Regulatory Measures - Research Paper Example

Regulatory Measures Regulatory measures Regulatory measures are guidelines set to control irregularities in organizations for the efficiency in their operations. It is apparent that the regulatory measures in the corporate world are meant to implement the ethical conduct in organizations. Some of the regulatory measures are Federal Sentencing Guidelines for organizations (FSGO), Sarbanes-Oxley Act (SOX) and Consumer Financial Protection Bureau (CFPB). This paper explains the events that led to each of these regulatory measures and the impact these laws have on business ethics. First is the Federal Sentencing Guidelines for organizations (FSGO) which involves an effective compliance program. The program is more a process and commitment than a specific blueprint for conduct. The Federal Sentencing Guidelines for Organizations (FSGO) was put into effect on November 1991 by the United States Sentencing Commission (USSC). FSGO enabled organizations with ethics and compliance programs meeting defined standards earn credit toward reduced penalties if employees engaged in wrongdoing. The Federal Sentencing Guidelines were developed because of an increase in white-collar crime and government focus to place the responsibility for such crime within organizations (Ferrell et al, 2013). FSGO have been designed to enhance the ability of the justice system to fight crime with an effective and fair sentencing system. It is apparent that organizations are held accountable and responsible and may be sued if a federal crime is committed by the employees. The government places the responsibility for controlling and preventing illegal and unethical activities on the top management. Studies have proven that the main reason for ethics programs ineffectiveness is the failure to develop an ethical climate. This has led to companies that provide the opportunity to engage in unethical behavior through decentralization and weak internal controls in danger of high penalties based on the FSGO (Ferrell et al, 2013). The main objectives of the FSGO are to work aggressively to deter unethical acts, self-monitor, and police, and punish those members of organizations who engage in unethical behavior. There are four considerations made in sentencing of organizations. One is that the court orders the organization to remedy any harm caused by the offense. The second is that in the instance the organization operated primarily for the criminal purpose, fines can be high to divest all the firm assets. The third consideration is that fines levied against the organization are based on the seriousness of the offense and organization culpability. The fourth involves probation for an organization defendant to ensure there is reduced future criminal conduct (Ferrell et al, 2013). The FSGO has tried more than 280 cases. It is evident that the most frequent offenses include antitrust offenses, tax violation, fraud and environmental. Since the implementation of FSGO, 91 percent of organizations have pleaded guilty of various offenses. Statistics shows that 65 percent were placed on probation. The probation may be costly to the firms as consultants may be required by the court to improve monitoring activities. After much debate over the importance of business ethics in organizations, the legislation has decided to institutionalize ethics as a required measure to prevent legal violations in organizations (Ferrell et al, 2013). The Sarbanes-Oxley Act of 2002 (SOX) was sponsored by Michael Oxley and Paul Sarbanes. The legislation came into force in 2002 and introduced major changes to the corporate governance and regulation of financial practice. The result of the act was because of the presence of culture and conditions in which a series of large corporate frauds occurred in 2000 to 2002. Some of the remarkable frauds were by Tyco, WorldCom and Enron that showed problems in the incentive compensation practices and conflict of interest (DeVay, 2006). The cost and benefits of SOX have been analyzed by different studies that have come up with different conclusions. The differences in conclusions are because of isolating the impact of SOX from other variables affecting corporate earnings and stock market. In terms of the compliance costs, Financial Executives International (FEI) Survey shows that the cost have continued to diminish relative to revenues since 2004. Statistics showed that for 168 companies with average revenue of $4.7 billion had an average compliance cost of $1.7 billion a 0.035 % of revenue. SOX is of benefit to firms and investors. Research has proven that borrowing cost is lower for companies that improved their internal control between 50 to 150 points. Also, the SOX legislation has had a negative impact on exchange listing choice of non-US companies. This is evident as it displaced businesses from New York to London as the financial service authority monitors the financial sector with a lighter touch in UK (DeVay, 2006). Sarbanes-Oxley act has four sections that are essential. One is the Sarbanes-Oxley section 302 which entails procedures for ensuring accurate financial disclosure. In this section, the report has to be certified that it does not contain any untrue statements or be considered misleading. Sarbanes-Oxley Section 401 is another one that ensures disclosures in periodic reports. As for the Sarbanes-Oxley Section 404 it ensures assessment of internal control. This is done by management producing an internal control report as part of each annual exchange act report. Sarbanes-Oxley section 802 gives the criminal penalties for influencing US Agency investigation (DeVay, 2006). The Consumer Financial Protection Bureau (CFPB) is an Independent agency in USA that is responsible for consumer protection in the financial sector. The agency jurisdiction includes credit unions, banks, security firms, mortgage-servicing operations and debt collectors. CFPB was formed after the congress passed the Dodd-Frank Wall Street Reform and consumer protection act in July of 2010. The creation of the CFPB was driven by the response to the financial crisis of 2007-2008 and the great recession that followed (Copeland, 2010). There have been proposed amendments with time. One is the CFPB Rural Designation Petition and Correction Act that was meant to direct CFPB to establish an application process that would give chances to individuals to get their county designated as rural. This was due to the federal consumer law. The impact of this amendment is that people would get certain mortgages by being exempted from the CFPB qualified mortgage rule. The regulatory activity that CFPB is considering is in retirement and insurance investments. This is to avoid the investment scams that target the retired and the elderly. The aspect of state commissioners being the main regulators leaves CFPB to not assume the leadership role in retirement investment. This would lead to amendment of the constitution to transfer insurance lawmaking power to the federal government (Copeland, 2010). In conclusion, it is evident that regulatory measures ensure ethical values are implemented in organizations. The FSGO enabled organizations with ethics and compliance programs meeting defined standards earn credit toward reduced penalties if employees engaged in wrongdoing. As for the SOX, it introduced major changes to the corporate governance and regulation of financial practice. The other regulatory measure is CFPB, which is an Independent agency that is responsible for consumer protection in the financial sector. References Copeland, W. C.(2010). DoddFrank Wall Street Reform and Consumer Protection Act: Regulations to be Issued by the Consumer Financial Protection Bureau. USA:DIANE Publishing. DeVay, D. (2006). The Effectiveness of the Sarbanes-Oxley Act of 2002 in Preventing and Detecting Fraud in Financial Statements. USA: Universal Publishers. Ferrell, O.C., Fraedrich, J & Ferrell, L. (2013). Business Ethics and Social Responsibility (9th ed). Mason,OH: Cengage Learning. Read More