Shown below is an interesting list of companies with equally interesting issues they have faced in the last 10 years from Forbes Magazine ( 2008). What is interesting to find here is the depth of corporate and personal unethical cases involving people of relatively high educational standings and social standing. The alarming frequency and magnitude of these unethical practices are staggering to say the very least, and yet there seems to be a large scandal waiting to be uncovered every day. This century marks the recognition of dealing with complex business and ethical issues as a priority of corporations around the world.
/>
The scandals shown in the table have outraged the public, with stark images of deception and fraud overshadowing corporations. The public has reacted rather violently, with the “Occupy Wall Street” movement for example, showing how vigilant the public may become as it clamours for transparency, decency and improved corporate social responsibility and ethical practices. Occupy Wall Street first started in September 17, 2011 and is a people-powered movement that started in Liberty Square, Manhattan and has spread over 100 cities in the US. The Occupy Wall Street Movement has resulted in actions in over 1,500 cities all over the world as well and is linked philosophically with the recent uprisings in Egypt and Tunisia. This movement aims to fight the power of banks and multinationals that they believe have taken over the democratic process. They blame the greed and corruption of these companies for the global economic recession and the general inequality in the world.
The public’s perception stems from the fact that better integration of ethical practices must be taken on by corporations. After experiencing the longest global recession in the US for example, the public has lost trust in a great number of corporations that previously were regarded highly saying that these institutions are opportunists, greedy and would not help regain lost wealth. These institutions include AIG, Countrywide Financial and Fannie Mae.
In response to these scandals, the Sarbanes-Oxley Act was enacted. This was a direct response of the United States’ Congress to the corporate scandals that were surfacing including the corporate scandals of Enron, WorldCom and HealthSouth. The Sarbanes-Oxley Act’s intention was to decrease the incidence of corporate fraud brought about by the mismanagement and abuse of corporate authority. The Sarbanes-Oxley Act was intended for publicly listed corporations to ensure proper corporate governance, however the provisions of the Sarbanes-Oxley Act involved compliance requirements for non-profit organizations and corporations that are not traded in public securities exchanges. The overall goal of the Sarbanes-Oxley Act was to ensure that corporate justice is given the proper organizational framework and envisions compliance by the above mentioned business organizations.
The Sarbanes-Oxley Act
The Sarbanes-Oxley Act was enacted by Congress in July of 2002. More than ten years after the enactment of the law, the Sarbanes-Oxley Act is still in the process of evolution. According to Knubel (2004), the United States Securities and Exchange Commission, the New York Stock Exchange and the National Association of Securities Dealers Automated Quotations (NASDAQ) are still in the process of providing full and binding interpretation of the rules and regulations stipulated by the Sarbanes-Oxley Act . The rules are very cumbersome and lengthy. The rules for Section406 and 407 which were published in January 2004 by the Board Audit Committees is sixty pages long .
The Sarbanes-Oxley Act mandates that all members of a corporate business entity be personal liable for the company’s actions. These include all senior management, executive, board and audit personnel. The act states that these personnel must comply with the new reporting requirements, sets guidelines for audit personnel and practices and establishes an accounting oversight board that would oversee national accounting issues. The Sarbanes-Oxley Act imposed a civil and a criminal section upon its enactment.
In Section 302 of the Sarbanes-Oxley Act, the law prescribes a set of procedures designed to ensure that financial reporting is accurate and correctly disclosed. This section mandates that the signing offer certify that the financial reports they submit are correct and that they are personally responsible for ensuring financial controls within their organizations. These signing officers must also state that they certify that the internal controls installed in their business organization are effectively implemented. The United States Securities and Exchange Commission is tasked by the United States Congress to promulgate the regulations that would enforce the provisions of Section 302. Even external auditors are required to certify that the internal control for financial reporting was effectively administered by the corporation’s management. Previously, the external auditors certify only on the accuracy of the statements but with the enactment of the Sarbanes-Oxley Act, these external parties are required to provide this type of opinion as well. This provision is encapsulated in Section 404 and it is stated that management is required to report the internal control adequacy. This is a highly costly regulatory requirement since the large effort (in addition to resources) is required to document and test critical financial control systems of the company .
The Sarbanes-Oxley act also warns against influencing external auditors to provide more favourable opinion regarding the accuracy of the financial reports and the certification of the internal controls administered by the corporation. It also warns against the use of off-balance sheet instruments that could be used for fraudulent transactions, similar to what Enron used before its abrupt fall .
The private sector is evolving to address the requirements for compliance of the Sarbanes-Oxley act. One example is the issuance of accounting guidelines that allow management and external auditors to perform the assessments required of financial reporting accuracy and on internal controls affectivity using a top-down risk assessment. These enable the reporting parties to provide both scope and evidence making it easier to provide a wider view of the assessment approach to the regulating agency. In addition, private organizations have been centralizing and automating their financial reporting systems to reduce compliance costs .
There has been significant academic research on the affectivity of the Sarbanes-Oxley Act. However, researchers have found it very difficult to conclude with finality whether the costs and the benefits of the act are significant because the effects of the Sarbanes-Oxley Act are difficult to isolate. There are simply many other economic and financial variables that come into play that affect the performance (and profitability) of business organizations.
According to the Financial Executives International survey of 2007 on the cost of compliance to the Sarbanes-Oxley Act, about 168 companies having revenues of US Dollar 4.7 billion (on the average) incurred an average cost of US Dollar 1.7 million to comply with the requirements of the Sarbanes-Oxley Act . The compliance costs for these companies account for about 0.036% of their revenues. This is a substantial cost item that adds up to the operating costs of these companies which are later passed on to consumers. The same survey by the Financial Executives International group also mentioned that the act provided for renewed investor confidence and more reliable financial reporting but were sceptical about the overall benefits of the act. Of those that were surveyed, only 22 percent stated that the benefits of the Sarbanes-Oxley Act’s compliance requirements outweighed the costs of doing so .
According to research conducted by the legal opinion group Foley & Lardner LLP (2007) on the additional costs incurred by public corporations in the United States, the Sarbanes-Oxley Act added a significant layer of costs that include external auditor fees, legal costs, insurances and additional board compensation to publicly listed business organizations. These additional expenditures are significant according to about 70% of the respondents of the survey conducted by the group. These resulted in significant changes to the corporation’s level of productivity .
Many critics of the Sarbanes-Oxley Act propose that the law be repealed. One of these critics is summarized in a book by Butler and Ribstein, published in 2006 . According to the researchers, investors are better off protecting their investments through diversification, rather than through the supposed reliance on the idealized benefits of the Sarbanes-Oxley Act. Lastly, a study conducted by the United States Securities and Exchange Commission indicated that these compliance costs have begun going down for companies that are fulfilling the compliance requirements .
The Sarbanes-Oxley Act is noted to have benefits as well. According to Arping and Sautner, the Sarbanes-Oxley Act enhanced the manner by which corporations in America exhibited their transparency to regulating agencies and to the shareholders. The researchers found that this is true for foreign firms that have cross-listed in the United States’ securities and exchange markets . According Iliev said that the Sarbanes-Oxley Act led to a reporting of conservative earnings from publicly listed corporations. However he added that because of the reporting of lower earnings, share prices tended to decrease . Companies that have exhibited transparency and greater financial control internally are said to have been more favourable to receive lower borrowing costs for required funds as well .
Some researchers believe that the act has helped transfer listing of corporations from the New York Stock Exchange to the London Stock Exchange. This is believed to be due to a less rigid financial regulatory system in London compared to New York. According to the Alternative Investment Market, a London-based advisory group, the growth in listing is due to the enactment of the Sarbanes-Oxley Act which caused concern with Federal authorities such as New York mayor Michael Bloomberg and United States senator Charles Schumer . The effect of the Sarbanes-Oxley Act on foreign firms cross listing in the securities and exchange markets in the United States is different depending on whether the originating country of the foreign firms is a developed nation or a developing nation. Studies showed that a foreign firm that is entering the United States securities and exchange markets that is coming from a developing country benefit from the higher costs of compliance and the resulting credit rating these companies acquire as a result of complying with the Sarbanes-Oxley act in the United States. Foreign companies that come from highly developed nations are penalized in that they have to incur additional compliance costs while not receiving benefits from the higher credit rating due to the fact that the requirements for financial reporting transparency in their originating countries are considerably high as well. In addition, researchers have found that those companies listing in the London Stock Exchange are smaller in terms of economic scale. This is explained by the fact that the Sarbanes-Oxley Act adds another cost layer that small companies may find prohibitive if they wish to enter the United States’ public securities and exchange markets .
The Sarbanes-Oxley Act has caused US corporations to be at a disadvantage in relation to foreign firms. With the additional cost layers imposed by this law, US firms are less competitive in the global market place. In addition, the law has caused companies to delist and register in other securities and exchange markets (such as the London Stock Exchange). The compliance costs are significant and are forcing companies to either move to other locations or to pass on the additional costs to the American consumer. This law was also blamed for the low incidence of Initial Public Offerings (IPOs) in the United States from 2007 to 2010, the periods covered by the recent financial crisis in the country.
However, former US Federal Reserve Chairman Alan Greenspan said that the Sarbanes-Oxley Act has functioned well and that has reinforced the principle that managers of corporation should be working on optimizing shareholder benefit. Other experts from the financial industry said that because of this law, investor confidence has been reinstated in the United States by restoring trust, accountability, accuracy and transparency . The Sarbanes-Oxley act has also been regarded as an important step in restoring ethical culture in corporations in the United States. It forces employees of all ranks to be transparent and accountable.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law last July 21, 2010. Championed by current United States President Barack Obama, the Dodd-Frank Act was envisioned to change the financial regulations of the United States by helping the federal government’s regulating agencies and the adjunct financial services industries evolve . The law was sent to the United States Congress in June 2009 and were revised by Barney Frank, the US House of Representatives Financial Services Committee Chairman and by Chris Dodd, the Senate’s Banking Committee Chairman. The Dodd-Frank Act was crafted primarily to promote financial stability by improving transparency in the United States ‘financial system. It was designed to ensure that companies account for their actions such that no more bail-outs were to be expected thus protecting the American taxpayer . In addition, the Dodd-Frank Act changes the United States’ regulatory structure in a variety of ways. This included the merging of some regulatory agencies, the deletion of some regulatory agencies and even the creation of new ones. This law also amended the Federal Reserve Act. Most importantly, the law was created to provide an early warning system if in case the United States economy becomes unstable .
The Dodd-Frank Act also required investment advisers to become more transparent . Previously, investment advisers were not required to register with the United States Securities and Exchange Commission if they had fewer than 15 clients in the last 12 months. The law required that all financial advisers register with the SEC . The law states that non-banking financial institutions register as well and shall be supervised by the United States Federal Reserve Agency.
Many critics believe that the Dodd-Frank Act is one of the most onerous aspects of the Federal law of the United States and is a threat to the country’s economy, to private businesses, and to bottom-line productivity and profitability . The law is about 2,300 pages and regulates almost all aspects of the banking industry. It takes aim at what used to be, lucrative sections of banking such as betting a bank’s own money on securities, derivatives trading and credit rating activities. Thus the Dodd-Frank Act was met with severe hostility from Wall Street. Lobbyists from Wall street is fighting the law head on and have utilized considerable monetary resources to reverse the effects of the law upon full implementation. Because of these lobbying efforts, the Dodd-Frank Act has not been implemented because of considerable delay in the publication of interpretative rules of the law. According to Protess, only one third of the law has been completed while the remaining parts of the law are still in the proposal stage of enactment.
Private companies have chosen to find ways to protect their businesses as well such as narrowing down industries that should be affected by the Dodd-Frank Act. One of thse industries is energy trading. With lobbyists from Wall Street and with numerous discussions with the Securities and Exchange Commission and the Commodity Futures Trading Commission a move was made to except energy trading from a blanket regulation to scrutinize all transactions as promulgated by the Dodd-Frank Act . In another instance, industry players have asked for the United States courts to intervene as it fought rules that would prevent industry players to conduct transactions that utilize the corporation’s resources only (Protess).
Observations and Conclusions
I believe that because of the many corporate scandals that have plagued the United States in the last decade and the failure of the United States financial system to address the issues that led to the financial crisis of 2007 – 2010, that the laws enacted by the United States Congress, particularly the Sarbanes-Oxley Act and the Dodd-Frank Act are needed to regulate and reform the United States financial sector. The visions for these laws are noble. These laws were created to influence transparency, accountability and accuracy in the financial industry by promoting accountability and fairness. However, these laws and regulations may not be as effective as initially conceptualized. Instead of stopping fraud, these laws may have stopped growth. Instead of creating transparency, these laws may have scared potential players into participating in the American economic market. Instead of providing confidence, these laws may have reversed the perspective of a stable US economy.
Could these laws be the reason why jobs in the United States remain scarce? Jobs are created when economic opportunities arise and are filled up by business organizations. These business organizations have the resources to capitalize on the business ideas. With the state of the American corporations grasping for profitability due to heightened competition and stiffening sources, America should assist the formation of new players into the economic market to participate in capitalizing these opportunities. These new players are most likely foreign. Entry to the United States market may be a difficult task given the enactment of these new laws.
According to an article in the Wall Street Journal, the new laws and regulations have killed entrepreneurial spirit and financial creativity in the country . There are marked reductions in IPOs and there are significant migration of companies to other securities and exchange markets. The United States is failing on capturing the renewed vibrancy of the global economy and it could be because of the enactment of these laws.
While I believe in the noble pursuits instituted by these laws, I believe in a Adam Smith approach to market regulations. The free-hand-of-the-market is still the best regulator of economies. Scandals and frauds pepper economic history but these are due to failures in acting on detected signals, not on the failure of the entire system. It is therefore more important to detect and react than to just prohibit market growth and evolution by sticking a hand into every aspect of business transactions. I think that the best approach is still to find a common ground, a place where businesses thrive, entrepreneurship is promoted and trust and transparency is maintained.
Works Cited
Arping, Stephan and Zacharias Sautner. "Did SOX Section 404 Make Firms Less Opaque? Evidence from Cross-Listed Firms." 1 August 2012. Papers SSRN.Com. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1561619. 21 November 2013.
Ashbaugh-Skaife, Hollis, et al. "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity." Thesis. 2007. http://web.archive.org/web/20070809115641/http://www.wbur.org/news/local/icd/icd.pdf.
Bainbridge, Stephen. Dodd-Frank: Quack Federal Corporate Governance Round II. 2011. http://minnesotalawreview.org/wp-content/uploads/2011/05/Bainbridge_PDF.pdf. 21 November 2013.
Bloomberg, Michael R. and Charles E. Schumer. Sustaining New York’s and the US’ Global Financial Services Leadership. Report. New York, N.Y., 2007. http://web.archive.org/web/20070202205743/http://www.senate.gov/~schumer/SchumerWebsite/pressroom/special_reports/2007/NY_REPORT%20_FINAL.pdf.
Butler, Henry N. and Larry E. Ribstein. "The Sarbanes-Oxley Debacle." 5 June 2006. AEI.Org. http://www.aei.org/book/economics/financial-services/the-sarbanes-oxley-debacle/. 21 November 2013.
Financial Executives International. "FEI 2007 Survey of SOX 404 Costs." 2007. FEI Mediaroom.Com. 21 November 2013. <http://fei.mediaroom.com/index.php?s=43&item=204>.
Foley & Lardner LLP. "Foley Study Reveals Continued High Cost of Being Public." 2 August 2007. Foley & Lardner. http://www.foley.com/foley-study-reveals-continued-high-cost-of-being-public-08-02-2007/. 21 November 2013.
Hart, Olive. Corporate Governance: Some Theory and Implications. 1995. http://www1.fee.uva.nl/fm/courses/1_multipart_xf8ff_3_hart%20ej%2095%20corp%20gov.pdf. 21 November 2013.
Hayek, Friedrich. "Cosmos and Taxis in Law." Legislation and Liberty (1973): Volume 1: Chapter 2. http://zhuanxing.cn/uploadfile/2013/0123/20130123014656761.pdf.
Holstrom, Bengt and Stephen Kaplan. The State of the US Corporate Governance: Whats Right and Whats Wrong. 2003. http://leeds-faculty.colorado.edu/bhagat/corporategovernance-rightwrong.pdf. 21 November 2013.
Iliev, Peter. ""The Effect of the Sarbanes–Oxley Act (Section 404) Management's Report on Audit Fees, Accruals and Stock Returns." 26 August 2009. Papers.SSRN.Com. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983772. 21 November 2013.
Knubel, John. The Relevance of the Sarbanes-Oxley Act to Non-Profit Organizations:Changes in Corporate Governance, Organization, Financial Reporting,Management Responsibility and Liability. 2004. 21 November 2013. <http://balancedscorecard.org/RelevanceoftheSarbanesOxleyAct/tabid/111/Default.aspx>.
Mitchell, Lawrence. "The Sarbanes-Oxley Act and the Reinvention of Corporate Finance." 2003. http://digitalcommons.law.villanova.edu/cgi/viewcontent.cgi?article=1344&context=vlr. 21 November 2013.
Paletta, Damian and Aaron Lucchetti. "Law Remakes U.S. Financial Landscape." 16 July 2010. Wall Street Journal. http://online.wsj.com/news/articles/SB10001424052748704682604575369030061839958. 13 November 2013.
Piotrosky, Joseph D. and Suraj Srivinasan. "Regulation and Bonding: The Sarbanex-Oxley Act and the Flow of International Listings." January 2008. SSRN. http://ssrn.com/abstract=956987. 13 November 2013.
Prentice, Robert and David Spence. Sarbanes-Oxley as Quack Corporate Governance: How Wise is the Received Wisdom? 2007. http://www2.mccombs.utexas.edu/faculty/david.spence/Sarbanes-GeoLJ.pdf. 21 November 2013.
Prentice, Robert. "Sarbanes-Oxley: the evidence regarding the impact of SOX 404." 2010. http://www.section404.org/UserFiles/File/research/InternationalArticles/Evidence%20Reguarding%20The%20Impact%20of%20SOX%20(CARDOZO_LAW_REVIEW).pdf. 22 November 2013.
Protess, Ben. Deconstructing Dodd-Frank. 11 December 2012. 21 November 2013. <http://dealbook.nytimes.com/2012/12/11/deconstructing-dodd-frank/?_r=0>.
Romano, Roberta. Quack Corporate Governance. 2005. http://www.cato.org/sites/cato.org/files/serials/files/regulation/2005/12/v28n4-5.pdf. 21 November 2013.
Rooney, Allan J.P. "Dodd-Frank Act Registration Overview." 6 December 2010. http://ww34.doddfrankregistration.com/overview/. 21 November 2013.
Rousse, Margaret. Sarbanes-Oxley Act (SOX). September 2007. 13 November 2013. <http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act>.
Securities and Exchange Commission. " Study and Recommendations on Section 404." April 2011. Securities and Exchange Commission. http://www.sec.gov/news/studies/2011/404bfloat-study.pdf. 21 November 2013.
Stanton, Sara Sibel. SOX Turns 10: Analyzing the Relevance of the Sarbanes-Oxley Act in 2012. 2012. 21 November 2013. <https://digital.library.txstate.edu/handle/10877/4179>.
United States House of Representatives. "Dodd–Frank Wall Street Reform and Consumer Protection Act (Enrolled Final Version – HR 4173." 2010. http://www.gpo.gov/fdsys/browse/collection.action?collectionCode=BILLS. 13 November 2013.
