The Compliance Environment of Sarbanes Oxley - Research Proposal Example

Research proposal Impact of Sarbanes Oxley (compliance environment) on Entrepreneurial leadership Topic/Research Questions The topic of current study could be stated as follows: Sarbanes Oxley has been considered as establishing significant rules regarding the Entrepreneurial leadership. Under these terms the compliance environment of Sarbanes Oxley should be analyzed and evaluated regarding its value for modern business activity, especially the role and the power of leaders in modern organizations. In accordance with the above subject a series of subordinate issues should be also examined through this study: 1. Which is the exact role of Sarbanes Oxley in all operational activities of firms within the modern market? 2. Are the rules implementing through the Sarbanes Oxley effective in terms of their mission? (Referring to targets set by legislators) 3. Which are the main effects of Sarbanes Oxley on leadership? 4. Which are the most important tools used by Sarbanes Oxley in order to force entrepreneurs to follow its principles? 5. Are there any alternative provisions – similar to Sarbanes Oxley – for the protection of the public from potential losses caused by frauds initiated by employees/ managers of large corporations? 2. Research contribution Current research is expected to support towards the identification of the value of Sarbanes Oxley in the confrontation of fraud observed quite often in various operational sectors of modern firms. The specific issue has been examined by several studies up to now; however, there are still many of its aspects that have left with no adequate analysis. The above assumption could be justified by the fact that the phenomenon of fraud in business transactions – especially regarding the decisions of leaders in modern organizations – is still quite common. Sarbanes Oxley provides an effective framework for the regulation of all aspects of business activities; however its provisions are either wrongly interpreted or they are just ignored. In modern organizations leaders have the power to take all crucial decisions – even against the interests of the shareholders. The latter have to be able to protect themselves against the violation of their rights; current study will show the method in which Sarbanes Oxley could be served as a tool for the protection of shareholders but also of the public (potential investors or indirectly influenced by the performance of a specific organization) from those leadership decisions that are against to the interests of the shareholders (and the public); the above target will be achieved through the analytical presentation of the various principles of Sarbanes Oxley but especially of those principles that can put constraints on the power of leaders in modern organizations; the consequences of the violation of the above legal framework by entrepreneurial leaders are also presented and evaluated taking into account the potential differences in market conditions and the turbulences in internal and external business environment. 3. Research Context and Background Sarbanes Oxley has been considered as one of the most important legislative texts regarding the regulation of business activities in USA. The specific text was developed under the expansion of the phenomenon of fraud within the business sector. In a relevant report of PriceWaterHouseCoopers (2008, online article) it is noticed that ‘without a doubt, the Sarbanes-Oxley Act is the single most important piece of legislation affecting corporate governance, financial disclosure and the practice of public accounting since the US securities laws of the early 1930s’. Despite the fact that the above legislative text was introduced for the protection of the shareholders of USA firms (the protection of the public under the terms explained above was also among the priorities of Sarbanes Oxley) through the years the effectiveness of Sarbanes Oxley was being limited; the inadequate measures taken for the protection of investors against potential frauds has being highlighted in the literature and the empirical research. The above issue is also mentioned by David et al. in a report of 2006. More specifically, it is noticed that ‘Sarbanes-Oxley was a response by Congress to some serious scandals on Wall Street; in WorldCom, Enron, Global Crossing, and a couple other instances, a small number of executives were acting primarily for their own interests, as opposed to on behalf of the interests of shareholders’ (David et al., 2006, online article). Under all the above issues, it is made clear that Sarbanes Oxley provides an integrate framework for the protection of investors in modern organizations but it is necessary that the rules of Sarbanes Oxley are applied (their application should be closely monitored) on all aspects of business activities; no exceptions should be made. The effectiveness of the provisions of Sarbanes Oxley is analyzed and evaluated in this study through the relevant literature but also the empirical research (referring to studies related with the particular field of knowledge). 4. Overview of the consulted and reviewed literature The establishment of Sarbanes Oxley Act has been followed by the simultaneous establishment of a series of requirements related with the application of this legislative text in practice – referring to the measures taken by the firms in order to align their strategies with the provisions of Sarbanes Oxley Act. Even under these terms, the extensive restructuring on business policies in order to meet the requirements of SOA, it has been proved in practice that the phenomenon of fraud is still well expanded. The specific issue was highlighted by Koestenbaum et al. (2005, online article) who noticed that ‘SOA compliance will not by itself ensure that corporate scandals do not recur; legislation rarely stops unethical acts or immoral behavior; rather, it provides a way to deal with such behavior within the legal system’. In practice, more measures should be taken by legislators in order to ensure that the targets set by the establishment of SOA will be achieved. On the other hand, the role of CEOs to the successful implementation of SOA in modern market is crucial. It is through the alignment of the business strategies with the above legislative text that the participation of investors in modern business initiatives is promoted; the continuation of existence of phenomena of fraud in modern market – despite the establishment of SOA – is a negative indicator for the performance of the specific legislative text – taking into account also the fact that the USA market is characterized by the liberalization in commercial activity and the limitation of business initiatives would be contradictory with the standards set by the relevant economic authorities (increase of commercial activity, support of entrepreneurial initiatives and funding of all efforts that aim to the expansion of business activities across the USA market). The role of CEO in the increase of effectiveness of SOA was examined by Koestenbaum et al. (2005). It was supported by the above researchers that ‘an important challenge to corporations and CEOs is the creation of a “tone at the top” that promotes ethical conduct and permeates the corporate culture; a major determinant of such a proactive ethical environment is strong, high-quality leadership provided by senior executives’ (Koestenbaum et al., 2005, online article). In other words, CEOs can intervene in the development of business plans and ethics so that the purposes of Sarbanes Oxley are promoted. In the long term, the achievement of the targets set by the Sarbanes Oxley will be depended on a series of other factors, like the existence of relevant mechanisms that will monitor the application of the provisions of SOA on all business activities and take immediate act whenever a violation of the principles of SOA is identified. The establishment of SOA in USA was related with a series of consequences for various business operations. In accordance with Zegarowski (2007, 52) ‘the passage of the Sarbanes–Oxley Act of 2002 in the United States has strengthened corporate governance, albeit at a relatively high cost; this legislation was in response to the collapse of Enron and other high-profile corporations; Sarbanes–Oxley was a political initiative driven by societal demands for reform’. The failure of large corporations to follow the principles of SOA soon led to the improvement of the position of small and medium enterprises within the USA market. It seems that the effects of SOA on particular business activities has been differentiated in accordance with the size of the firm, its position in the market and its presence within the international commercial market. In this study the main issue under examination is the impact of SOA on the entrepreneurial leadership. In order to understand this impact it should be necessary to refer – even briefly – to the general framework of leadership within the commercial market of USA (the relevant framework has many similarities with the one referring to the leadership of all business entities around the world). As it is already noticed above, the role of CEO in the effectiveness of the principles of SOA within the commercial market is crucial. CEOs are the leaders of corporations, i.e. of those business entities that mostly influence the commercial activity in USA (as in all around the world). Towards this direction, in order for the provisions set by the SOA to be applied on the various activities of a specific corporation it is necessary that its CEO sets the framework for this intervention – cooperation between the corporate ethics and the provisions of the law. In accordance with Bielski (2005, 26) CEOs within the modern market have the following behavioural characteristics: ‘a) they value managing and leading people, i.e., getting work done through others; b) they are intellectually curious, c) they ‘walk the talk’; d) they are comfortable with their authority e) they understand that to deliver full value, every aspect of the leadership system must be aligned with strategy: structure, processes, people, and human resource systems’. From another point of view, O’Neill (2002, 15) supported that successful leaders should be able to reply to the following issues: ‘a) what were the critical success factors in previous successful change efforts? b) what caused other efforts to fail? c) who can veto? d) what is the organizations risk profile? …’ The CEOs that have the skills/ competencies described above will be able to support the application of SOA – as of all relevant commercial legislation – on their enterprise. In the context of the entire commercial market, the application of such a strategy would help to promote the applicability of SOA in all industrial sectors. It should be noticed that at the corporate level, entrepreneurship may presents different characteristics. It is for this reason that Kuratko et al. (2005) stated that corporate entrepreneurship is a term differentiated from common entrepreneurship. The latter can be given a general explanation referring to commercial activity in its common form while the former should be characterized as the ‘formal or informal activities aimed at creating new businesses in established companies through product and process innovations and market developments; these activities may take place at the corporate, division (business), functional, or project levels, with the unifying objective of improving a companys competitive position and financial performance’ (Kuratko et al., 2005, 600). On the other hand, even if the provisions of SOA are strictly followed, the resolution of all the problems related with the corporate activities in USA – through the SOA – cannot be guaranteed; it is necessary that other criteria are also met (as described throughout this study) both in the short and the long term. The effectiveness of SOA on entrepreneurial leadership can be identified through the previous examination of the content and the characteristics of this type of leadership within the modern market. In accordance with a relevant description (Webster’s Third New International Dictionary, 1961, in Das et al. 1997, 69) entrepreneurship is ‘the creation of new enterprises’. On the other hand, entrepreneurship has been also characterized as ‘the process of creating something different with value by devoting the necessary time and effort, assuming the accompanying financial, psychological, and social risks and receiving the resulting rewards of monetary and personal satisfaction’ (Hisrich and Peters 1992, p.6, in Badger, 2003, 47). The qualities of entrepreneur are also extensively examined by Crossan et al. (2005). The above researcher admits that in modern market entrepreneur has a series of rights/ obligations the most important of which seems to be the identification of chances for business development. It seems that the role of entrepreneur in modern commercial market is quite challenging having to respond not only to the requirements of the law (in order to establish his commercial activities) but also to the demands (trends) of the market. Through another definition ‘entrepreneurship ceases somewhere during the operation of the ongoing venture ... An expanded view of entrepreneurship should include the entirety of the entrepreneurial experience, that is, behaviours necessary in the operation of the firm, its performance, and the psychological and non-psychological outcomes resulting from firm ownership’ (Naffziger et al., 1994, p. 31, in Cope, 2005, 374). The above definitions cannot lead to the assumption whether entrepreneur has the sole responsibility for the effectiveness of SOA; however because it is normally the entrepreneur (or the CEO) that decides at a final stage the alignment of the corporate strategies and ethics with the provisions of SOA (as in case of all other legislative texts) for this reason his role in the effectiveness of SOA is considered as quite important. Under these terms, the impact of SOA on various entrepreneurial decisions on leaders could be explained if the impact of SOA on the particular entrepreneurial activities would be identified. On the other hand, the fact that the principles of corporate governance have been changed through the SOA leads to the necessity for a relevant change in the priorities of entrepreneurs across USA. As already noticed above, the establishment of SOA supported the development of small and medium enterprises – the pressure on large corporations by the provisions of SOA was extremely strong and a limitation of corporate activities in the country followed the entrance of SOA in the country’s commercial framework. Moreover, it is noticed that since the establishment of SOA ‘US-based corporations have operated under stricter governance guidelines than at any previous time, especially as regards the structure of boards of directors and financial oversight of the corporation; a now perennial governance “hot button” issue not addressed by SOA is concern over continually rising executive compensation; beginning with 2007 filings, US corporations must now include a Compensation Disclosure and Analysis (CD&A) section’ (Dalton et al., 2008, 85). In accordance with the above, the terms related with the rewarding of CEOs in large corporations are of critical importance for the evaluation of the entire corporate strategy; the application of extremely favourable provisions for the CEO regarding his compensation may lead to the assumption that the financial activity of a particular firm is not appropriately monitored – a fact that can also influence other operational sectors of the particular firm. On the other hand, it seems that despite its strict provisions regarding the level and the extension of corporate initiatives, SOA has helped firms of all sizes to improve their performance in the long term. In accordance with the study of Switzer (2007, 651) ‘firms subject to Sarbanes-Oxley experienced an incremental increase in market valuation ranging between 15.7% and 34% depending on the measure of board independence used in the estimation; some sub-optimal deployment of the endogenous governance mechanisms is observed’. It seems that Sarbanes Oxley Act 2002 managed to achieve the targets set by the legislators through the establishment of the specific legislative text. Of course, it should be mentioned that ‘corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments’ (Wintoki, 2007, 229). However, SOA could influence the policies applied by firms on their corporate governance by setting the limits within which their governance has to be developed and in which the responsibilities/ rights of their CEOs have to be formulated. On the other hand, the research made by Wintoki (2007, 229) showed that ‘wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firms operating environment’. On the other hand, it is supported by Offstein et al. (2005, 201) that there is ‘a positive relationship between long-term incentives of the top executive and the diversity of competitive moves undertaken by the firm’. In other words, SOA can influence all corporate activities (even indirectly) by imposing specific criteria for the decisions taken by the leaders especially of the large corporations; small and medium firms have been also benefited by the provisions of SOA in terms that the activity of large corporations has set under control and in this way new potentials for development of small and medium enterprises have appeared across the US market. There are also cases in which the development of the specific legislative text has been related with the political decisions of the USA government. Indeed, the study of Baker (2008) led to the conclusion that ‘the laws overarching emphasis on restoring credibility to the capital markets is revelatory of a deep ideological commitment to maintaining the capitalist system which is inherent in the American political structure’ (Baker, 2008, 114). Of course, the development any legislative text follows the principles set by a country’s political, social and cultural framework; however this dependency cannot be considered as absolute. In many cases, issues related with specific social phenomena (like in case of fraud within the large corporations operating in the USA market) can lead to the development of specific legal texts in order for the society’s balance to be retrieved. 5. Methodology The research methodology of this study will be based on two different types of research: qualitative and quantitative. It will be a qualitative research at the level that the literature related with the specific issue will be analyzed and discussed. On the other hand, quantitative research will be also employed in this study; a survey will be conducted among the employees of 5 large corporations operating in the USA market. The survey will be based on a questionnaire that will be distributed through e-mail. The results will be gathered (the questionnaire will be also returned through e-mail) and evaluated in terms of current market conditions in USA but also in combination with the views of the literature presented throughout the paper. 6. Research Plan and timeline Current research will be conducted through the following stages: a) A research proposal will be submitted for review and evaluation as of the potentials and the value of the study for the modern commercial market; the completion of this stage will require approximately 10 days – this phase of the project is already completed b) A preliminary plan of the project (approximately the 1/3 of it) will be submitted in about 20 days from the approval of the research proposal c) The completion of the entire project is expected to take 2 months (always taking as start date the day of the research approval). References Badger, B., Chaston, I., Hampson, Y., Sadler-Smith, E. (2003). Managerial Behavior, Entrepreneurial Style and Small Firm Performance. Journal of Small Business Management, 41(1): 47-64 Baker, R. (2008) Ideological Reactions to Sarbanes-Oxley. Accounting Forum, 32(2): 114-124 Bielski, L. (2005). What Makes a Good Leader? the Go-To "Guy" with Vision and Passion Will Top the Org Chart-And Lead Change Management. ABA Banking Journal, 97(12): 21-27 Cope, J. (2005). Toward a Dynamic Learning Perspective of Entrepreneurship. Entrepreneurship: Theory and Practice, 29(4): 373-396 Crossan, M., Dutta, D. (2005). The Nature of Entrepreneurial Opportunities: Understanding the Process Using the 4I Organizational Learning Framework. Entrepreneurship: Theory and Practice, 29(4): 425-447 Dalton, D., Dalton, C. (2008) Corporate Governance in the post Sarbanes-Oxley period: Compensation disclosure and analysis (CD&A). Business Horizons, 51(2): 85-92 Das, T.K., Teng, B.S. (1997). Time and Entrepreneurial Risk Behaviour. Entrepreneurship: Theory and Practice, 22(2): 69-87 David, J., Pollock, A. (2006) Reforming Sarbanes-Oxley: How to Restore American Leadership in World Capital Markets, online, available at http://www.heritage.org/Research/Regulation/hl995.cfm Koestenbaum, P., Keys, P., Weirich, T. (2005) Integrating Sarbanes-Oxley, Leadership, and Ethics, online, available at http://www.nysscpa.org/cpajournal/2005/405/perspectives/p13.htm Kuratko, D., Covin, J., Hornsby, J., Ireland, D. (2005). A Model of Middle-Level Managers Entrepreneurial Behavior. Entrepreneurship: Theory and Practice, 29(6): 699-716 Offstein, E., Gnyawali, D. (2005) CEO compensation and firm competitive behavior: Empirical evidence from the U.S. pharmaceutical industry. Journal of Engineering and Technology Management, 22(3): 201-225 O’Neill, R. J. (2002). Governments Change-Management Challenge: Key Questions to Which Government Leaders Should Find Answers as They Embark on Systemwide Reform. The Public Manager, 31(1): 15 PriceWaterHouseCoopers (2008) Sarbanes-Oxley and strategies for compliance, online available at http://www.pwc.com/extweb/newcoatwork.nsf/docid/D0D7F79003C6D64485256CF30074D66C Wintoki, B. (2007) Corporate boards and regulation: The effect of the Sarbanes-Oxley Act and the exchange listing requirements of the firm value. Journal of Corporate Finance, 13(2-3): 229-250 Zegarowski, G. (2007) Corporate sustainability after Sarbanes–Oxley linking social–political initiatives and small and medium-sized enterprise resources. International Journal of Disclosure and Governance, 4: 52-58 Website http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072302.pdf Read More