Week 3

Chapter 4- Managerial Ethics and Corporate Social Responsibility

ü  Ethics is the code of moral principles that governs behavior with respect to what is right and wrong. An ethical issue is present in any situation when the actions of an individual or organization may harm or benefit others.

ü  Ethical decisions and behavior are typically guided by a value system. Four values-based systems that serve as criteria for ethical decision making are the utilitarian, individualism, moral-rights, and justice approaches.

ü  For an individual manager, the ability to make ethical choices depends partly on whether the person is at a preconventional, conventional, or postconventional level of moral development

The model for evaluating social performance uses four criteria: economic, legal, ethical, and discretionary.

ü  Managers can help organizations be ethical and socially responsible by practicing ethical leadership and using mechanisms such as codes of ethics, ethics committees, chief ethics officers, training programs, and procedures to protect whistle-blowers.

ü  Managing ethics and social responsibility is just as important as paying attention to costs, profits, and growth.

ü  Companies that are ethical and social responsible perform as well as- and often better than- those that are not social responsible.   

Sarbanes–Oxley Act

From Wikipedia, the free encyclopedia

v  The Sarbanes–Oxley Act of 2002 also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which set new or enhanced standards for all U.S. public company boards, management and public accounting firms. It is named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley

v  The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets.

v  It does not apply to privately held companies. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Harvey Pitt, the 26th chairman of the Securities and Exchange Commission (SEC), led the SEC in the adoption of dozens of rules to implement the Sarbanes–Oxley Act. It created a new, quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, charged with overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

v  The act was approved by the House by a vote of 423–3 and by the Senate 99–0. President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt."^[1]

v 

v  Debate continues over the perceived benefits and costs of SOX. Supporters contend the legislation was necessary and has played a useful role in restoring public confidence in the nation's capital markets by, among other things, strengthening corporate accounting controls. Opponents of the bill claim it has reduced America's international competitive edge against foreign financial service providers, saying SOX has introduced an overly complex regulatory environment into U.S. financial markets.

 Sarbanes Oxley Pros & Cons

By Angie Mohr, eHow Contributor

Updated: May 31, 2010

·  The Sarbanes-Oxley Act (SOX) was signed into law in July 2002. The legislation's purpose was to bring stability and trust back to financial markets after a series of high-profile business failures. SOX was intended to make the directors and auditors of corporations more accountable. It also required more thorough and timely disclosure of operations. Many companies, especially smaller ones, struggled to implement SOX into their reporting processes.

Pro: Shareholder Information

·  SOX requires that companies disclose more information about their risk profiles, their assets and debts and their commitments. This information allows shareholders to make more informed assessments of these companies prior to investing in them. The increased disclosure ensures that public companies can be compared more transparently. This increase in shareholder confidence led to an increase in capital flowing into the markets.

Con: Cost

·  One of the harshest criticisms of SOX legislation is that the rules were the same for the largest multi-national corporations as for the smallest public companies. The costs involved in disclosure, testing and revamping internal controls and reporting to both shareholders and the SEC caused an uneven burden on smaller companies. SOX has been modified since its inception to lessen the reporting requirements on smaller companies; however, the cost of compliance is still high.

Pro: Internal Controls

·  Section 404 of SOX requires that management test internal controls quarterly and issue a report stating that the internal controls of the company are both sufficient and effective. While this component is the most expensive to comply with, the focus on internal controls helps to eliminate some of the management overrides that occurred during high-profile failures like Enron. Internal control testing ensures that transactions occur the way they are supposed to, and ensures that checks and balances are in place to catch aberrations.

Con: Increased Audit Fees

·  One of the consequences of implementing SOX is that auditors are now more responsible and accountable for their audit reports on their clients. This means that more audit testing is done, which has increased audit fees substantially since 2002. The increased liability of auditors also increases the audit fee.

Pros:

• Companies have better internal control environments as a result of Sarbanes-Oxley. This will lead to more accurate information being available to investors who are more confident in making investing decisions.
• All participants in financial reporting have increased responsibilities and consequences for not living up to those responsibilities.

Cons:

• The legislation was passed without any specific guidance to companies as to how it should be implemented. As a result, each company had to create its own methodology for ensuring compliance, which was inefficient and expensive.
• There continues to be a significant difference between what the SEC and Public Company Accounting Oversight Board are saying publicly -- that they want the process to be more efficient -- and how the PCAOB inspectors are conducting their reviews -- at a very detailed level, which is not helping auditors reduce their efforts.
• Smaller companies that are audited by the Big Four will have to pay higher audit fees even if they are not subject to Sarbanes-Oxley as the additional audit requirements of Sarbanes-Oxley creep into their methodologies. Many private companies and smaller public companies are realizing that the Big Four have designed their audits to serve the Fortune 500 companies and that this model is slow and expensive.