Corporate Compliance The United States corporate governance system must seem to be in terrible shape. Top executive compensation is also routinely criticized as excessive by the press, academics, and even top Federal Reserve officials. These failures and concerns in turn have served as catalysts for legislative change— in the form of the Sarbanes-Oxley Act of 2002(SOX) — and regulatory change, including new governance guidelines from the NYSE and NASDAQ. The move toward shareholder value and increased capital market influence has also been apparent in the way corporations have reorganized themselves. For example, there has been a broad trend toward decentralization. Large companies have been working hard to become more nimble and to find ways to offer employees higher-powered incentives. At the same time, external capital markets have taken on a larger role in capital reallocation, as evidenced by the large volume of mergers and divestitures throughout the '90s. The corporate governance structures in place before the 1980s gave the managers of large public U.S. corporations little reason to make shareholder interests their primary focus. Since the mid-1980s, the American style of corporate governance has reinvented itself and the rest of the world seems to be following the U.S. lead. Technological advancements, an increase in the number of business failures and the widely publicized corporate scandals which have rocked the nation's confidence have forced companies to place more emphasis on internal control systems and audits. Section 404 of the Sarbanes Oxley Act requires public companies to include a report about the effectiveness of controls in their annual form 10-k.
Shivdasani, A., & Zenner, M. (2004). Best practices in corporate governance: What two decades of research reveals. Journal of applied corporate finance, 16(2/3), 29-41.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
Frydman, C., & Saks, R. E. (2010). Executive Compensation: A New View from a Long-Term Perspective, 1936-2005. Review Of Financial Studies, 23(5), 2099-2138.
Another substantial problem with Sarbanes-Oxley and Dodd-Frank reform efforts are the misplaced ethical incentives it places on attorneys in advice on the structure of their clients. Since Sarbanes-Oxley only applies to companies traded on public markets, it substantially raises the cost of being public, and creates strong incentives to go-private for management and directors as well as a company’s legal advisors. Lawyers stand to gain substantially not only from the reduced pressures of reporting and monitoring obligations, but additionally from the substantial fees garnered in advising large-scale, multibillion dollar buy-outs. Th...
This section was included to reduce potential for fraud in publicly traded companies by adding more strict procedures and requirements for financial reporting. Management was responsible to create or enhance their internal controls and follow-up with a report assessing the effectiveness of the control structure. For many companies, this section was the most complicated and most expensive to implement because it also required management to report on the shortcomings of the controls. These reports also needed to be checked for accuracy by an external, registered auditor to confirm the operation and effectiveness of the
Public Law 107-204 of the 107thCongress was enacted by the senate and House of Representatives to “To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” This law is better known as the Sarbanes Oxley Act, consists of a number of sections designed to oversee and prevent securities fraud, and enhancements to white-collar crime. Thesix key principles of the SOX internal controlsaccording to Internal Control and Cash are: establishment of responsibility, segregation of duties, documentation procedures, independent verification, physical controls, and other controls. Sarbanes Oxley has changed internal controls through risk mitigation and accountability. A key factor, the establishment of responsibility includes authorization and approval of transactions by a ...
Sarbanes-Oxley Act was enacted following a prolonged period of corporate scandals involving large public companies from 2000 to 2002, this was to restore investors confidence in markets and close loopholes for public companies to defraud investors. This act has had a profound effect on cooperate governance in the US, it requires public companies to strengthen audit committees, perform internal controls tests, set personal liability of directors and officers for accuracy of financial statements, and strengthen disclosure. The Sarbanes-Oxley
The Sarbanes-Oxley Act of 2002 (SOX) was implemented because of all of the corporate scandals of the recent years were uncovered. SOX were put into place because it forces companies to pay more attention to internal controls. This system forces the company’s responsibilities on corporate executives and boards of directors to make sure that the companies’ internal controls are effective and reliable and less than one part of the law, companies must develop sound principles of control over financial reporting. The companies must continually develop and check sound principles of control over financial reporting and that the system is in working condition. Independent outside auditors must attest to the level of internal control. In addition, SOX also developed the “Public Company Accounting Oversight Board”, (PCAOB) which now establishes auditing standards and regulates auditor activity. Some corporate executives have complained about the expense and time that has involved in following the requirements but 60% of the investors believe that this is a good system and would not invest in a company that does not follow SOX.
Executive compensation has been a commonly debated topic in many different nations around the world. Most of these discussions focus around the staggering rise in compensation over the last couple of decades, most evident in the United States and more specifically, in the financial industry. This issue was brought to light during the housing market crash in 2008, when a lack of regulation in the financial securities market led to the exposure and critique of several large investment banks. Through investigational probes, it was found that not only was executive compensation exorbitantly high, but executives were also acting both unethically and immorally. Even after this information surfaced, many executives left their roles with large payouts
However, majority of scholars argue that the problem of excessive compensation should never be addressed via legislation. It is argued that involving the legislature would end up creating more problems than solutions (WAGNER, 2012). This is largely because it is never easy to set a standard guideline as to how much a CEO should receive. Companies that are doing fairly well prefer to pay their CEOs highly. Likewise, with the increasing technological advancements and innovations, companies seem to be performing much better than the previous years. Improvement in performance translates into increased CEO salaries and compensations. All in all, internal regulatory bodies should be created to ensure that these compensations are not too extreme (WAGNER,
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The world of business is full of different regulatory and legal requirements. In order to fulfil the responsibilities, companies must create a program of comprehensive compliance.
The Asian Financial Crisis which exposed the corporate governance weaknesses was a wake-up call for all the policymakers, standard setters as well as the companies (OECD, 2014). The parties that involved and affected from the crisis started to realize the importance of having strong corporate governance practices in their countries. Consequently, the Asian economies along with the OECD established the Asian Roundtable on Corporate Governance in 1999, in order to support the enhancement of corporate governance rules and practices (OECD, 2014).
There has been a drive towards corporate governance which has been driven by a greater need for shareholder protection. If investors feel well cushioned then there is a higher chance that t...
Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.