The Sarbanes-Oxley Act of 2002 is considered by many to have made the most sweeping changes affecting corporate governance since the Securities and Exchange Acts of 1933 and 1934. About 4 years after its passing, however, many governance experts question whether the time and expense of compliance engender any real reforms. This article examines whether corporations have restructured their boards in response to the enactment of Sarbanes-Oxley and finds evidence that companies are implementing changes that should (...) strengthen the monitoring ability of their boards. (shrink)

As a public director of a NASDAQ stock exchange listed public corporation, I have seen how quickly the reforms in corporate governance imposed by the Sarbanes-Oxley Act have changed procedures and policies in public corporations. In areas such as transparency of financial records and other financial matters including compensation of top executives and conflict of interest policies affecting both corporate boards of directors and employees of the corporation the reforms of this new federal law have quickly changed corporate (...) practices in many corporations. Many persons who have studied this new law believe that these changes will benefit the public, shareholders, employees, and other stakeholders in the modern corporation by increasing the reputation of these organizations for integrity and transparency. Stock exchanges such as NASDAQ and the New York Stock Exchange now require all listed companies to have (after a transition time) a majority of independent directors on their boards of directors. Only independent directors may serve on the audit, nominating and compensation committees of boards in most cases. Some exceptions are made to these rules for foreign and domestic issues of companies where a majority of the voting power is held by one person. According to Morrison & Foster LLP, Corporate Board Advisory March , 2004, NASDAQ requires that the board of directors of a listed company determine that an independent director does not have a relationship that would “interfere with the exercise of independent judgment” in carrying out the responsibilities of a director. (shrink)

This paper explores the financial reporting scandals of the past decade and the resulting U.S. legislative attempts to impose ethical behavior and control the incidence of new reporting problems via the Sarbanes-Oxley legislation. We begin with a brief historical perspective followed by assertions of ethical consequences of legislation with discussions of key recent corporate scandals, the motives for the frauds, and the consequences. Ethics related provisions of the Sarbanes-Oxley Act are discussed with the potential impact of (...) the legislation on the likelihood of similar future frauds and accompanying prognosis for future corporate ethical behavior. (shrink)

Although the composition of the board of directors has important implications for different aspects of firm performance, prior studies tend to focus on financial performance. The effects of board composition on corporate social responsibility (CSR) performance remain an under-researched area, particularly in the period following the enactment of the Sarbanes-Oxley Act of 2002 (SOX). This article specifically examines two important aspects of board composition (i.e., the presence of outside directors and the presence of women directors) and their relationship (...) with CSR performance in the Post-SOX era. With data covering over 500 of the largest companies listed on the U.S. stock exchanges and spanning 64 different industries, we find empirical evidence showing that greater presence of outside and women directors is linked to better CSR performance within a firm’s industry. Treating CSR performance as the reflection of a firm’s moral legitimacy, our study suggests that deliberate structuring of corporate boards may be an effective approach to enhance a firm’s moral legitimacy. (shrink)

Reports of research fraud have raised concerns about research integrity similar to concerns raised about financial accounting fraud. We propose a departure from self-regulation in that researchers adopt the financial accounting approach in establishing trust through an external validation process, in addition to the reporting entities and the regulatory agencies. The general conceptual framework for reviewing financial reports, utilizes external auditors who are certified and objective in using established standards to provide an opinion on the financial reports. These standards have (...) become both broader in scope and increasingly specific as to what information is reported and the methodologies to be employed. We believe that the financial reporting overhaul encompassed in the US Sarbanes–Oxley Act of 2002, which aims at preventing accounting fraud, can be applied to scientific research in 4 ways. First, Sarbanes–Oxley requires corporations to have a complete set of internal accounting controls. Research organizations should use appropriate sampling techniques and audit research projects for conformity with the initial research protocols. Second, corporations are required to have the chief financial officer certify the accuracy of their financial statements. In a similar way, each research organization should have their vice-president of research (or equivalent) certify the research integrity of their research activities. In contrast, the primary responsibility of the existing Research Integrity Officers is to handle allegations of research misconduct, an after-the-fact activity. Third, generally accepted auditing standards specify the appropriate procedures for external review of a corporation’s financial statements. For similar reasons, the research review process would also require corresponding external auditing standards. Finally, these new requirements would be implemented in stages, with the largest 14 research organizations that receive 25% of the total National Institutes of Health funding, adopting these research oversight enhancements first. (shrink)

We explore how the Sarbanes–Oxley Act of 2002 created pressure for firms to take more visible and costly corrective action following the announcement of an earnings restatement. Building on theory about focusing events, the institutional effects of legislative change, and the agenda-setting role of the media, we propose that Sarbanes–Oxley created reactive normative pressure on firms that announce earnings restatements, increasing the likelihood of CEO replacement in their aftermath. We theorize that Sarbanes–Oxley changed the (...) meaning—and therefore the impact—of media coverage of earnings restatements. Our findings show that firm behavior after Sarbanes–Oxley did change in ways that are consistent with the intent of the legislation: to increase executives’ accountability for the reliability of their firms’ financial statements. Moreover, we show this change is a result both of the direct effect of the legislation on increasing CEO accountability as well as through intensifying the effect of the media spotlight on misconduct. (shrink)

The Sarbanes–Oxley Act of 2002 requires audit committees of public companies’ boards of directors to install an anonymous reporting channel to assist in deterring and detecting accounting fraud and control weaknesses. While it is generally accepted that the availability of such a reporting channel may reduce the reporting cost of the observer of a questionable act, there is concern that the addition of such a channel may decrease the overall effectiveness compared to a system employing only non-anonymous reporting (...) options. The rationale underlying this concern involves the would-be reporter’s likelihood of reporting, the seriousness with which the organization treats an anonymous report, and the organization’s ability to thoroughly follow-up the report. Thus, we explore the extent to which the availability of an anonymous reporting channel influences intended use of non-anonymous reporting channels. Further, in response to Sarbanes–Oxley and the environment of financial scandals that led to its passage, many firms are strengthening their internal audit departments, and providing them with greater independence from upper management’s direct control. Accordingly, our examination tests whether the intended use of the internal audit department as an internal reporting channel is greater when the internal audit department is of “high” versus “low” quality. Finally, the study investigates intended reporting behavior across three different cases (e.g., settings). Results show that the existence of an anonymous channel does reduce the likelihood of reporting to non-anonymous channels, that generally the internal audit department quality does not affect reporting to non-anonymous channels, and that case-setting affects the type of channel to be used. Implications from the study are discussed. (shrink)

. In this paper, we consider the nature of recent corporate abuses both in the U.S. and in Europe, and how globalization has had an impact on amplifying their consequences. We discuss the rules-based and principles-based remedies that have been proposed in each region, respectively. With a focus on the U.S. Sarbanes-Oxley Act (SOA), we examine the principles forwarded by this act, and how it addresses those principles with specific rules and governance mechanisms. Invoking Integrative Social Contracts Theory (...) (ISCT), we conclude with a reconciliation of the principles and rules-based approaches to corporate governance as suggested by theory. (shrink)

Gallup Polls have reported on the perceived ethics of various professions in the US since 1976. Clergymen and pharmacists were consistently identified as two of the most ethical professionals in the 1980''s and 1990''s. Business executives have not fared well in these polls and have not been rated among the top ten most ethical professions in any of the years the poll was taken. Ethical codes have not done much to belay the perception that the US business executive is not (...) very ethical. Whether the Sarbanes-Oxley Act will impact the ethical behavior of business executives remains to be seen. (shrink)

The Sarbanes–Oxley Act of 2002 requires company executives to certify financial statements and internal controls as a means of reducing fraud. Many companies have operationalized this by instituting a sub-certification process and requiring lower-level managers to sign certification statements. These lower-level organizational members are often the individuals who are aware of fraud and are in the best position to provide information on the fraudulent act. However, the sub-certification process may have the effect of reducing employees’ intentions to report (...) wrongdoing. We suggest that subordinates with knowledge of a superior who committed a fraudulent act and certified that there is no fraud will feel less personal responsibility to report the act, thus, decreasing reporting intentions. Additionally, we suggest that if the fraud is discovered subsequent to the reports being filed with the Securities and Exchange Commission, employees will perceive lower management responsiveness to investigate the fraud, which will reduce intentions to report. Using an experimental approach, we manipulate two between-participant variables: the presence or absence of sub-certification by the transgressor and the timing of fraud discovery, either before or after the reports have been filed with the SEC. We find that when sub-certification is present, perceived personal responsibility and intentions to report were diminished compared to when sub-certification is absent. Timing of the discovery of the fraudulent act did not influence perceived management responsiveness or reporting intentions. Supplemental analysis shows that personal responsibility partially mediates the relationship between sub-certification and reporting intentions. Our findings suggest that audit committees and senior executives may want to carefully consider the costs and benefits of the sub-certification process. (shrink)

This article evaluates effectiveness and costs of external regulation, in particular the Sarbanes-Oxley Act of 2002 (SOX) in restricting managerial malfeasance and safeguarding shareholder interests. It discusses the role of managerial ethics as an alternative corporate governance mechanism to protect shareholder value. This article builds a mathematical model to illustrate shareholders' choices of best corporate governance mechanisms, taking into account the influence of managerial ethics, effectiveness and costs of monitoring. We suggest that the best corporate governance design and (...) the optimal monitoring expenses are influenced by managerial types, monitoring efficiency, and effectiveness of ethics education. We conclude that stringent regulation and monitoring may not always enhance shareholder value. When managerial ethics could be improved by ethics education or social norms, ethics education may be a better alternative than stringent regulation. (shrink)

The tension between external forces for better ethics in organizations, represented by legislation such as the Sarbanes–Oxley Act (SOX), and the call for internal forces represented by increased educational coverage, has never been as apparent. This study examines business school faculty attitudes about recent corporate ethics lapses, including opinions about root causes, potential solutions, and ethics coverage in their courses. In assessing root causes, faculty point to a failure of systems such as legal/professional and management (external) and declining (...) personal values (internal). We also found that faculty recommend external forces as a remedy more often than increased ethics educational coverage; we contextualize this finding with recent ethics education literature. We conclude by proposing that neither legislation nor ethics education alone are complete when addressing widespread unethical corporate acts and offer a multi-faceted approach to ethics educational opportunities. (shrink)

Regulatory responses to the business failures of 1998–2001 framed them as a general failure of governance and ethics rather than as firm-specific problems. Among the regulatory responses are Section 406 of Sarbanes–Oxley Act, SEC, and exchange requirements to provide a Code of Ethics. However, institutional pressures surrounding this regulation suggest the potential for symbolic responses and decoupling of response from organizational action. In this article, we examine Codes of Ethics for a stratified sample of 75 U.S. firms across (...) five distinct industries and find that content and language converge across organizations in ways undesired by the regulators, and that language is used to minimize the effects of the Code on constraining organizational behavior. There is, however, a noteworthy exception in the sections of the Codes dedicated the ethics of financial reporting. Although this material still contains legalistic boilerplate information, it does offer concrete guidance and emphatic language pertaining to the need to maintain the integrity of reporting practices. This suggests that the corporate understanding of the source of the failures is one of fraudulent financial reporting. Aside from the matter of financial reporting, the vague and stylized content of the Codes was a predicted response and constitutes a rational response to the regulation. The regulation, however, clearly states the belief that Codes should vary from firm to firm and that individual firms should determine the specific content of a Code. Aside from financial reporting matters, the observed result suggests that regulatory efforts may have failed to instigate corporate change in attitudes toward and enforcement of higher ethical standards by corporate actors. (shrink)

Both the Sarbanes–Oxley Act of 2002 and the Dodd-Frank Act of 2010 include clawback provisions that require executives to pay back incentive compensation earned on financial statements that are restated in a subsequent period. Such provisions intend to reduce unethical reporting behavior by executives who otherwise might be more inclined to misstate financial statements to boost incentive-based compensation. However, such provisions could promote rather than deter unethical behavior. In particular, Pyzoha :2515–2536, 2015) finds that, under certain conditions, executives (...) are less willing to restate financial statements in the presence of a clawback policy. Similarly, auditors might also act unethically by being less likely to propose restatements in the presence of clawbacks to avoid upsetting management. To examine this possibility, this study reports the results of three experiments that examine the effect of clawback provisions on auditor judgment. Contrary to expectations, our three experiments, along with supplemental qualitative evidence consistently indicate that clawbacks do not affect auditors’ propensity to propose restatements. These results suggest that a decrease in the number of restatements in a clawback environment will not be due to auditors acting unethically to appease management. The effects of clawbacks on auditors’ risk assessments, however, are less conclusive. As such, we offer potential post hoc explanations to guide future research. (shrink)

Will the Sarbanes-Oxley Act of 2002 and the emerging EU auditing standards be adequate to stop major corporate scandals? Certainly they will help, but the best defence against fraud is a corporate culture strong enough to itself stop abuse internally. Activities imposed from the outside can never match the role of colleagues within a company who challenge one another to maintain the highest of ethical standards and good business practices. Boards must ensure a strong ethics framework of appropriate (...) behaviour. Since behaviour is based on values priorities, a mutual effort at all levels to deal with corporate ethics begins with a clear understanding of core values, both individually and organisationally. If a company wants to achieve a high Return on Capital Employed and Customers Engaged, a high Return on Competencies Enhanced, and a high Return on Co-Creative Energy, it is a major breakthrough to discover the interrelationship between: value, values, valuing and valuation. (shrink)

Since the introduction of the U.S. Sarbanes-Oxley Act in 2002 and several other national corporate governance codes, whistleblowing policies have been implemented in a growing number of companies. Existing research indicates that this type of governance codes has a limited direct effect on ethical or whistleblowing behaviour whereas whistleblowing policies at the corporate level seem to be more effective. Therefore, evidence on the impact of (inter)national corporate governance codes on the content of corporate whistleblowing policies is important to (...) understand their indirect impact on whistleblowing behaviour. This study analyzes the contents of whistleblowing policies, and parts of corporate codes of conduct and codes of ethics, describing such policies of 56 leading European companies. By classifying the contents in seven categories, an exploratory framework was created. General contents often identified were: applicability to all employees, a group-wide scope and an authoritative tone. The most common general violations to report were breaches of internal policies and external regulations or laws. The more specific violations most frequently mentioned were criminal offences and dangers to health and safety or the environment. Contacts to report to were the direct or indirect supervisors, a compliance officer or a confidential “hotline” facility. A confidentiality guarantee was common and anonymous reporting was often possible, though sometimes discouraged. Protection against retaliation is stated by ensuring that retaliation will not happen, prohibiting it or making it punishable. The requirement of good faith was frequently given. Finally, investigation of the report was often guaranteed. Surprisingly little information is given on the treatment of whistleblowers reporting an unfounded complaint in good faith, or reporting a violation they were involved in. The study’s findings are most relevant to companies without a whistleblowing policy or those that intend to benchmark their policies, and to pan-European standard setters. (shrink)

The question of whether females tend to act more ethically or risk-averse compared to males is an interesting ethical puzzle. Using a large sample of US firms over the 1992–2014 period, we investigate the effect that the gender of a chief executive officer has on earnings management using classification shifting. We find that the pre-Sarbanes–Oxley Act period was characterized by high levels of classification shifting by both female and male CEOs, but the magnitude of such practices is, surprisingly, (...) significantly higher in firms with female CEOs than in those with male CEOs. By contrast, our results suggest that following the passage of the punitive SOX Act, classification shifting by female CEOs declined significantly, whilst it remained pervasive in firms with male CEOs. This suggests that the observable differences in financial reporting behavior between male and female CEOs seem to be because female CEOs are more risk-averse, but not necessarily more ethically sensitive than their male counterparts are. The central tenets of our findings remain unchanged after several additional checks, including controlling for alternative earnings management techniques, corporate governance mechanisms, CEO and chief financial officer characteristics and propensity score-matching. (shrink)

Since the introduction of the U.S. Sarbanes-Oxley Act in 2002 and several other national corporate governance codes, whistleblowing policies have been implemented in a growing number of companies. Existing research indicates that this type of governance codes has a limited direct effect on ethical or whistleblowing behaviour whereas whistleblowing policies at the corporate level seem to be more effective. Therefore, evidence on the impact of (inter)national corporate governance codes on the content of corporate whistleblowing policies is important to (...) understand their indirect impact on whistleblowing behaviour. This study analyzes the contents of whistleblowing policies, and parts of corporate codes of conduct and codes of ethics, describing such policies of 56 leading European companies. By classifying the contents in seven categories, an exploratory framework was created. General contents often identified were: applicability to all employees, a group-wide scope and an authoritative tone. The most common general violations to report were breaches of internal policies and external regulations or laws. The more specific violations most frequently mentioned were criminal offences and dangers to health and safety or the environment. Contacts to report to were the direct or indirect supervisors, a compliance officer or a confidential "hotline" facility. A confidentiality guarantee was common and anonymous reporting was often possible, though sometimes discouraged. Protection against retaliation is stated by ensuring that retaliation will not happen, prohibiting it or making it punishable. The requirement of good faith was frequently given. Finally, investigation of the report was often guaranteed. Surprisingly little information is given on the treatment of whistleblowers reporting an unfounded complaint in good faith, or reporting a violation they were involved in. The study's findings are most relevant to companies without a whistleblowing policy or those that intend to benchmark their policies, and to pan-European standard setters. (shrink)

Recent financial fraud legislation such as the Dodd–Frank Act and the Sarbanes–Oxley Act (U.S. House of Representatives, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, [H.R. 4173], 2010 ; U.S. House of Representatives, The Sarbanes–Oxley Act of 2002, Public Law 107-204 [H.R. 3763], 2002 ) relies heavily on whistleblowers for enforcement, and offers protection and incentives for whistleblowers. However, little is known about many aspects of the whistleblowing decision, especially the effects of contextual and (...) wrongdoing attributes on organizational members’ willingness to report fraud. We extend the ethics literature by experimentally investigating how the nature of the wrongdoing and the awareness of those surrounding the whistleblower can influence whistleblowing. As predicted, we find that employees are less likely to report: (1) financial statement fraud than theft; (2) immaterial than material financial statement fraud; (3) when the wrongdoer is aware that the potential whistleblower has knowledge of the fraud; and (4) when others in addition to the wrongdoer are not aware of the fraud. Our findings extend whistleblowing research in several ways. For instance, prior research provides little evidence concerning the effects of fraud type, wrongdoer awareness, and others’ awareness on whistleblowing intentions. We also provide evidence that whistleblowing settings represent an exception to the well-accepted theory of diffusion of responsibility. Our participants are professionals who represent the likely pool of potential whistleblowers in organizations. (shrink)

When a series of corporate scandals erupted soon after the collapse of the 1990s bull market in equities, policy makers and reformers chiefly responded by augmenting and refining the checks and balances surrounding publicly traded corporations. Through measures such as the Sarbanes-Oxley Act of 2002, securities regulations were intensified and corporate governance was tightened. In essence, reformers followed the tradition of modern political philosophy, developed in the 17th and 18th centuries, in its insistence that pro-social outcomes are best (...) produced through institutional mechanisms that harness self-interest. The empirical evidence, however, suggests the institutional approach will do little to prevent future ethical breakdowns. To corroborate this finding, we survey the literature on board composition, auditor consulting practices, shareholder activism, and executive compensation. Consequently, we look to another stream of political philosophy, the ancient tradition comprising Plato and Aristotle, which argues that social groupings, such as corporations, work best when led by individuals of good character. Applying the ancient view to modern commercial realities, the paper concludes that Benjamin Franklin's attempt to connect virtuous character with enlightened self-interest offers a compelling ethic for corporate leaders. (shrink)

Firm managers make ethical decisions regarding the form and quality of disclosure. Disclosure can have long-term implications for performance, earnings manipulation, and even fraud. We investigate the impact of venture capital (VC) backing on the quality and informativeness of disclosure controls and procedures for newly public companies. We find that these controls and procedures are stronger, as evidenced by fewer material weaknesses in internal control under Section 302 of the Sarbanes–Oxley Act, when companies are VC-backed. Moreover, these disclosures (...) are informative and are more likely to be followed by subsequent financial statement restatements than are disclosures made by non-VC-backed IPO companies. (shrink)

The Sarbanes–Oxley (SOX) Act was passed in 2002 in response to various instances of corporate malfeasance. The Act, designed to protect investors, led to wide-ranging regulation over various actions of managers, auditors and investment analysts. Part of SOX, and the focus of this study, targeted the disclosure by firms of “pro forma” earnings, an alternate (from GAAP earnings), flexible and unaudited measure of firm performance. Specifically, SOX directed the Securities and Exchange Commission (SEC) to craft regulation which would (...) reduce – and preferably eliminate – any pro forma earnings disclosure which might be “misleading”. Examining earnings press releases over a 3-year period, this study addresses three questions. Were firms disclosing pro forma in a potentially misleading manner, what was the nature of this potentially misleading disclosure, and did SOX affect the disclosure practices? We find the following. In 2001 (prior to SOX), 53 firms – over 10% of all U.S. S&P 500 firms – were disclosing pro forma earnings in a potentially misleading manner. This was being done most commonly by using traditional GAAP terminology (e.g., “net income”) in the press release headline to describe what was later in the press release revealed to be a pro forma amount (i.e., “net income excluding special items”). By 2003 (subsequent to the SEC regulation), potentially misleading disclosure practices were seen in less than 1% of the earnings press releases of S&P 500 firms. This significant reduction suggests that managers, prior to the regulation, were either careless in their pro forma reporting practice, or were intentionally – and unethically – attempting to mislead investors. Either way, we conclude that the SEC regulation was both necessary and effective. (shrink)

Internal auditing has been adding value in organisations across all sectors for many years. This paper is based on research by the authors into this value in the UK, widened to include the contribution by internal auditing's professional development worldwide. This development is based mainly on international internal auditing standards, now receiving recognition by governments, regulators, external auditors and other authorities across the world. Not least by the worldwide requirements of the US Sarbanes-Oxley Act of 2003, and board (...) responsibility for the effectiveness of internal control. The paper discusses how the assurance, compliance and consultant roles of internal auditing are being recognised today at board level in many organisations as valuable contributors to good governance practices. (shrink)

ECONOMICS AND LAW HAVE HISTORICALLY ATTENUATED THE CONTRIBUtion of ethics in their putative separation of fact and value. In this essay I argue that reconceptualizing the relationships between law, economics, and ethics reveals the shortcomings of positions that disavow ethics. In the first section I contend that thinkers must reread Adam Smith as an economist and a moral philosopher to appreciate his extended treatment of sympathy, conscience, and social justice. In the second section I appropriate the work of Amartya Sen (...) to examine the entanglement of fact and value in deliberating economic choices, including moral motivations and social evaluations that problematize reductive images of economic actors. Finally, I interrogate legal regulation of corporate governance with respect to the Enron scandal and the 2002 Sarbanes-Oxley Act. I argue that legal regulation is a necessary but not sufficient resolution to corporate misconduct because it too enervates ethics and bifurcates fact and value. (shrink)

This research examines whether having a readily available code of ethics on a corporation's website associates with either their auditor or stock exchange listing. As such, it is the first research that studies the association among readily available codes of ethics, client auditor and stock exchange listing on a longitudinal basis. In our data gathering, we went to the website of each corporation and searched for a readily available disclosure of its code of ethics at the beginning of April 2006 (...) through April 2009 – third-through-sixth anniversaries of the Sarbanes–Oxley Act. Our data indicate that the average readily available rate of codes of ethics for Ernst and Young 's clients was significantly lower than the average readily available rate for the clients of Deloitte and Touche in 2006 and 2007 and PricewaterhouseCoopers in 2007. However, our data indicate no differences among the Big Four firms in 2008 and 2009. Our data indicate that the average readily available rates for the clients listed on the New York Stock Exchange were significantly higher than for clients that were not listed on the NYSE for all four observation points. (shrink)

Government can control conflicts of interest in business firms by either issuing obligatory commands to behave in a specified way or by creating incentives to alter private behavior. In order to choose between these two approaches, we also need to know something about the nature of the subject firms and the way that they are likely to respond to particular stimuli. Legislators and legal scholars often rely on intuition to predict the behavior of firms, but this will not suffice for (...) such a complex situation. Fortunately, there is a well-developed body of scholarship that addresses organizational behavior; unfortunately, like many bodies of scholarship, it contains rival and conflicting approaches. This article discusses four of these approaches to organizational behavior: the nexus of contracts theory, an application of rational choice theory to corporations; decision theory; general systems theory and its recent autopoetic variants; and new institutionalism. It then uses each of these approaches to predict the way that firms will respond to obligatory commands and behavior incentives. The specific cases it discusses are the U.S. Sentencing Commission’s Organizational Sentencing Guidelines, the Sarbanes-Oxley Act, and contemporary compliance theory’s idea of reasonable, responsive, or cooperative enforcement. (shrink)

Moral Seduction Theory suggests that auditors are morally compromised by the perceived consequences of their opinions. The root of the auditing problem appears to result in an unintentional bias rather than in dishonesty. Although important accounting reforms have been taken to deal with auditors' trustworthiness, their lack of independence has not been adequately addressed. The new regulation (Sarbanes-Oxley Act) is a consequence of an incorrect understanding of the main true source of auditor's biases. We have developed a cognitive (...) approach by connecting the Throughput Model (TM) to the Moral Seduction Theory. This approach allows a better understanding of how conflicts of interest lead auditors to avoid the issuance of warning signals to stakeholders. We have tested our model by conducting a hypothetical scenario with eighty experienced auditors from international accounting firms. Our results confirm auditors' unintentional reluctance to issue qualified audit opinions alerting investors due to their fear of precipitating clients' final bankruptcy. The main implication is that, more than a regulation, effort should be made in monitoring those conflicts of interest to reduce unintentional bias. (shrink)

In his classic paper, The Serpent Beguiled Me And I Did Eat, Gerald Dworkin makes the case that, without probable cause, the useof Proactive Law Enforcement Techniques (PALETs) is morally impermissible. Call this prohibition Dworkin’s Rule (DR). Here we argue that there are two reasonable exceptions to DR—the use of PALETs, without probable cause, is justifi ed when employed against High Level Government Officials (HLGOs) and High Level Business Officials (HLBOs). Moreover, these exceptions are consistent with Dworkin’s notion of Ideal (...) Criminal Sanctioning. Finally, if society were to endorse the use of PALETs on HLBOs, we might be able to dispose of the current bane of American business, the Sarbanes-Oxley Act of 2002, and let business get back to the business of business. (shrink)

The Securities and Exchange Commission requires the disclosure of changes to or waivers of corporate codes of ethics. Because the nature of amendments or waivers can vary, we expect the text of Item 5.05 to include different topics within different filings. We examine the population of these disclosures in Item 5.05 8-K filings from 2004 to 2020. While previous studies utilized small samples (fewer than 50 observations) to examine limited aspects of these filings, we use the population of these filings (...) from 2004 to 2020 (2121 8-K filings) to elucidate the nature and details of the disclosures. We assess whether Latent Dirichlet Allocation—a computational linguistics technique—can help discern the underlying topics represented in filings. While the Securities and Exchange Commission identifies two topics—amendments and waivers—the Latent Dirichlet Allocation analysis reveals four topics (three related to amendments): (1) code updates and clarifications; (2) combining codes of conduct for all officers and employees, or splitting codes to include a code directly applicable to senior financial officers; (3) codes of ethics waivers; and (4) substantive code changes. The overall trend is for fewer 8-Ks to be filed in recent years, with updates and clarifications becoming the predominant filing type. Our results further indicate that Item 5.05s related to updates and clarifications, and those related to combined or split codes, use fewer words and are more easily readable than those disclosing waivers or material code changes. Although we find no significant price reaction to Item 5.05 8-K filings, we find significant trading volume and volatility reactions, suggesting that these disclosures could give rise to differences in opinion among investors, which is consistent with the US Senate's assertion that these disclosures are of interest to investors. (shrink)

Sometimes the fact that something is the law can be justified by the law. For example, the Sarbanes-Oxley Act is the law because it was enacted by Congress pursuant to the Commerce Clause. But eventually legal justification of law ends. The ultimate criteria of validity in a legal system cannot themselves be justified by law. According to H.L.A. Hart, justification of these ultimate criteria is still available, by reference to social facts concerning official acceptance - facts about what (...) Hart calls the "rule of recognition" for the system. -/- Drawing upon criticisms of sociological accounts of the law that can be found in the writings of Hans Kelsen, I argue in this essay that Hart's approach cannot account for statements about the law that assert the independence of legal validity from rule of recognition facts. I offer as an alternative a legal quietist approach, which can account for such statements. For the quietist, legal justification exhausts the possible justification for law. If our judgments about the law are fundamental, in the sense that they cannot be justified by other judgments about the law, then they have no justification (which is not to say that they should be abandoned). I argue that legal quietism is exemplified - if somewhat imperfectly - in Kelsen's writings, and I end the essay by exploring some difficulties that the quietist approach must face. (shrink)

Previous accounting ethics research berates auditors for ethical lapses that contribute to the failure of Andersen (e.g., Duska, R.: 2005, Journal of Business Ethics 57, 17–29; Staubus, G.: 2005, Journal of Business Ethics 57, 5–15; however, some of the blame must also fall on regulatory and professional bodies that exist to mitigate auditors’ ethical lapses. In this paper, we consider the ethical and economic context that existed and facilitated Andersen’s failure. Our analysis is grounded in Akerlof’s (1970, Quarterly Journal of (...) Economics August, 488–500) Theory of the Market for Lemons and we characterize the market for audit reports as a market for lemons. Consistent with Akerlof’s model, we consider the appropriateness of the countervailing mechanisms that existed at the time of Andersen’s demise that appeared to have effectively failed in counteracting Andersen’s ethical shortcomings. Finally, we assess the appropriateness of the remedies proposed by the Sarbanes–Oxley Act of 2002 (SOA) to ensure that similar ethical lapses will not occur in the future. Our analysis indicates that the SOA regulatory reforms should counteract some of the necessary conditions of the Lemons Model, and thereby mitigate the likelihood of audit failures. However, we contend that the effectiveness of the SOA critically depends upon the focus and attention of the␣Public Companies Accounting Oversight Board (PCAOB) towards assessing the ethical climates of public accounting firms. Assessments by the PCAOB of public accounting firm’s ethical climate are needed to sufficiently ensure that public accounting firms effectively promote and maintain audit quality in situations where unconscious bias or economic incentives may erode the public accounting firm’s independence. (shrink)

The corporate meltdowns of this and the previous decade in the US - WorldCom, Enron, Tyco, and in Australia - FAI, HIH and AWB being among the many examples - have resulted in the governments of those two countries introducing legislation and policy guidelines aimed at minimising future corporate misbehaviour. -/- The US has introduced the Sarbanes Oxley Act, with requirements on corporate accountants and auditors, as well as its whistleblowing provisions. It has revised the Federal Sentencing Guidelines (...) for Organizations. New rules for the NYSE and NASDAQ have also been introduced. In addition, the U.S. Securities and Exchange Commission and U.S. Department of Justice have further strengthened the Foreign Corrupt Practices Act 1977, last revised in 1997. -/- Australia has revised the Corporations Act to include whistleblower protection clauses as well as adopted the ASX Corporate Governance guidelines. Standards Australia has issued its handbook on corporate governance. Although not a business issue, the Australian government has also announced that it will introduce whistleblower protection legislation for the public sector by the end of its first term in office. This legislation will likely influence whatever the private sector does in this respect. The inclusion of whistleblower protection in both Sarbanes–Oxley and the Corporations Act reflects a growing body of research that finds that people internal to an organisation are the most effective way to identify corporate wrongs. The Commonwealth Treasury has recently issued an options paper, stating that the Corporations Act has been ineffectual. It has sought submissions on revisions to the legislation that the Australian Government could take. This paper examines the policies advocated by over 20 organisations and academics concerned with whistleblowing issues. It draws the conclusion that on current indications, even after further reform, Australian legislation and policies are still likely to be less effectual than overseas practices. -/- --------------------------------- . (shrink)

Ethics researchers have scrutinized ethical business problems, which have been demonstrated through the actions of managers at Enron, WorldCom, and Arthur Andersen, among others. In response to these business transgressions, the US government has implemented the Sarbanes–Oxley Act to shore up businesses’ ethics infrastructures. However, universities, too, struggle with ethics problems. These include NCAA (National Collegiate Athletic Association) violations, discrimination issues, sexual harassment, endowment admits, plagiarism, and research funding manipulation. Despite these problems, we have little knowledge regarding universities’ (...) ethics infrastructures and codes of conduct, and insignificant empirical research on academic ethics issues (Kelley & Chang, Journal of Higher Education, under review, 2006; Morgan & Korschgen, College Student Journal, Sept., 2001). This lack of knowledge exists despite the critical role universities play in shaping the moral behavior of future generations (Langlais, The Chronicle of Higher Education, January 13:B11, 2006; Woo, BizEd, May/June:22–27, 2003). In this paper, we conduct exploratory research to identify the elements of universities ethics’ infrastructures. From our research, we develop an understanding of the ethics policies and infrastructure elements in place at a representative group of universities. We compare these infrastructures to those in business as well as across Carnegie Classifications. We then conclude with recommendations for developing university ethics infrastructures and suggestions for future research. (shrink)

The Prudent Investor Rule creates a potential ethical dilemma for investment advisors selling over-the-counter financial products issued by their firms. The "opportunity" to defraud investors using complex, over-the-counter derivative securities designed for client-specific risk management is much higher than for exchange traded securities. This paper emphasizes the ethical responsibility held by trustees and their organizations to eliminate potential conflict of interests through internal control and monitoring. Independent evaluations of the performance of investment advisors and independent appraisals of complex over-the-counter securities (...) are important in reducing the risks of conflicts of interest. Recent lessons learned from the corporate ethics crisis and requirements of the 2002 Sarbanes Oxley Act would suggest that conflict of interest must be eliminated with third party validation of derivative pricing. By performing due diligence and validation, the trustee is able to satisfy the requirements under the Prudent Investor Rule. (shrink)

Comprehensive regulatory changes brought on by recent corporate governance reforms have broadly redefined and re-emphasized the roles and responsibilities of all the participants in a public company’s financial reporting process. Most notably, these reforms have intensified scrutiny of corporate audit committees, whose role as protectors of investors’ interests now attracts substantially higher visibility and expectations. As a result, audit committees face the formidable challenge of effectively overseeing the company’s financial reporting process in a dramatically changed – and highly charged – (...) corporate governance environment. This paper discusses the new expectations of audit committee responsibilities and effectiveness in the wake of corporate governance reforms, key challenges, “whistleblower” provisions and shortcomings, and provides some directions for future research. (shrink)

Sarbanes–Oxley Section 406 requires a code of ethics for top financial and accounting officers in public companies. The objective of this research is to discover the impact of a financial code of ethics on firm behavior. We performed a longitudinal tracking of firm adoption of a financial code of ethics starting in 2005. We checked these companies’ codes again in 2011 to confirm their continued implementation. Financial restatements were used as a dependent variable to measure improved financial reporting (...) after the adoption of the financial codes. The results confirm that the adoption of a financial code of ethics improves the integrity of financial reporting. (shrink)

Corporate scandals brought the issue of corporate governance to the forefront of the agendas of lawmakers and regulators in the early 2000s. As a result, Congress, the New York Stock Exchange, and the NASDAQ enacted standards to improve the quality of corporate governance, thereby enhancing the quantity and quality of disclosures by listed companies. We investigate the relationship between corporate governance strength and the quality of disclosures in pre- and post-regulation time periods. If cross-sectional differences in corporate governance policies affect (...) the quality of financial disclosures, the quality of information available to analysts varies with such policies. Specifically, higher quality disclosures, produced as a result of strong corporate governance, should lead to more accurate and less dispersed analysts’ forecasts. Our analysis suggests that voluntary implementation of stronger corporate governance enhanced the quality of disclosures in the pre-regulation period; however, exceeding current corporate governance standards does not appear to result in higher quality disclosures post-regulation. These results suggest that SOX and the stronger regulations enacted by U.S. exchanges were effective in reducing variation in the quality of financial information available to investors. (shrink)

Since the mid-1980s, internal corporate investigations have become commonplace in the U. S., with an upsurge occurring as a result of the corporate scandals of 2001-02 involving Adelphi Communications Corporation, Enron, Merck & Company, Riggs Bank, and other companies accused of financial malfeasance. After an introduction, this article first presents the U. S. public policy framework (as implemented through the U. S. Sentencing Commission, the U. S. Department of Justice, and the Securities and Exchange Commission) encouraging the use of corporate (...) internal investigations and self-reporting of these results to federal authorities; second, evaluates this framework, identifying the public policy issues inhibiting companies from using corporate internal investigations and self-reporting significant results; third, proposes a policy incentive regime which attempts to ameliorate these outstanding issues; and fourth, offer policy recommendations and suggestions for further research on this topic, including increasing the maximum deduction in the Organizational Sentencing Guidelines Culpability Score available to a firm for development of an Effective Compliance and Ethics Program (from 3 to 5 points), and self-reporting the results of an internal investigation (from 5 to 7 points); evaluating the effectiveness of these enhancements in legal incentives over a period of 5-7 years after implementation; instituting a formal federal government effort to educate the American business community on the corporate reputation (and financial) benefits of an effective compliance program; and protecting attorney-client privilege and work product protection, through legislative action, to encourage company executives and directors to utilize independent, outside attorneys to conduct fair, comprehensive, and impartial internal investigations. (shrink)

The U.S. Foreign Corrupt Practices Act has gained significant popularity in recent years across borders due to the increased investigation and penalties under the law. The following case is a real-life case that highlights the main provisions of the FCPA. Using cases in teaching an auditing or ethics course is much needed to develop students’ professional judgment, critical and analytical thinking skills and communication skills. Presently, there are a few cases that address the Foreign Corrupt Practices Act and its effect (...) on financial reporting and auditor responsibilities about illegal acts. The Armor Holdings case is interesting and information is publicly available regarding the circumstances that describe the bribery act, lack of whistle-blower protection, the tone at the top, and the accounting treatment. In addition, the increase in actions brought by the Securities and Exchange Commission under the FCPA since 2010 heightens the relevance of this case and underscores the need for students to learn the skills necessary to ensure compliance with FCPA and related key regulations such as the Sarbanes Oxley and the Dodd Frank Act. Therefore, cases like this one provide a rich tool to navigate topics and enforce students’ learning of client’s illegal actions and their consequences. These skills are invaluable in practice. (shrink)

This study examines the similarities and differences in pre- and post-Sarbanes-Oxley corporate ethics codes and codes of conduct using the framework of structuration theory. Following the passage of the Sarbanes-Oxley (SOX) legislation in 2002 in the United States, publicly traded companies there undertook development and revision of their codes of ethics in response to new regulatory requirements as well as incentives under the U.S. Corporate Sentencing Guidelines, which were also revised as part of the SOX mandates. (...) Questions that remain are whether these new or revised codes are effective means of communicating changed ethical foci and attitudes in organizations. Centering resonance analysis (CRA) is used to identify differences and similarities across time and industries by analyzing word networks of 46 pre- and post-SOX corporate codes of ethics. Analyses focus on content and structure of generated word networks as well as resulting factors that emerged from the texts. Results are interpreted from the structuration perspective that content and structure of codes are constrained and enabled by system structures while they function to produce and reproduce those structures. Results indicate that corporate codes of ethics are formal discourses of ethics, laws, and control. Code structure has changed across time, with an increased emphasis on compliance in post-SOX codes. Implications for research and practice are discussed in light of findings. (shrink)

This study examines the impact of Sarbanes–Oxley on the nonprofit sector. Focusing on three key SOX policies applicable to charities—conflict-of-interest policies, records retention policies, and whistleblower policies—this study tests the relationship between the existence and addition of these policies on subsequent ethical and governance lapses as reflected in the issuance of “donor advisories” by the large third-party ratings agency Charity Navigator. The findings suggest that, controlling for other relevant organizational factors, the three SOX-inspired written policies are related to (...) a reduced likelihood of donor advisories in the organizations rated by Charity Navigator. (shrink)

The history of the public accounting profession is filled with perceived crises in professionalism. Baudot et al. focus on the post Sarbanes–Oxley period, highlighting how the advocacy efforts of the public accounting profession directed toward financial regulation represent the most recent of crises. This study makes an important contribution to the literature because it illustrates the inherent challenges faced by a regulatory structure that requires private interests to act in the public good. The purpose of this commentary is (...) to provide a historical and institutional context for the study’s findings, to assess the current state of research, and to offer suggestions for future research. (shrink)