1) Read the article “Ethics In Accounting.” can be found through the DeVry Library Services(Links to an external site.). The first sentence of the article says “Ethics in Accounting is one of the most

Michael Kopper, former executive at En ron, was sentenced to 37 months in jail. Kopper pleaded guilty in 2002 to wire fraud and money laundering and his testimony helped convict Fastow . Michael Koenig, another former executive, served 18 months in jail as he helped present false accounts \ to investors. After the Enron scandal, one of the debates was conducted around the ethical behaviour of executives. Although there are a number of factors that influence ethical behaviour, none were powerful enough to change the ethical behaviour. As stated by Weeks & Nantel, the only factor that could change the ethical behaviour is a properly devised distributed, promoted and enforced code of ethics, updated on a regular basis, which can act as a \ catalyst in an organisation to comply to ethical standards (Weeks & Nantel, 1992). Enron did have a Code of Ethics , a nearly 65 pages document which probably made employees think that th e company they are working for is a pure and clean organisation. The Code be gins with a letter from Enron’s founder, Kenneth Lay, who assures employees he conducts business “in accordance with all applicable laws and in a moral and honest manner” (apud Michael Miller). Also, the Code states: “We know Enron enjoys a reputation for fairness and honesty that is respected. Enron's reputation finally depends on its people, you a nd me.” (apud Michael Miller). The Code is based on several values, such as respect, integrity and communication. Sadly, Enron’s executiv es didn’t comply to any of the Code’s requirements. The Enron scandal led to huge losse s to company creditors, investors and employees but the reasons why the scandal took place had little effect on other parties (Sosnoff, 2002). The initial government response to the Enron bankruptcy was to impose new regulations that would give employees more flexibility to sell the company’s stock in their 401(k) re tirement plans. The new regulation would allow employees to sell any company stock contributed to 401(k) after 3 years. LUCRĂRI ŞTIIN ŢIFICE, SERIA I, VOL. XIII (3) 37 Enron followed a rule that allows a company to prevent employees to sell company stock, including 401(k), before the age of 50 (Stevenson & Labaton, 2002). Obviously, this was a very questionable practice when a company chooses to preserve its stock value at the expense of its employees.

At one point, the Enron employees had 60% of their 401(k) in Enron stock, causing them to lose more than $1 bill ion, as the share price fell from more than $90 in August 2000 to less than $1 when the company declared bankruptcy. Clearly, after the Enron scandal, investor sentiment was not expressed as public outrage but it affect ed the valuation of public firms and the US stock market and hence crea ting a need to improve investor confidence in US financial markets.

The revelation of “unethical” accounti ng policies by Enron and other firms (such as WorldCom) and the continuous weakness of the stock market, have determined political and public suppor t for free-market policies. It has already led to increased regulations of accounting and auditing authorized by the Sarbanes-Oxley Act and an incr ease in criticism of privatisation. The most significant changes broug ht on by the Sarbanes-Oxley Act include ( Joseph T. Wells, 334 ):

 The creation of the Public Comp any Accounting Oversight Board;  Requirements for senior financial officers to certify SEC filings;  New standards for auditor committee independence and for auditor independence;  Enhanced financial disc losure requirements;  New protection for those who disclose frauds;  Enhanced penalties for white-collar crime.

According to Gifford, SOX is a result of public demand to “do something” about a problem of concer n regarding American corporations (2004). However, the major potential pr oblem of the Act is that senior corporate managers may be held liab le for the illegal actions of their subordinates that these managers di d not direct or even know about. An FD Morgen-Walke survey s howed that 40% of portfolio managers and investors said that S OX reforms are insufficient to enhance accountability, while 56% say they are unconvinced that a public accountability board will be more eff ective than the old system. However, FACULTATEA DE MANAGEMENT AGRICOL 38 more than 53% believe that Enron-like scandals are not just work of a “few bad apples”, as the Bush administrati on indicated. But the investors see the SOX as a step in the right direction. Two out of three investors said that CEO/CFO certifications enforced and the penalties imposed would improve the accuracy of financial reporting (Smart Pros, 2002). Sarbanes-Oxley Act compliance is mandatory; therefore resources must be allocated to its implementation. As a re sult, the diversion of funds from other potentially profitable endeavours may result in improper investment which can further result in loss of value or innovation to companies. Furthermore, companies lo se productivity with the necessity of allocating employees to compliance instead of their usual profitable activity.

Also, some of the resources required to implement the Act cannot be included in rate of investment (RO I) calculations, hence in meeting ROI targets, the Act may fall s hort of acceptable levels. As a result of SOX, as found by a Wharton School study, delisting of public companies tripled in 2003 from 2002 ((Leuz, et, al., 2004). The study found that most companies de-listed their shares in an attempt to avoid high costs of complying with the Act, mostly because some smaller companies listing costs were as much as $500,000 to comply. Controversial or not, SOX “has of ten been described as the most important corporate reform legislation in the United States since the Securities and Exchange Act of 1934” (Business Law Online). In recent years, researchers have begun to examine the market reaction to the passage of the Sarban es-Oxley Act. Li, Pincus, and Rego (2004) find significantly positive stock returns associated with SOX’s final provisions, while Rezaee and Jain (2003) show a positive stock price reaction on several days before the passage of SOX. Several studies showed that cust omers believe it’s important for a business to seek out ways to employ good governance and that companies have a more positive image if they ar e doing something to make the world a better place. (Ptacek & Salazar, 1997; Weeks & Nantel, 1992). However, the public’s scepticism towards the actual results remains high. Obviously, no system of controls can prevent all misconduct, but a company can demonstrate that it has satisfied its obligation to implement good procedures and hence has a bett er chance to receive leniency.

A survey by Oversight Systems Inc. (2004) asked what impact SOX compliance had on shareholders value. 37% of respondents say SOX LUCRĂRI ŞTIIN ŢIFICE, SERIA I, VOL. XIII (3) 39 increase shareholder value as invest ors know they operate as an ethical business, while 25% of those questioned report that SOX boosts shareholder value by building overall confidence in the market. But the survey also showed the negative impact of SOX on the stock value. 33% of respondents say that SOX compliance created costs that suppress the stock prices, while 14% say that SOX decreased their ability to pay out dividends as compliance costs are draining their earnings. A 2003 study by AMR Research found out that as much as 85% of public companies are planning changes in their IT systems in order to support compliances to SOX To anal yze the effect on SOX on shares, Gompers, Ishii and Metric k (2003) construct a governance index to capture the extent of shareholders’ protection in a corporation using some of the governance rules. The researchers s how that the relationship between shareholders and executives is defined by the rules of corporate governance. John, Litov, and Yeung (2004), in a re search, show that an increase in investor protection reduces ex ecutives’ inclination to bypass risky projects that could bring value to the company. This suggests that SOX should lead to an increase in risk -taking by companies with weak shareholder rights. SOX applied to all companies in the United States. Of all the provisions, only two apply to nonprof its. However, these two provisions quickly sparked debates whether nonpr ofits should adhere to certain provisions of the Act. The provisions that apply to nonprofits refer to the Independent Audit Committee, auditor re sponsibilities, certified financial statements, “whistleblower” protec tion, document destruction policy, disclosure and insider transacti ons and conflicts of interest.

Although the debate regarding S OX compliance and effects have been mostly about United States companie s, little focus has been placed on effects of SOX compliance on the global trade. The Act requires companies involved in international trade to establish control for import-export operations and global supply chain. Th e processes must be published in annual and quarterly reports to investor s. Furthermore, companies have to report their efforts to “identify, assess a nd respond to risk such as terrorist attacks” (Field, 2004). Wrongful declarat ions and errors in valuation of import-export operations will face legal action under the new Act as well as under the Customs and Border Protecti on, the Department of Commerce and FACULTATEA DE MANAGEMENT AGRICOL 40 the Food and Drug Administration and ot her agencies. According to SOX, companies involved in international trad e have to disclose all off-balance sheet transactions, obligations and arrangements. Failure to comply, results in delisting the company by the SEC or barring of international trade. CONCLUSIONS It’s hard to believe that anyt hing good would come out after a scandal such as Enron. However, even with the loss of million of jobs and thousands of dollars, the lessons to be learned from Enron might be a valuable by-product of the entire scanda l. As a result of the scandal, the Sarbanes-Oxley Act forced companies to better control their accounting policies and make financial informati on more reliable. The scandal brought attention to the financial statement fraud by executives and, as a result, good governance has become a priority for mo st companies, while the focus on ethics in financial reporting has in creased investors confidence in some companies. The Sarbanes-Oxley Act has obv iously had an impact on the managerial structure and government re gulations of the public company.

The Act attempts to regulate what would normally be personal ethical decisions in a corporate world where ethics are not really of any interest anymore. SOX is an excellent step towards regulating corporate governance and is comparable to the legisl ation implemented in Europe. Sarbanes Oxley Act has both positiv e and negative effects. The Act has a predominating positive effect of increased investor confidence in the US financial market but also creates costs that result in lowered productivity of public companies and dilution of th e dominant US financial services market. REFERENCES 1. BERGEN LARA . (2005). The Sarbanes-Oxley Act of 2002 and its Effects on American Businesses . University of Massachusetts Boston. USA. 2. CHARY, VRK . (2004 ). Ethics in Accounting. Global Cases and Experiences . Punjagutta. The ICFAI University Press, India. LUCRĂRI ŞTIIN ŢIFICE, SERIA I, VOL. XIII (3) 41 3. JOHN C.COATES IV . (2007).The Goals and Promise of the Sarbanes- Oxley Act . 21 J. Econ. Persp. 91. USA.

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