Enron and Conflict of Interest - Case Study Example

? PUBLIC POLICY ANALYSIS: SARBANES-OXLEY ACT OF 2002 of Table of Contents Table of Contents Introduction 3 History of the Policy and Current Situation 3 Public Prescription and Implementation of the Act 4 Rationale for the Policy and Impact on Businesses and Society 5 Analysis of Policy’s Efficacy 9 Critical strengths Weaknesses of the Act 10 Conclusion and Recommendations 11 Appendix 12 Key Provisions of the Sarbanes–Oxley Act Of 2002 12 References 13 Introduction Many business enterprises become successful and start venturing into practices that are devoid of the required market principles of trade. With the economies of scale created, they remain to dominate the market by use of improper ways. A lot of fraud goes on in the market and therefore the authorities have to come up and pass measures that will create a balanced market for all parties. This paper seeks to analyse the Sarbanes-Oxley act of 2002. This is one of the legislative ways the government of the USA came up with to control the market. In light of this, the paper will venture into the history of the act to try and establish its necessity. It will then create a prescription that will indicate who failed in operation for this law to be enacted. The impact of the law on business and society will be discussed followed by a review of literature as per the course content. The viability of the law will be discussed based on its strengths and weaknesses. History of the Policy and Current Situation The US financial market had witnessed a large series of frauds in the corporate sector in 2002. Some of the highly publicised scandals included some large companies like Enron Corporation, Tyco and WorldCom. Due to these market malpractices, there were serious consequences that saw Enron collapse in 2001 after filing for bankruptcy on December 1. According to Healy and Palepu (2003), the company was a power in the US energy sector having been formed in the year 1985. This large success led the management to into venture production of other energy related products; natural gas, pulp, paper and communications sectors. A critical analysis of the operations of the company according to economic consultants indicated that the rise to stardom of the company was not genuine. Many accounting practices that were unethical had taken place which killed the trust of the public in the US large sector market (PriceWaterhouseCoopers 34). Together with scandals at other companies like WorldCom and Tyco International, the public truly believed that there are several accounting practices yet to be discovered. Due to these happenings where the greedy executives wanted to benefit from their positions in companies, the Sarbanes-Oxley Act of 2002 of 2002 was formed. It is also called Public Company Accounting Reform and Investor Protection Act of 2002 and abbreviated as SOX act of 2002 (Healy and Palepu 15). The SOX bill was signed into law on July 30 2002 by the then president George Bush and had provisions creation of reforms in the accounting and corporate business world by use of a board which it mandated, the “Public Company Accounting Oversight Board." The current position of the act has been a creation of corporate responsibility and it has seen a drastic overhaul of the entire US financial operations where there is a high level responsibility in management. This is a step that has highly reduced bankruptcy among companies. Having not created such an act earlier on means that the government had failed to implement its duties as this act was created as a matter of contingency. Public Prescription and Implementation of the Act As an act that was created as a matter of contingency, the act took care of the matters that were happening at the time and remained to take care of future similar matters. It was an emergency measure that made sure that the confidence of the public in the large business sector was restored. The policy has eleven chapters and each seeks to create accountability to the management teams of the large companies by making sure that each person is held responsible for the actions taken for and on behalf of the company. The implementation of this act, according to PricewaterhouseCoopers (2003) was followed by a collection of other bills which sought to cement the open spaces that would create a leeway for other future breaches. When the Michael Oxley bill (H.R. 3763) was presented, the House of Representatives passed it in April 2002. Senator Sarbanes also presented hiss bill (bill number 2673) in July of the same year. Because of these two bills, a committee was selected so that there can be harmonization of these two bills. This is because there was need to include both criminal and civil issues in the final law. The committee harmonised the two bills and created one strong act that would see managers take responsibility of the acts carried both within and outside the business itself. A combination of the two bills brought up the name ,The Sarbanes-Oxley act which, in economic terms is called The Public Company Accounting Reform and Investor Protection Act of 2002 (H.R. 3763, 2002). As stated, George Bush signed it into law on July 30, 2002. The actual implementation is therefore based on the fact that it covers all the affairs of transactional procedures, both internally and externally and holds every person responsible for any act of misconduct on company issues (Moncarz, Moncarz and Cabello 21). Rationale for the Policy and Impact on Businesses and Society The rationale for the public policy and impact of the act to business are all in the different sections it has. All the procedures of execution of any act by way of dealing with any issue on a company are included for easy execution. The act has a description of the specified instructions that companies must adhere to in order to uphold the rule of law. The rationale here describes a logical basis and procedural arrangement of the policies that enables effective implementations. The arrangements are made in chapter form and from the foregoing, it can be established that it covers most of the areas of operation (Archi and Bucholtz 59). In the first title, the act elaborates issues related to the Public Company Accounting Oversight Board (PCAOB). This board, which is supposed to be a non-governmental and non-profit agency, pronounces its duties as autonomous. All companies must register with this body and report all their accounting procedures. On the other hand, the board sets all the auditing procedures. It has the mandate of inspecting, enforcing and investigation of the standards of firms (Kohn 1). The second title mandates companies to create situations for open auditing practices. Standards are supposed to be established for the independence of the external auditor. All auditing and non- auditing practices must always be approved by the audit committee of the clients. This encourages honesty, transparency and openness in accounting procedures. This regulation is vital for the sake of public interest and knowledge of operations of companies. In the third title, there is need for personal; responsibility on every executive in a company. This is in line with how accurate corporate financial reports are transparent. This is supposed to reduce the amount of fraud that happens in a company. Every public company is also supposed to have an audit committee to oversee all financial transactions in their respective companies. They have the responsibility of arresting any person that carries out unscrupulous business and financial practices in the company. The fourth title is supposed to be associated with disclosure of the finances of the company. It sets rules that regulate any dealing between companies and the executives of the same company. Stakeholders of any company are supposed to report any ownership of stock in the company that exceeds 10% of the company shares. This is meant to stop and put at check ownership of stocks that is fake as far as senior executives are concerned. In title five, there is a basis for restoring the confidence of the investors in the large market industry in the USA. The first part of the title indicates that all workers working with or under a banking sector to make sure they pre-approve the research they do for investment. The second part of the title indicates that no one working under an investment bank need to have part to play in evaluation of compensation securities. In the third part, brokers are restricted from going against or threaten to go against the analysts of securities as a result of poor results. In this sixth title, the authorities are empowered to censure professionals in the securities from performing. These professionals may be brokers, dealers and advisers. Moreover, the court allows barring penny stocks as these usually lower the value of the stocks in the market. The seventh title there is a need to publicise the research as well as publication of reports, studies regarding accounting firms and banks that associate themselves with investment. This title also has two sections. The first section is a study that elaborates a study that led to accounting firms of 1989 to be consolidated. The second section indicates an identification of the possible violators of laws regarding securities ranging from the year 1998 to 2001. In the eighth title, there are penalties for a collection of offences such as fraud by manipulation, altering or destroying financial records to hide evidence of any anomaly done earlier on. It mandates accounting firms to see to it that they keep records of relevance in audit for at least five years. Moreover, this title has provisions for protection of whistle blowers. If there is a whistle blower, he is supposed to be protected by authorities and also be compensated for any injury caused to his land as a result of divulging the information associated with a given scandal. Title nine has a provision for increment of criminal penalties that relate to white collar crimes as well as the conspiracies associated with that. The act brings to issue the idea of intension and attempt to conspire and elevates these to being at the same level as an action that is completed. It indicates that an intention to conspire to commit a crime, if proved before a court shall carry the same punishment as a completed action of conspiracy. In title ten, the duty of the CEO of the company is established. It states that the officer is supposed to sign the tax returns of the company. This is in line with the senate regulations so as to hold him accountable for approving the tax returns. The greatest idea in this title is increment of accountability for the people involved in the processing of the tax returns. The last bit of the act is title eleven. Most of the elements of this title are associated with the final punishments of specific financial misconducts. It for instance identifies frauds in the corporate sector and tampering with records as offences. These are then charged specified amounts of penalties. Each audit committee is supposed to have a financial expert certified by the Executive officers of the companies. These are to be held responsible for the financial representations as far as the company is concerned (Touche 34). The penalties meted for lack of compliance to these rules and regulations are high and go up to the level of one million dollars or face an imprisonment of a term not less than ten years. After betraying the trust of the public, Enron, WorldCom and other large companies had to be held accountable for the misdemeanours that came up. A law had to be set to redeem the image of the industry and create a favourable environment both for local and foreign traders in the country. Enron Inc. and Adelphia Inc. did the wrongs to the market and collapsed leaving the existing companies to bear the pain of trying to boost the value of the market. Analysis of Policy’s Efficacy The existence of ethics in the business world is an issue of concern to many stakeholders associated with business. It seems that people have failed to understand the value of business to the corporate society and seeks to satisfy their personal needs at first. A question revolving around whether the formation of the act changed the approach of management to the value of business remains an issue of concern. The Sarbanes-Oxley act addressed two issues in the line of ethics as far as the role of the board is concerned. First issue realised is the involvement of all employees of all companies to report any suspected act of wrongdoing to the company. This is supposed to be done without fearing retaliation. The whistle-blowers are fully protected and any manager who does not make a provision for this in his company is supposed to be sued (DiPiazza and Eccles 23). The governing boards are supposed to make amendments to these government requirements so that provisions of the act are adhered to. Companies are required to be more ethical since the very existence of the company bids support to a very wide range of individuals. The existence is wide complex web that creates a chain of dependency and interdependence. Baruch (2003) supports this and relates sections of the act to creation of a unified market where every trader has an equal and fair chance of developing. Therefore there is a high level of development of ethics as indicated in title eight where acts of fraud are supposed to be absolutely abolished. For the interest of the public and investors, the act has clearly elaborated the issues related with influence, coercion, manipulation and misleading of any other person for some gainful means. This means that even if an external auditor comes in, there will be a high protection for them and any move to deviate their ability either for collective or individual benefit is highly discouraged (Turley 13). This discouragement is done through the high penalties levied to the culprits. It is stated that even a proved intention would lead to a ruling of an accomplished action and would carry equal punishment as if the action was actually done. A look at the off balance sheet items indicate a very useful disclosure in the periodical reports. Enron is not the only company that suffered as a result of unclear reporting and eventual suffering as a result of this. The Lehmann Brothers bankruptcy as was analysed in 2010 by asset experts indicated a move of debts and assets off balance sheet so that the company may look appealing to investors (Burkhanov 17). However, this provision has been created in the SOX act and a future repeat cannot be done. A company transparency level has to be certain given that there are classes of auditors that are supposed to help identify the correct and accurate figures to be put to press for the public. It should be noted that the public usually uses this information to make major investment decisions regarding a certain company. Perhaps the most important aspect of the act is that which touches directly on the internal matters. The Internal Control on Financial Reporting (ICFR) as seen in the titles makes it mandatory to test and document financial manuals through the correct legislative measures without which there would be personal responsibility on these matters. With the correct internal controls, there is supposed to a very strong collection of interdependence on ideas which would result in an understandable documented report for the company. Critical strengths Weaknesses of the Act The act has had a lot of influences on the operations of the market. Much effectiveness has been witnessed as afar as business responsibility is concerned. Turley (2002), states that business responsibility has increased because the business management is always aware of the consequences if this act is breached. Moreover, there has been an increased confidence in the operators in the market, a confidence that had elapsed after the companies involved in the scandal collapsed. There are also loopholes in the act which have paved way for lawsuits challenging the viability of sections of the act. For instance, in 2006, Free Enterprise Fund filed a case in which it asserted that the regulatory board teams have powers over the industry, and that they should be appointed by the president as opposed to the SEC. Such a case, if it sails through may force a change into the whole act which would be costly and form a crisis. Ron Paul, a congressman also contended that the act was unnecessary and only makes to create a notion that USA companies are inferior to foreign ones in the market. Small firms and non-US companies are therefore bound to deregister from the US economy due to this government intrusion. Conclusion and Recommendations Future lawmakers are supposed to make laws that are ethical and just too for all people; the traders and consumers alike (Baruch 30). Such an issue would not have occurred if stakeholders had taken prior responsibility of the work they do. This law has got very many good things and works to protect all the stakeholders from different business perspectives. It has held every individual accountable for the actions that they do which is a positive sign for the business society. This analysis has brought to life the knowledge of the Sarbanes-Oxley act in view of its history, application to the market and the impacts it has had on businesses. The law as indicated has got a few loopholes but these should be left to the commission of Oxley to correct with time. It should be noted that, just like any other issue, the business world is extremely dynamic and contingent matters can be dealt with as they arise. Appendix Key Provisions of the Sarbanes–Oxley Act Of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002) This act is also known as the ‘Public Company Accounting Reform and Investor Protection Act 1.0 Sarbanes–Oxley Section 302: Disclosure controls 1.1 Sarbanes–Oxley Section 303: Improper Influence on Conduct of Audits 1.2 Sarbanes–Oxley Section 401: Disclosures in periodic reports (Off-balance sheet items) 1.3 Sarbanes–Oxley Section 404: Assessment of internal control 1. 4 Sarbanes–Oxley 404 and smaller public companies 1.6 Sarbanes–Oxley Section 802: Criminal penalties for influencing US Agency investigation/proper administration 1.7 Sarbanes–Oxley Section 906: Criminal Penalties for CEO/CFO financial statement certification 1.8 Sarbanes–Oxley Section 1107: Criminal penalties for retaliation against whistleblowers References Archi, Caroll and Ann Bucholtz. Business and Society , Ethics Stakeholder Management. New York: south West Cengage, 2008. Baruch, Lev. "Corporate Earnings: Facts and Fiction." Journal of Economic Perspectives 17.2 (2003): 27-50. Burkhanov, Umar. "The Big Failure, Lehmann Brothers Effects on Global Markets." European Journal of Business Economics 2 (2011): 17. DiPiazza, Sam and Robert Eccles. Building Public Trust – The Future of Corporate Reporting. New York : John Wiley & Sons, 2002. Healy, Paul M. and Krishna G. Palepu. "Enron and Conflict of Interest." Journal of Economic Perspectives 17.2 (2003): 3-26. Kohn, Stephen M. National WhistleBlowers Centre. 10 10 2010. 26 11 2013 . Moncarz, Elisa, et al. The Rise and Collapse of Enron, Financial innovations, Errors and Lessons. Print. Florida: Florida International University, 2006. PriceWaterhouseCoopers. The Sarbanes-Oxley Act of 2002:Understanding the Independent Auditor’s Role in Building Public Trust: A White Paper. Print. New York: PriceWaterhouseCoopers, 2003,. Touche, Delloitte and. Taking Control:A Guide to Compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Print. New Yok: Delloitte and Touche , 2004. Turley, James S. The Sarbanes-Oxley Act at 10,Enhancing the reliability of financial reporting and audit quality. Print. New York: Ernst and Toung, 2002. Read More