Sarbanes-Oxley Act

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SARBANES-OXLEY ACT 6

Sarbanes-OxleyAct

Sarbanes-OxleyAct

Followinga series of scandals that hit major corporate companies in the UnitedStates, the Congress came up with a 66-page piece of legislationcalled the . The new set of laws created a betterframework to enhance transparency in financial reporting. Somecritics of the move argued that the government was looking forgreater control and regulation of the corporate world. After itspassage in 2002, the policy made it mandatory for companies toenhance their financial process and accountability. In the newarrangement, the laws contributed an expanded role and requirementsof administration boards, management, as well as accounting firms.Certain provisions of the law apply to private companies such as thewillful destruction of evidence as a means to deter investigations bythe federal agencies. Besides, the regulation provides for penaltiesand criminal charges against individuals for misconduct. In general,the stipulations brought a new life in the way public corporationsconduct their business in the United States.

How could have prevented the Enron Scandal

TheEnron Scandal in 2001 emerged after a series of flaws by theexecutives and the auditors. The company’s executive utilized theaccounting loopholes, poor financial reporting, and special purposeentities to make money at the expense of the stockholders. Closerexamination of the case reflects that the executives of the said firmengaged in unethical and fraudulent practices that undermine thebasic principles of corporate finance. Some of the actions by theexecutives included poor bookkeeping, unethical business practices,and non-compliance with governance rules, among others. The could have helped in preventing the collapse ofthe organization. The policy could also have aided in improving thefinancial reporting and utilization of the recommended accountingpractices. There was also pressure on the company to ignore some ofthe issues that were queried by the board and auditors. The Actprovided for a mechanism through which the executives are heldresponsible for their actions in an organization (Davies, 2016). Furthermore, it broadened the reporting requirements, particularly inpublic companies to prevent the high number of stakeholders fromlosing money.

WorldComAccounting Scandal

WorldComfaced a similar scandal after the stockholders lost money due toaccounting errors. With the Act, the top executives could have facedconspiracy charges and securities’ fraud even before the companycould report losing money. The collective embezzlement caused lootingof funds for individuals’ gain. The scandal involved the seniorstaff in organizations using loopholes in the regulatory mechanisms.Moreover, the scandal witnessed file stuffing where false documentswere used during the transactions. Criminal transfers documented bythe regulators within the organization illustrated alleged crimes,the culprits, and the amount of money lost. Accountability andtransparency are necessary in the business world. The role ofmanagers is increasingly important in advancing accountability withinorganizations. Accountability is part of ethics that companies arerequired to observe (Davies, 2016). Both non-profit and for-profitorganizations develop sound governance policies and values.

Itis considered that better regulations and standards improve thecriteria for corporate valuation. Better laws enhance transparencywhile improving the recognition of the risk exposure. Mostimportantly is the need to foster discipline in the market to provideaccurate and reliable financial statements. The move allows thestakeholders, including investors and regulators to gain a deeperinsight into the performance and value of the companies.

Sarbanes-OxleyAct and Business Ethics

Alongwith a couple of later acts that relaxed some provisions, the created a framework for a more transparent processof financial reporting. It was though excessively “mandatory”hence, it directly affected business decisions. In reality, the acthas formed more of a “comply or explain” environment. After the was passed, the financial reporting companiescleaned up their act. Its enactment made it possible for corporateexecutives to face fraud charges while colluding firms encounterstiff penalties from the regulators (Collins, 2012). The previousethical dilemma emerged due to a lack of the necessary laws to chargethe fraudsters in corporate crime. With the new regulations andforced accountability, the Securities and Exchange Commission had avery close eye on everyone. With this upgraded moral compass, though,a price had to be paid. Forming a publicly traded company became evenmore of a financial burden that discourages new IPOs, which is stilltoday, negatively affecting the economy.

Contraryviews, along with studies that show inconsistencies in the quality ofreporting depending on who audited their financial statements areattempts at discrediting a piece of legislation that at minimumaccomplished its primary purpose – to create transparency andenforce accountability. The increased transparency has created acomfortable environment for investors, thus improving confidence inthe market (El-Kassar, Elgammal, &amp Bayoud, 2014). Enron andWorldCom scandals revealed the rot in the corporate America. Companymanagement, especially the senior executives, should observe thebasic principles of corporate finance. The move would take asignificant step towards enhancing the attainment of positiveoutcomes, particularly the shareholder value. Many actors look at thecorporate sector to provide the right support for their welfare.

EthicalDilemma

EnronCompany had great emphasis on the financial goals. The approachcontributed to a situation where employees and executives worked tomake money as opposed to reflecting on the long-term objectives.Cheating was common among the employees. Errors were covered in thename of hiding the irregularities by the executives. Moreover, themembers of staff were uncooperative and rarely communicated to oneanother. On its part, WorldCom operated in a competitive environmentwhere it earned its reputation following the attainment of highprofits. As a result, the executives and employees engaged in crookedbookkeeping to hide the true financial standing from thestockholders. Another dilemma occurred on the fact that employeeswere less willing to share resources and important information.

Inthe case WorldCom, Bernard Ebbers, the CEO of the company was forcedto enter wrong financial statements to hide the shortage of funds theorganization was undergoing. After the firm merged with Sprint, itsstock price began falling consistently. Besides, banks were demandingthat the CEO needed to pay the over $400 million debt owed throughmargin calls. Ebbers had two options he could either sell a bigportion of the company’s stocks or buy time to accumulate thefunds. He opted to cook the accounting books so that he could buysome time to accumulate the debt owed. He had invested millions ofdollars in stock hence, he was avoiding to sell them at the reducedprice because he could also have incurred huge losses.

References

Collins,D. (2012). Businessethics: How to design and manage ethical organizations

Davies,A. (2016). Bestpractice in corporate governance: Building reputation and sustainablesuccess.London: Routledge.

El-Kassar,A.N., Elgammal, W. &amp Bayoud, M.M., (2014). Effect of internalaudit function on corporate governance quality: Evidence fromLebanon. InternationalJournal of Corporate Governance,5(1/2),103-117. DOI: 10.1504/IJCG.2014.062349

Hoboken,N.J. : Wiley.