Ethics and law in business and society - Research Paper Example

? Ethics and Law in Business and Society (Policy Paper) Introduction Ethics represents the doctrine related to moral philosophy, which incorporates systematic, defending and recommending concepts that further intend to segregate between the right deeds and wrong deeds. The anthropomorphic view reflects about the human behavior of following an order under the enforcement of law. This view is generally adapted by individuals and entities as a phenomenon of natural pride for being able to provide a meaning to their world. Ironically, the underlying fact is that human beings pertain to be the actual source of morals and ethics. Therein, imposition of laws to raise the ethical standard of human beings is often contravened with skeptic arguments concerning its effectiveness. One such example had been the enactment of Hippocratic Oath, which has continued in the recent phenomenon, with the enactment of the Sarbanes-Oxley Act 2002. The Sarbanes-Oxley Act 2002 has been enacted to protect the investors, who invest in the form of securities by refining the accurateness and trustworthiness of the company’s financial disclosure. This law was basically enacted in retort to the frequent reporting of accounting scandals in early 2000s, especially drawing from the inferences in the Enron case. Correspondingly, this particular law complies with a motive similar to that endured in the Hippocratic Oath to raise integrity and moral values amid the medical professionals and the physicians for practicing medicine with truthfulness, but in the paradigm of accountants and auditors in the 21st century context (Newsome & Wilson, 2006; Tyson, 2001). Although these two laws deal with different realms of professionalism, while the effectiveness and complete realization of the intended virtues of Hippocratic Oath in raising the moral values of medical practitioners remain dubious (Stern & Papadakis, 2006; Gilman, 2005), the effectiveness of Sarbanes-Oxley Act is implying the same for accountants and auditors has also been a subject of major concern. Hence, the focal point of the discussion henceforth is not to differentiate between these two laws but is rather confined to critically examine the roots and the effectiveness possibilities of Sarbanes-Oxley Act 2002 as a measure to stimulate moral understanding and develop conscience within accountants and auditors to avoid instances such as Enron’s collapse in the future. This essay, in precise, thus intends to discuss about the public policies associated with the Sarbanes-Oxley Act 2002 from a critical viewpoint. History of the Act Public Policy Prescription Section 302 of the Sarbanes-Oxley Act 2002 reflects about the financial reports that need to incorporate certain certifications to prove its accuracy, transparency and legitimacy. The policy further stresses on the fact that it is the responsibility of the financial officers to review the report before signing their agreement to the disclosed facts, in order to ensure that the report being framed does not entail ‘Material Untrue Statement’. Eventually, the signing officers are considered as solely responsible for the internal controls of a company and thus, the only enforcer to accounting integrity. Correspondingly, Sarbanes-Oxley Act 2002’s section 401 incorporates the policies associated with the financial disclosures. In accordance to this particular section, the financial statements being published must be accurate. Furthermore, these financial statements must incorporate ‘Material Off-Balance Sheet’ transactions or liabilities. The commission here is basically required to conduct a detailed study on the ‘Off-Balance Transaction’. According to the policies of Sarbanes-Oxley Act 2002 mentioned under section 404, the issuers must publish information concerning the scope along with the adequacy in the annual reports. Eventually, the section 409 of the concerned act focuses on the responsibilities of the issuers to inform the public on immediate basis pertaining to any change(s), which occurs within their financial operations. Accordingly, section 802 of the Sarbanes-Oxley Act 2002 imposes penalties in terms of fines and/or 20 years of imprisonment for destroying, mutilating and falsifying the records chargeable against the company along with those responsible for the forgery or for the identification of the same at the grass-root level, including auditors (Sarbanes-Oxley Summary, 2003). Market Failure or Government Failure The failure of Enron Corporation was further alleged in Smith & Walter (2006), as the outcome of the combined failure on numerous fronts. It was the false presentation of financial statements involving high-risk and ineffective financial strategies, which were pursued by Enron for a continuous period. Unfortunately, these facts were later found to remain unnoticed by its business consultants as its advisors (from the best of the belief) or had been neglected by them as noteworthy aspects to prohibit accounting forgery. This shows the corporate failure associated with Enron’s downfall that compelled the Congress in the US to enforce the Sarbanes-Oxley Act in 2002. In the case of Enron, involvement of auditors, top level management officials, analysts and company board of directors were revealed, which further depicts the failure of the entire corporate chain. Additionally, further investigation reported that few of Enron’s bankers’, such as JP Morgan and its trading partners had been supporting the company by providing finances to its operations rather than whistle-blowing and restricting further continuation of the forgery. According to the observations, it has been revealed that JP Morgan has provided finance to support Enron’s strategy of tax avoidance. These evidences provide with a clear picture of the business and the market failure associated with the collapse of Enron (Sridharan, Dickes & Caines, 2002). To be noted further, it is the objective of the Securities Exchange Commission (SEC), which operates under the purview of the Federal Government, to monitor, supervise and ensure transparency of the business functions conducted by all publicly listed companies like Enron. However, the failure of Enron reveals the ineffectiveness of the SEC to satisfy its responsibilities at the best possible extent. The reported reasons for this could be varying from the involvement of government officials with the top level management of Enron to the lack of responsible functioning in timely identification and mitigation of the fraudulent activities conducted by Enron in its reporting practices. Correspondingly, these evidences provide an overall understanding of the government failure to prohibit the occurrence of accounting fraud at such a magnitude that left the entire nation under a shock (Li, 2010; Gudikuns, 2003). Trace Sarbanes-Oxley Act 2002 Implementation Sarbanes-Oxley Act was enacted in the year 2002 by George W. Bush, following the case rule of Enron Corporation’s bankruptcy. The act particularly incorporates changing reforms for the financial officers, auditors and corporate board members among others. Additionally, the law also adopts various latest provisions that are intended to impose legal penalties and discourage corporate entities to get engaged in accounting fraud. Eventually, this particular law also imposes severe penalties for fraudulent activities, with an intention to protect the interests of the investors and the employees. Focusing on its structural implementation, the act has been operated through a ‘Public Company Accounting Oversight Board’ in order to impose professional standards, moral values and competencies associated with the accounting profession to raise the ethical guideline in the doctrine and ensure more accurate financial reporting procedures among the publicly listed companies. Principally, enforcement of the law has been aimed to ensure acceleration of the corporate responsibilities and financial disclosures (SOX-Online, 2012). Concerning the role of public accounting firm, as propagated in the Sarbanes-Oxley Act, it is supposed to be their responsibility to prepare and preserve the working paper used in auditing a company’s financials for the duration of minimum seven years. Correspondingly, the firm must provide the review and approval of a second partner related to the audit report as per the mentioned law. This act further prescribes a series of restrictions upon the directors and the executives of companies including both internal and external auditors to these firms. Moreover, the periodic report, which is the personal certification of the Corporate Executive Officer (CEO) and Corporate Financial Officer (CFO), are also needed to be submitted with the SEC within due time period as mentioned in the Sarbanes-Oxley Act. Expanding to the realm of debt and securities management by a company, this particular act imposes prohibition on the personal loans to the directors and the officers. It further prescribes that it shall be deemed as an unlawful activity on part of the issuer to impart loan in direct sense or indirectly to the director or officer of a company considering the later as the insurer. Moreover, section 1107 under this act stressed on the applicability of criminal penalty for vengeance against the whistle-blowers that was found to be a major threat amid the stakeholders of Enron, restricting them to act in a more responsible manner. The Sarbanes–Oxley Act 2002, under section 906, also prescribes criminal penalties for the CEO(s)/CFO(s) associated with the certification of forged financial statements as a measure to discourage the top level management of any company from participating in similar accounting frauds (SOX-Online, 2012). Impacts of Sarbanes–Oxley Act on Business and Society Sarbanes–Oxley Act 2002 has been adopted by the U.S. Congress in the aftermath of the large-scale accounting fraud of Enron Corporation in 2001, which has often been replicated as a clean-up measure by the government to counter its market and government failure in the timely identification and prohibition of financial forgery (Smith & Walter, 2006). This law has been enforced with a view to protect the interests of the investors from repeat occurrences of similar fraudulent cases, involving the top level management of the company and also replicating the market as well as government failures in mitigating the forgery. Essentially, the act has been applied as a mechanism in order to keep strict control on the financial reporting that has been under rigorous scrutiny as allegedly being in contrast to the auditor independence provisions enacted in the US (Shaub, 2003). Although the act mainly taken note on the legitimate functioning of publicly listed companies, one provision of this act is enforceable over all business undertakings in the US. The provision reflects about the legal implications over the person accused of harassing the whistle-blowers. In case of Enron, it has been observed that the top-level management were found guilty of enforcing power upon the whistle-blowers, who intended to convey the information related to Enron’s forging of financial reports and therefore, hindering the chances of the unethical conduct being identified at its early stage (Dewey, 2012). Therefore, the Sarbanes- Oxley Act imposes strict regulations and penalties related to vengeance for the whistle-blowers taking its learning outcome from the Enron case. Arguably, the heavy loss of the investors and the employees associated with the Enron’s bankruptcy compelled the US congress to enforce the Sarbanes–Oxley Act 2002 (Thomas Publishing Company, 2013). Concerning the impact of Sarbanes–Oxley Act 2002, there lays an underlying question, as to whether the enforcement of the law has been able to mitigate the systematic flaws underlying the corporate sector pertaining to ethical values. Emphasizing a similar skepticism, as addressed in Zhang (2005), the enforcement of the law has exhibited significant impact on the ever-changing policies of the boardroom politics owing to which, its implications are also observable in context of the corporate governance practices performed by publicly listed companies in the US. Further analysis reveals in DeFond & Francis (2005) that the present day directors and the executive officers are taking their job role more seriously, but auditors have to face challenges in keeping up with the measures suggested in the act. Furthermore, implementation of this particular law has been successfully able to regain the confidence of the investors upon the companies and its financial reports even though the longevity of the investors’ trust on the act remains a debatable concern as argued in Cohen, Dey & Lys (2007). Correspondingly, it has also been revealed in Lowengrub (2005) that law enforcement of Sarbanes-Oxley has laid a significant impact over the management and reporting responsibilities within the corporate sector America. The cost being incurred associated with the Sarbanes-Oxley compliance includes an accelerated price-tag. In lieu to the enactment of the Sarbanes-Oxley Act, companies faced direct along with indirect costs that involve accelerated director’s fees, increased insurance premium and higher consulting fees among others. Moreover, it has been observed that due to the enforcement of the Sarbanes-Oxley law, the auditors are facing additional costs, which are being carried over to the corporate clients. In accordance with the Sarbanes-Oxley requirement, it is thus necessary for the audit partners to be rotated on every five years or less on a continuity basis, which can further increase the costs of the auditing for these companies having a negative impact on auditors’ confidence and independence levels. Furthermore, with the implementation of the Sarbanes-Oxley Act, heightened political along with the legal risks on part of the directors, CEO(s) and board members, the companies are being forced to accelerate the compensation of the executives to employ them under such intense inspection (Lowengrub, 2005). The effectiveness of the act also remains dubious in contrast to the UK along with the Common Wealth countries those have adopted the ‘Principle-based’ approaches for the enforcement of the provisions under the ‘Corporate governance codes’. The principle of ‘Comply’ associated with the Sarbanes-Oxley law entails the duty and compulsion of the companies to seriously follow the principles related to ‘Corporate governance codes’. Failure to comply with the set standard of ‘Corporate governance codes’ related to the investors imposes severe legal implications over the financial officers, which has also set a line of control for the companies, with the best intention to prohibit future occurrences of financial frauds (Chinaacc, 2013). It is worth mentioned in this context that since its enactment the act has been criticized on the grounds of being in contrast to the provisions of auditor’s independence, whereby the law was amended considering the ‘Model Audit Rule’, established by the National Association of Insurance Commissioners (NAIC). The principle purpose of the ‘Model Audit Rule’ is basically to improve the ‘state insurance department’s’ scrutiny regarding the financial conditions of the investors. The ‘Model Audit Rule’ has modified its regulation in three areas post enactment of the Sarbanes-Oxley act. In this respect, these three areas of improvement constituted management report related to ‘internal control over financial reporting (ICFR)’, auditor’s independence along with the scope of the services being rendered and improvement of the requirements for the liberation of members of the Audit committee, bridging the gap between the provisions of Sarbanes-Oxley act and auditor’s independence (Litwinsk & Friedrichs, 2007). Policy Analysis As was mentioned above, this particular act binds the ethical standard of human beings from performing fraudulent activities. Ethical standard defines certain set of ethical values that comes from within an individual. Skepticism thus prevails in the enactment of the law as to whether a legal restriction can actually prohibit occurrences of immoral activities and fraudulent behavior of people. Considering the example of Lehman Brothers, that has become bankrupt in the year 2008, that is after the enactment of the Sarbanes-Oxley act, further raises significant arguments against the effectiveness of the law enactment. Focusing on the example of Lehman Brothers, its bankruptcy can also be examined to have occurred due to forging of financial accounts, which reflects about the failure of the Sarbanes-Oxley Act. A quick recap of the Lehman Brother’s collapse shall assist in gaining a better insight concerning the causes for bankruptcy. Lehman Brother’s Holdings Incorporation inscribed a global footprint on part of its banking activities. Therein, its bankruptcy laid great impacts on thousands of the participant’s associated with the financial market. The company misrepresented the figures of the financial report by depicting a better health unethically, thereby entering into the unethical activities associated with colossal miscalculation. This shows the exact scenario of the Enron corporation based on which the Sarbanes-Oxley act was enforced within the UK corporate sector and thereafter raising questions on the effectiveness of the act (PwC, 2009). Undoubtedly, the implementation of the Sarbanes-Oxley law incorporates certain advantages and disadvantages. It ensures restoration of the public confidence related to capital markets. Moreover, it also ensures the strengthening of control on part of corporate accounting. Elimination of the redundant information system and increase in the responsibility of the financial reporters also frames a vital beneficence of Sarbanes-Oxley law. Furthermore, with enforcement of this particular law, the companies are expected to perform in a more accountable way when producing financial reports. As argued in Jahmani & Dowling (2008), the Sarbanes-Oxley law has helped the investors to regain confidence on part of the information being provided to them. With the advantages identified on the legal grounds of obtaining better control on the financial reporting procedures followed by public listed companies, enforcement of the Sarbanes-Oxley law also faced certain challenges pertaining to corporate sector and most argued on the grounds of socio-economic perspectives. For instance, implementation of the Sarbanes-Oxley law reflects involvement of accelerated cost being incurred. In correspondence to the pertaining Sarbanes-Oxley law, there are no standard guidelines for applying the principle and the policies associated with it. On part of the investor over a long run, the implications of the law are adverse. With the change in the system, the company is likely to incur huge costs, which directly hits the investor’s pocket. Thus, these are certain pros and cons associated with the implementation of the law (Jahmani & Dowling, 2008). In accordance with the overview of the study, it can be recommended that Sarbanes-Oxley law being implemented must incorporate certain standard set of policies and regulations. A fixed set of standards complying with legal rules and regulations will therefore enable the companies to execute the regulations with effectual integrity. Furthermore, being too much costly, it becomes difficult for the small organizations to implement this law. Moreover, in case of the large organizations, the costs, which they incur lay a direct impact over the investor’s decision. Therefore, costs associated with the Sarbanes-Oxley law must be reduced to provide a bit comfort to the auditors, companies and the investors pertaining to accelerated costs being involved. According to the survey conducted by The New York Stock Exchange (NYSE) Working Group, it has been recommended that company’s management can annually check the efficiency of the internal control (NYSE Euronext, 2013). Conclusion Conceptually, ethical standard represents the set of values and morals, which a human being follows from within, which can hardly be controlled with the imposition of external pressures such as legal provisions. In simple words, it is a matter of self-guidance and self-attribute that is directed by the conscience. Thus, a noteworthy question hereby arises concerning the ways to alter the human behavior by implying external legal regulations. Sarbanes-Oxley Act 2002 has been enforced in order to bind the financial officers from performing fraudulent activities on part of presenting financial records and internal control. Sarbanes-Oxley law has enforced after the revelation of bankruptcy of Enron Corporation due to forging of books of accounts. Notably, due to the occurrence of numerous fraudulent financial activities, the relationship between the auditors and the company has deteriorated. In this context, this relationship needs to be re-established to foster effectual auditing and trustworthy financial reports. Furthermore, NYSE also recommended that audit firms must change their investing habits and develop certain latest designs and approaches that can assist them in monitoring the performance of the other parties. In contrast, the study also revealed about the enforcement of Sarbanes-Oxley law that directly protects the interest of the investors. Policies related to this law imposes legal monetary and non-monetary penalties upon the financial officers, if found guilty of practicing unethical conduct pertaining to financial reports. Corporate scenario and the audit firms’ strategies were greatly influenced by the implementation of Sarbanes-Oxley law. Eventually, application of this law entails advantages as it ensures proper monitoring over the financial reports being produced by the companies. References Chinaacc. (2013). Corporate governance codes. 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