleblower protection are primarily aimed at reducing opportunities for fraud and increasing the likelihood of detection.