Sarbanes–Oxley Act

All posts tagged Sarbanes–Oxley Act

Ethics and Federal Compliance Laws

Published July 24, 2013 by Mayrbear's Lair

Aristotle

To comprehend the topic of business ethics, it is important to identify the voluntary and legally required aspects of institutional practices and the behavior that supports it. Aristotle (384– 322 BC) believed that a person’s good or bad character was developed by habituation. In other words a person’s goodness or wickedness is developed as the result of repeatedly engaging in acts that have a common quality. These repetitious acts rely on an individual’s natural aptitudes and tendencies to gravitate towards righteous or immoral behavior (Aristotle, 2012).  In other words, the formation of a person’s character emerges by actions that are committed repeatedly in a certain manner and as a result of being guided or receiving direction externally to support these patterns. Once the behavior is understood by the individual, they can then choose to engage their free will. The continuation then, of the behavior, becomes a habit which over time translates into second nature. This demonstrates how a leader’s conduct and business practices cultivate a climate that is adopted by subordinates. During the Enron scandal for example, investigators discovered that Enron’s leaders developed a culture of deceit that was supported by their top executives, board members, and corporate attorneys, to gain the competitive edge and ensure capital gains.

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The Enron collapse revealed deep failings that existed in the American accounting system and in the operation of corporate boards. Enron and other widespread corporate accounting scandals resulted in Congress establishing the Sarbanes-Oxley Act (SOX). It was designed to create a federal oversight system to monitor corporate accounting practices by making financial fraud reporting a criminal offense. Boatright (2009) reported that the SOX Act also increased the penalties for executives that engage in criminal activity. In addition, SOX addressed a wide range of provisions to require corporate transparency in three major areas: financial reporting, corporate boardrooms, and criminal law (Boatright, 2009). Poor business decisions alone however, did not result in Enron’s downfall. What was cleverly disguised from stakeholders was insider plundering. Because of this, Congress feels that Federal oversight is needed. Investors rely heavily on financial reports and in turn these reports can become the vehicles that lead to fraud. For example, by presenting a false image, executives can cover poor performance outcomes to maintain their lavish lifestyles. SOX changed the way corporations address problems with accounting and auditing. It requires that every publicly traded organization establish an independent auditing committee that is solely responsible for detecting fraud. It also supports internal whistle blowing by mandating all companies incorporate policies to support employees reporting acts of fraud without fear of retaliation.

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CEOs careers are now on the line. They are required to sign off on company financial forms to ensure their processors have complied with all mandates. Many corporate chiefs complain about the amount of time and money that is invested to comply with SOX regulations, but most agree that it is worth the trouble to reassure investors. Ferrell et al. (2012) posit that in addition, the law requires corporations to design a code of conduct that includes transparency and accountability in financial reporting to stakeholders (Ferrell, Fraedrich, & Ferrell, 2013). Experts expect further misconduct to occur despite the regulatory laws because global competitors are not required to comply with these regulations. This means that more scrutiny is called for because the more integrated world markets become, the more difficult it is to compete on a global level when the playing field is uneven. In the meantime, only time will reveal the long term results.

References:

Aristotle. (2012). Ethics. Seattle, WA: Amazon Digital Services, Inc.

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

Regulatory Measures

Published July 12, 2013 by Mayrbear's Lair

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It seems like practically every day a new scandal is spotlighted in the media regarding ethical misconduct. For example, recently celebrity chef Paula Deen quickly lost several corporate endorsement deals because of revelations that she engaged in behavior that reflected views of bigotry and discrimination. Other scandals, like Enron on the other hand, were just as shocking because what appeared as a highly ethical organization was, in fact, quite the opposite. It is not clear whether Deen will survive her scandal, but because of Enron, regulatory measures were implemented to prevent another occurrence of this nature. Ferrell et al. (1998) suggested that because of events like Enron, the federal government intervened to help guide the ethical conduct of organizations and institutionalized ethics as a preventative measure to prevent corporate legal violations (Ferrell, LeClair, & Ferrell, 1998). This research is focused on three significant regulatory measures: (a) The Federal Sentencing Guidelines for Organizations (FSGO), (b) The Sarbanes-Oxley Act of 2002, and (c) the Consumer Financial Protection Bureau (CFPB). This study identifies the events that led to the development of these measures and scrutinizes the impact these directives played on business ethics. In addition, case examples are included to highlight how these mandates affect ethics in business. The results of these findings conclude that in a business arena, leaders who navigate without regulations are conducive to ethical misconduct.

Three Significant Regulatory Measures

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The Federal Sentencing Guidelines for Organizations (FSGO)

When regulatory measures are implemented, they have a great impact on the ethical manner in which organizations behave and operate. Ethical compliance programs are more of a process and a commitment from organizations to practice ethical behavior than they are specific blueprints for the direction of ethical conduct. In this context, regulatory measures serve to help leaders achieve positive outcomes with social awareness and accountability. Ferrell et al. (1998) pointed out that today’s leaders are dealing with complex issues that require effective leadership skills. For example, managers are required to identify, comprehend, and implement the acceptable use of corporate funds; recognize the falsification of important documents and account records and pinpoint controversial techniques sales representatives use for closing deals. These are some of the common challenges managers face in the modern workplace. In addition, competition, political pressure, and different value systems also influence ethical conduct (Ferrell, LeClair, & Ferrell, 1998). Organizational ethics programs are established, therefore, to outline the parameters of accountability and responsibility with respect to acceptable business conduct. For instance, news reports revealed unethical practices in the grocery industry where, in some cases, managers will re-date food products to extend a product’s shelf life. This kind of ethical misconduct is identified as a white collar crime (WCC) and as a result, the government responded by issuing the Federal Sentencing Guidelines (FSG).

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The goal of these mandates was to reward organizations for implementing legal and ethical compliance programs. They were created to encourage corporations to monitor internal control systems by decreeing punishment and restitution should the systems fail. For example, to demonstrate compliance, a company is required to create and document an internal conformity program by demonstrating their ethical culture. In addition, the legal standards are communicated throughout the entire organization to make sure violations do not occur. If and when they do occur, management must provide evidence that a proactive compliance program was implemented. In short, the main objectives of the FSGO are to take aggressive actions to police and self-monitor an organization’s ethical behavior to avoid unethical acts and punish perpetrators that are engaged in WCC and misconduct. The penalties for violating these mandates include the remedy of any harmed caused, are subject to stiff fines, and include any further actions required to reduce future criminal misconduct.

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The Sarbanes – Oxley Act of 2002 (SOX)

When corporations display unethical conduct that affects the public on a grand scale, the government is forced to step in to enforce penalties that will influence social responsibility. For example, the Enron financial disaster was one of the most significant events that occurred to rattle the modern business world. It revealed a level of corruption in the business arena on an unprecedented scale. For example, to many individuals, business ethics are considered different than individual ethics. Because of this perception, Enron staffers that were cognizant of the firm’s off-balance partnerships accepted these practices as part of doing business in a competitive market. Because they were informed these partnerships were legal, employees did not perceive this conduct as an issue of ethics. Bredeson & Prentice (2010) explained that in order to avoid this happening again, the Sarbanes-Oxley Act (SOX) was developed and imposed the most important security mandates since the great stock market crash of 1929, which led Congress to pass the original federal securities laws. SOX consists of provisions that: (a) created a new federal agency, (b) restructured the entire accounting industry, (c) implemented Wall Street practice reforms, (c) created extreme alterations in corporate governance practices nationally and internationally, and (d) attacked insider trading and obstruction of justice (Bredeson & Prentice, 2010). Since then, to support these laws, the Public Company Accounting and Oversight Board (PCAOB) was developed and, together with the SEC, issued additional rules and policies to implement SOX’s many regulations.

In addition to enforcing corporate giants to revamp their governance practices, the PCAOB was also designed to protect whistleblowers. Boatright (2009) suggested that protection to private sector employees who acted as whistleblowers was a significant issue that SOX addressed for the first time. In other words, as a result of the massive fraud events from Enron, WorldComm, and other conglomerates, this reform prevents the retaliation from corporate institutions against any employees that provide law enforcement evidence which relates to the exposure of trade commission offenses (Boatright, 2009). However, the immediate purpose for SOX was to restore stakeholder confidence in the securities market once again. Experts contend the only significant complaint leaders have about SOX is that post-Enron, SEC accounting rules require market to market estimations. This practice forces financial institutions to revalue assets in situations where the value is not easily ascertainable due to pricing fluctuations. All in all, most leaders agree that despite the additional costs and extra energy required to ensure big corporations adhere to these provisions, SOX effectively enforces best practice policies in both the corporate and accounting worlds.

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The Consumer Financial Protection Bureau (CFPB)

The mortgage and loan crisis of 2008, where lenders failed to educate brokers about the disastrous consequences of falsifying financial data to help people secure loans, contributed to organizational misconduct in the financial services industry. As a result, the government stepped in once again to take more regulatory measures by outlining the legal framework to help guide ethical practices in the financial service industry. Carpenter (2012) contended that as a result of that crisis, Congress was forced to pass significant reforms through a new regulatory system called the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act entitled stakeholders financial protection and established the Financial Protection Act of 2010 (CFP Act). The CFP Act in turn served to help establish the Consumer Financial Protection Bureau (CFPB or Bureau) within the Federal Reserve System  (Carpenter, 2012). The Bureau was designed to oversee and provide the rulemaking, enforcement, and supervisory powers over a wide range of consumer financial products and services as well as the institutions that sell them.

The laws also enable the Bureau principal rulemaking authority over many federal consumer protection laws that were enacted prior to the Dodd-Frank Act. Among the numerous consumer protection laws developed were the Truth in Lending Act and the Real Estate Settlement Procedures Act. These directives were designed to help stakeholders comprehend the complicated lending transactions they engage in with more transparency and accountability. In short, the Bureau serves as a system for bank supervision to ensure corporations are in compliance with federal consumer financial protection laws and make sure the markets work for families rather than bankrupt them. In 2011, the Bureau reported their operations included the assessment of each institution’s internal ability to detect, prevent, and remedy violations that may harm consumers by examining the corporation’s internal procedures (CFPB Public Affairs, 2011). These mandates and regulatory measures serve to insure that corporate moguls follow ethical governance practices to avoid further financial disasters from occurring in financial service industries.

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Conclusion

The law is ubiquitous. It enables, prohibits, and regulates practically every activity of a human being directly or indirectly in some way. Mann & Roberts (2013) purported that in an effort to resolve moral issues, experts have struggled for years to fine tune various ethical behavioral systems. Laws were created to help define relations between individuals and corporations. These relations have an effect on the economic and social order and are the products of civilization’s governance practices. In this respect, the law is designed to reflect the social, political, economic, religious, and moral principles of a society (Mann & Roberts, 2013). In other words, laws are used as tools for social control. Their function is to regulate and guide conduct in human relations.

When corporate leaders misuse their power, government agencies step in to create mandates that outline acceptable and ethical conduct which protects people and keeps the public safe. Ferrell et al. (2013) contended that these regulatory measures provide motivation for organizations to develop core practices throughout their organizations to ensure ethical and legal compliance and are designed to move emphasis away from an individual’s moral obligations. Instead, focus is put on the development of structurally sound organizational core practices and structural integrity for both financial performance and nonfinancial performance purposes. These methodologies include access to communications, compensation, social responsibility, corporate culture, leadership, risk, stakeholder perceptions, and the more subjective aspects of earnings, corporate governance, technology, and other significant areas (Ferrell, Fraedrich, & Ferrell, 2013). The findings of this research deduce that regulatory measures implemented by the federal government have played a significant role in the development of ethical behavior in organizations because time and time again, history proves that many influential leaders who are motivated to achieve high levels of success, and operate without regulations, are unable to avoid the temptation to engage in ethical misconduct when the stakes, profits – especially when competition in the marketplace is extraordinarily high.

References

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Bredeson, D., & Prentice, R. (2010). Student guide to the Sarbanes-Oxley Act. Mason, OH, USA: Cengage Learning.

Carpenter, D. (2012). The consumer financial protection bureau. Washington, DC, USA: CreateSpace Independent Publishing Platform.

CFPB Public Affairs. (2011, July 12). Consumer financial protection bureau outlines bank supervision approach. Treasury Department Documents and Publications. Latham, US: Federal Information and News Dispatch, Inc. Retrieved June 26, 2013, from http://search.proquest.com/docview/876103177?accountid=32521

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

Ferrell, O., LeClair, D., & Ferrell, L. (1998, March). The federal sentencing guidelines for organizations: A framework for ethical compliance. Journal of Business Ethics. Dordrecht, Netherlands: Springer Science & Business Media. Retrieved June 26, 2013, from http://search.proquest.com/docview/198195145?accountid=32521

Mann, R., & Roberts, B. (2013). Business law and the regulatoin of business. Mason, OH, USA: Cengage.