MGT7019+Sarbannes-Oxley


 * Assignment:**

Assess the Sarbanes-Oxley Legislation:
Congress enacted the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) to restore public trust in the markets. Among its ways of achieving this, Sarbanes-Oxley attempts to improve organizational ethics by defining a code of ethics as including the promotion of honest and ethical conduct, requiring disclosure on the codes that apply to senior financial officers, and including provisions to encourage whistle blowing. The Securities Exchange Commission’s implemented rules expanding the disclosure requirement on the code of ethics to include codes that apply to the chief executive officer and further develop the definition of a code of ethics.

Using Case 6.14 on pp. 340-345, A Primer on Sarbanes-Oxley, answer questions 1-3 on p. 345. After reading the document and before answering the questions, initiate your paper with the problem statement; The problem to be investigated is.

Your answers should not simply be your opinion. For each answer to each question, include at least one outside, peer-reviewed article that you can cite as an academic research resource that validates your answer. Length: 5-7 pages


 * **MGT7019-8 ** ||  ||
 * **Ethics in Business ** || ==== **7 Case Study: A Primer on Sarbanes-Oxley ** ==== ||
 * Stephen **
 * “Busy is good!” You can call me anytime. I am usually here during the day or evening hours. **
 * I am glad you enjoyed this assignment. I think most of us had to work on the “outskirts of SOX” in your work. You will really appreciate the next assignment involving the first case to be investigated under SOX. It might really open your eyes about this legislation. **
 * Keep up the good work. **
 * Keep up the good work. **

=**Case Study: A Primer on Sarbanes-Oxley**= The problem to be investigated is the Sarbanes-Oxley Act of 2002 (SOX). SOX was written and passed as a reaction to a public scandal in order to “ buoy up public confidence in. . . public companies ” ( Jennings, 2010, p. 340 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). As Enrione, Mazza, & Zerboni (2006) found <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">scandals primarily put at stake the legitimacy of those actors who have the role of regulating the system (lawmakers) or are directly accountable for misbehaviors (governance enactors). To prevent a legitimacy crisis, these actors are active in proposing codes of governance to display their commitment to accountability and integrity <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 968 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">This paper addresses three specific topics in regards to SOX; the ethical issues that were legislated by the act, the new costs of implementing the act, and the governance practices that are essential for compliance with the act.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Legislated Ethical Issues in SOX
<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Ethics could broadly be defined as the application of the golden rule – “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">all things whatsoever ye would that men should do to you, do ye even so to them <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">(Matthew 7:12, King James Version <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). The legislation of ethics is not just a modern occurrence, but the feeling that one can do so is debatable. Just because one keeps the letter of the law, does not necessarily make one ethical. Graham (1995) indicates that ethical decisions come not from authority figures (of which is the law), but are “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">independently arrived at principled beliefs that are used creatively in the analysis and resolution of moral dilemmas <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 47 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">SOX identifies and legislates many areas that common sense, and moral fiber should indicate are the domain of ethics, and resolved voluntarily by the parties involved. This focus of SOX on where the line is tends to obfuscate the true purpose of the laws, which is to encourage principals to meet the obligations incumbent on them by their positions; of meeting their fiduciary duties in an exemplary and competent manner, without conflict of interest, or exerting unfair advantage over others because of their position, or knowledge. In essence, asking them to act in a manner that they would expect others to act if those others were in their stead. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">There are several sections of SOX that should have been treated as a matter of ethics, rather than legislated (although if one has no principled beliefs, how is one to determine what to do?). Several of the sections identify means of “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">investigating, inspecting, and enforcing compliance <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Jennings, 2010, p. 340 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">) in terms of conflict of interest between knowledgeable parties in the accounting area. For example, Part II regards Auditor Independence in terms of public accounting firms and the firms that they are to audit. It doesn’t require much thought to determine that a potential conflict of interest exists if work is performed and then inspected by the same party. Part II is “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">a statutory code of ethics for public accounting firms <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 341 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">) that identifies that accounting firms cannot audit a company that they have performed other financial consulting work for, or for firms that have as senior management former employees of the firm. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">It is ethical for a person’s word to be as binding as a written contract. If one signs their name to a document this should infer that the person has read it, understands it contents, and agrees “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">in all material respects <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Jennings, 2010, p. 342 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">) with the information it conveys. This should be just as true for the financial statements of a company. It is the duty of the CEO and CFO to know “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">about the operations and activities of their company <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 274 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). Part III of SOX requires these officers to certify that the financial statements that a company files are representative of the company’s actual condition. Isn’t this akin to asking someone to state under oath that they are not in fact lying? <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Finally, it is generally not a good idea to let an alcoholic tend bar, or a thief to hold ones valuables. Unethical persons, who have demonstrated their lack of ethics in the financial arena should not be placed in positions of fiduciary trust. While this seems to be common sense, SOX does in fact have provisions that makes what seems obvious the law. For example in Part III of SOX it identifies that executives who have engaged in insider training, or backdating of stock options, or any other violation of securities laws cannot “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">serve as an officer or director of a publicly traded company <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Jennings, 2010, p. 342 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). Under Part IX of SOX the SEC can do the same thing for those who have “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">used manipulative and deceptive devices or engaged in fraudulent interstate transactions <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 345 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). Shouldn’t this logically be handled in the interviewing process of the company doing the hiring to do a thorough background check and vetting before they are tendered a position of trust in the first place?

<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">The New Costs of SOX
<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Every governmental regulation comes with an associated cost, and these costs are not necessarily exclusively financial. The direct costs of implementing SOX are reasonably easy to determine. These include accounting and audit fees, and costs associated with boards of directors and audit committees. The indirect costs associated with SOX are less easily determined, but could include the cost of public financing, an increase in risk aversion, diminished productivity, and the cost of a mostly independent board ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">D’Aquila, 2004 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). These costs would all be higher as the regulations of the act are implemented and should decrease with time, as policies and programs are put into place to ensure compliance. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Direct costs are a result of part IV of the act which deals with enhanced financial disclosures. This generally means that companies will either have to hire additional personnel, or outsource compliance with the new reporting requirements. In addition to the accounting and auditing costs compliance with the act requires, it has also increased the responsibility of boards of directors, which will potentially increase their compensation packages. As boards need to hire consultants and attorneys to advise them on their role, and the restrictions they can act under, these costs will also increase. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">D’Aquila (2004) notes that there are also indirect costs of compliance with SOX. One such possible cost is that as smaller firms seek capital from alternate lenders rather than offering an IPO because of the additional costs of compliance with SOX, the “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">cost of capital will likely rise <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 8 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). She also notes that the time, and additional review of information before making a business decision may increase, potentially diminishing the effectiveness, flexibility, and productivity of American firms. A more significant possibility for indirect costs is the emphasis SOX places on independent audit committee members, which means by definition they are outsiders and must rely on management for access to financial information that they are to pass judgment on, and are also more limited in their knowledge of the company, than would an “insider”. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In addition to these costs, both direct and indirect, on all publicly traded companies in the United States, there are additional costs to citizens as well. As part of the act, fees are collected from all public companies based on the size of their assets, fees that must be paid for in some way. Publicly traded companies must add these fees into the price of their products and services, and consequently to the customer. In addition, surveys have repeatedly stated that many smaller public companies have been motivated to go private, because of the additional 404 costs. These costs have also caused many foreign companies to de-list from U.S. exchanges, diminishing the availability of investment opportunities. In all, the costs of SOX have led many to claim that the costs heavily outweigh any benefits derived from compliance with the act.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Governance Practices for Compliance with SOX
<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">SOX compliance is extremely important for a publicly held company because of the penalties that are imposed in the act. The requirements of this paper are to list the governance practices that this author would give a company so that they would be in compliance with SOX. Thus the following list is proposed to meet the requirement: <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">While this author is sure that this is not a complete list of the various practices that would need to be performed in order to be in compliance with SOX, he feels that it would be a very good start.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">The most important consideration would be to perform a fit-gap analysis to determine, “where are we now” versus, “where do we need to be?”
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">This author would recommend that a compliance committee be formed comprising officers from each major department to oversee the implementation efforts.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">To meet the Part III requirements for Corporate Responsibility, this author would recommend that descriptions be created for the job responsibilities, roles, and duties of each board member.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In addition, descriptions should be produced for the job responsibilities, roles, and duties of those board members who will be on the audit committee, including a definition of what constitutes “independence” and the requirements of membership, and the requirements of qualification for the financial expert required by the act.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Policies and procedures would have to be put in place for how the audit committee will oversee the work, and qualifications for auditors.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">The audit committee would have to be given the ability to prohibit any firm performing auditing services for the company, from providing any other form of service for the company.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">This author would recommend the creation of a conflict-of-interest policy that is active on each officer or director.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">This author would recommend the creation of a code of ethics and expected conduct, as well as a training program for each employee regarding the standards that all employees will be held to.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Policies would need to be put in place to ensure accurate, standardized, and complete financial reports, and certifications on those reports by appropriate parties. These policies should include a policy on the retention, and management of financial records.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Establish a means for the reporting and investigation of allegations of violations for employees directly to the audit committee without having to go through management.


 * = References ||
 * * D’Aquila, J. M. (2004). Tallying the Cost of the Sarbanes-Oxley Act. //The CPA Journal//, 74(11), 6, 8-9. Retrieved from http://xt6nc6eu9q.search.serialssolutions.com.proxy1.ncu.edu/?sid=CentralSearch:WOS&genre=article&atitle=Tallying+the+Cost+of+the+Sarbanes-Oxley+Act&volume=74&issue=11&title=The+CPA+Journal&issn=0732-8435&date=2004-11-01&spage=6&aulast=D%27Aquila&aufirst=Jill
 * Enrione, A., Mazza, C., & Zerboni, F. (2006). Institutionalizing Codes of Governance. //American Behavioral Scientist//, 49(7), 961-973. Retrieved from http://online.sagepub.com
 * Graham, J. W. (1995). Leadership, Moral Development, and Citizenship Behavior. //Business Ethics Quarterly//, 5(1), 43-55. Retrieved from EBSCOHost
 * Jennings, M. (2009). //Business Ethics: Case Studies and Selected Readings// (6th ed.). Mason, OH: South-Western Cengage Learning. ||