企業(yè)倫理學(xué)（原書第5版）教案指導(dǎo) 第10章　公司治理與會計(jì)實(shí)務(wù)中的倫理決策

Chapter10-EthicalDecision-Making:CorporateGovernance,Accounting,andFinance

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Copyright?McGraw-HillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGraw-HillEducation.

IMChapter10:

EthicalDecision-Making:CorporateGovernance,Accounting,andFinance

ChapterObjectives

Afterreadingthischapter,youwillbeableto:

Explaintheroleofaccountantsandotherprofessionalsas“gatekeepers.”

Describehowconflictsofinterestcanariseforbusinessprofessionals.

OutlinetherequirementsoftheSarbanes-OxleyAct.

DescribetheCOSOframework.

Definethe“controlenvironment”andthemeansbywhichethicsandculturecanimpactthatenvironment.

Discussthelegalobligationsofamemberofaboardofdirectors.

Explaintheethicalobligationsofamemberofaboardofdirectors.

Highlightconflictsofinterestinfinancialmarketsanddiscussthewaysinwhichtheymaybealleviated.

Describeconflictsofinterestingovernance,createdbyexcessiveexecutivecompensation.

Defineinsidertradingandevaluateitspotentialforunethicalbehavior.

OpeningDecisionPoint

Volkswagen’sDieselFraud

TheVolkswagenscandalremainedintheheadlinesasthiseditionofthetextwenttopress(summer2017).WhilethisVWcasecanbeusedtohighlightnumerousethicalissues(e.g.,corporateculture,stakeholderresponsibility,employeeparticipation,professionalresponsibilities),manyofthecoreissuesdealwithdecision-makingandgovernanceatalllevelsoftheVWorganization.Manyofthesecoreissuesareaddressedinthediscussionquestions:

HowwouldyouassignresponsibilityfortheVWscandal?Whatshouldhavebeendonedifferentlyandbywhom?

Whoarethestakeholdersinthiscase?Howweretheinterestsofeachstakeholderrepresented?

Isitfairtoexpectanyemployee,includingprofessionalssuchasengineersandaccountants,toconfrontmanagementoverdirectivesthattheybelieveareunethical?

WhatchangestotheVWboardwouldyourecommendthatmighthelppreventfuturescandals?

Theco-determinationprinciplewascreatedtoensurethatemployeeshavearoleinmanagerialdecision-making,thuscreatingamoredemocraticworkplace.Whatarethebenefitsofthismodel?Whatarethedisadvantages?

Whatdoyouunderstandby“independent”boardmember?Whoorwhatshouldanindependentboardmemberrepresentthatwouldbedifferentfromotherboardmembers?

Introduction

Thefirsteditionofthistextbookwaswrittenin2006,soonafterawaveofmajorcorporatescandalshadshakenthefinancialworld.

Recallthosecompaniesinvolvedintheethicalscandalsduringtheearlyyearsofthiscentury:Enron,WorldCom,Tyco,Adelphia,Cendant,RiteAid,Sunbeam,WasteManagement,Health-South,GlobalCrossing,ArthurAndersen,Ernst&Young,ImClone,KPMG,J.P.Morgan,MerrillLynch,MorganStanley,CitigroupSalomonSmithBarney,Marsh&McLennan,CreditSuisseFirstBoston,andeventheNewYorkStockExchangeitself.

Atthecenterofthesescandalswerefundamentalquestionsofcorporategovernanceandresponsibility.

Significantcasesoffinancialfraud,mismanagement,criminality,anddeceitwerenotonlytolerated,butinsomecaseswereendorsedbythosepeopleinthehighestlevelsofcorporategovernancewhoshouldhavebeenstandingguardagainstsuchunethicalandillegalbehavior.

Sadly,theverysameissuesareasmuchalivetodayastheywereseveralyearsago.

Considertherashofproblemsassociatedwiththefinancialmeltdownin2007-08andtheproblemsfacedbysuchcompaniesasAIG,Countrywide,LehmanBrothers,Merrill-Lynch,BearStearnsandofthefinancierBernardMadoff.

ConsidertheVWscandaldescribedintheOpeningDecisionPoint

Onceagain,wehavewitnessedfinancialandethicalmalfeasanceofhistoricproportionsandtheinabilityofinternalandexternalgovernancestructurestopreventit.

Attheheartofthebiggestethicalandbusinessfailuresofthepastdecadewereaspectsoffinancialandaccountingsmisconduct:

Misconductrangedfrommanipulatingspecialpurposeentitiestodefraudlenders,tocookingthebooks,toinstitutingquestionabletaxdodges,toallowinginvestmentdecisionstowarptheobjectivityofinvestmentresearchandadvice,toPonzischemes,toinsidertrading,toexcessivepayforexecutives,todiceyinvestmentsinsub-primemortgagesandhedgefunds,toriskycreditdefaultswaps.

Ethicsinthegovernanceandfinancialarenashasbeenperhapsthemostvisibleissueinbusinessethicsduringthefirstyearsofthenewmillennium.

Accountingandinvestmentfirmsthatwereoncelookeduponastheguardiansofintegrityinfinancialdealingshavenowbeenexposedcorruptviolatorsofthefiduciaryresponsibilitiesentrustedtothembytheirstakeholders.

Manyanalystscontendthatthiscorruptionisevidenceofacompletefailureincorporategovernancestructures.

Aswereflectontheethicalcorruptionandfinancialfailuresofthepastdecade,somefundamentalquestionsshouldbeasked:

Whathappenedtotheinternalgovernancestructureswithinthesefirmsthatshouldhavepreventedthesedisasters?

Inparticular,whydidBoards,auditors,accountants,lawyers,andotherprofessionalsfailtofulfilltheirprofessional,legal,andethicalduties?

Couldbettergovernanceandoversighthavepreventedtheseethicaldisgraces?

Goingforward,canwerelyoninternalgovernancecontrolstoprovideeffectiveoversight,oraremoreeffectiveexternalcontrolsandgovernmentregulationneeded?

**TeachingNote:Tolinkgovernancetothediscussionofethicsthroughoutthetext,consideraskingstudentshowethicsplaysaroleingovernance.Howdoesethicsplayaroleinthesegovernancearenas?

Shareholderrights

Executivecompensation

Mergersandacquisitions

Compositionandstructureoftheboardofdirectors

Auditingandcontrol

Riskmanagement

CEOselectionandexecutivesuccessionplans

ProfessionalDutiesandConflictsofInterest

EthicalResponsibilities:

Thewatershedeventthatbroughttheethicsoffinancetoprominenceatthebeginningofthetwenty-firstcenturywasthecollapseofEnronCorporationanditsaccountingfirmArthurAndersen.

TheEnroncase“haswreakedmorehavocontheaccountingindustrythananyothercasesinU.S.history,”includingthedemiseofArthurAndersen.

**TeachingNote:ThetrailersfromtheEnronmovieneverceasetoamazestudents,evenyearslater:

/watch?v=0zMakN-EMLg

,yetmanyinstructorsstillprefer“greedisgood”from“WallStreet”:

/MovieSpeeches/moviespeechwallstreet.html

.

EthicalresponsibilitiesofaccountantswerenotunheardofpriortoEnron,buttheeventsthatledtoEnron’sdemisebroughtintofocusthenecessityoftheindependenceofauditorsandtheresponsibilitiesofaccountantslikeneverbefore.

Accountingisoneofseveralprofessionsthatserveveryimportantfunctionswithintheeconomicsystemitself.

EvenastaunchdefenderoffreemarketeconomicssuchasMiltonFriedmanbelievesthatmarketscanfunctioneffectivelyandefficientlyonlywhencertainrule-basedconditionsaremet.

Itisuniversallyrecognizedthatmarketsmustfunctionwithinthelawandtheymustbefreefromfraudanddeception.

TheLIBORratescandaldescribedinthefollowingDecisionPointisacaseofhowfraudcanunderminetheintegrityofanentirefinancialsystem.

Somearguethatonlygovernmentregulationcanensurethattheseruleswillbefollowed.

Othersarguethatenforcementoftheserulesistheresponsibilityofimportantinternalcontrolsthatexistwithinmarket-basedeconomicsystems.

Businessandeconomicmarketsrequirebusinessprofessionalstooperatewithintegrityandfairness.

*ChapterObjective1AddressedBelow*

Professionslikeattorneys,auditors,accountants,andfinancialanalystscanbethoughtofas“gatekeepers”“or“watchdogs”inthemarketplace.

Theirroleistoinsurethatthosewhoenterintothemarketplaceareplayingbytherulesandconformingtotheveryconditionsthatensurethemarketfunctionsasitissupposedtofunction.

Theserolesprovideasourceforrulesfromwhichwecandeterminehowprofessionalsoughttoact.

Inenteringintoaprofession,weacceptresponsibilitiesbasedonourroles.

Theseprofessionscanalsobeunderstoodasintermediaries,actingbetweenthevariouspartiesinthemarket,andtheyareboundtoethicaldutiesinthisroleaswell.

Alltheparticipantsinthemarket,especiallyinvestors,boards,management,andbankers,relyonthesegatekeepers:

Auditorsverifyacompany’sfinancialstatementssothatinvestors’decisionsarefreefromfraudanddeception.

Analystsevaluateacompany’sfinancialprospectsorcreditworthiness,sothatbanksandinvestorscanmakeinformeddecisions.

Attorneysensurethatdecisionsandtransactionsconformtothelaw.Indeed,evenboardsofdirectorscanbeunderstoodinthisway.

Boardsfunctionasintermediariesbetweenacompany’sstockholdersanditsexecutivesandshouldguaranteethatexecutivesactonbehalfofthestockholders’interests.

*ChapterObjective2AddressedBelow*

DecisionPoint:LIBORCheating

ThisDecisionPointisadaptedfromtheOpeningDecisionPointforthischapterinthepreviousedition.TheLIBORscandaldemonstratedwidespreadcorruptionandfailureofgatekeepersthroughoutthefinancialindustryinboththeU.K.andtheU.S.Thiscasecanbeusedtohighlighttheroleoforganizationalgatekeepersforinsuringtheintegrityofwider,moresystemicoperations.Thebankingsystemitselfrequiresindividualsworkingatprivatefirmstooperateinwaysthatmightsacrificeshort-termpersonalbenefitforthewell-beingofthesystemitself.individualsThus,thiscasecanalsoprovidealead-intotheagencyproblemintroducedbelow.

ConflictsofInterest:Themostbasicethicalissuefacingprofessionalgatekeepersandintermediariesinbusinesscontextsinvolvesconflictsofinterests.

Aconflictofinterestexistswhereapersonholdsapositionoftrustthatrequiresthatsheorheexercisesjudgmentonbehalfofothers,butwhereherorhispersonalinterestsand/orobligationsconflictwiththoseothers.

Example:Afriendknowsthatyouareheadingtoafleamarketandasksifyouwouldkeepyoureyesopenforanybeautifulquiltsyoumightsee.Sheasksyoutopurchaseoneforherifyouseea“greatbuy.”Youaregoingtothefleamarketforthepurposeofbuyingyourmotherabirthdaypresent.Youhappentoseeabeautifulquiltatafabulousprice,theonlyoneatthemarket.Infact,yourmotherwouldadorethequilt.Youfindyourselfinaconflictofinterest–yourfriendtrustedyoutosearchthefleamarketonherbehalf.Yourpersonalinterestsarenowinconflictwiththedutyyouagreedtoacceptonbehalfofyourfriend.

Conflictsofinterestcanalsoarisewhenaperson’sethicalobligationsinherorhisprofessionaldutiesclashwithpersonalinterests.

Example:Afinancialplannerwhoacceptskickbacksfromabrokeragefirmtosteerclientsintocertaininvestmentsfailsinherorhisprofessionalresponsibilitybyputtingpersonalfinancialinterestsaheadofclientinterest.

Suchprofessionalsaresaidtohavefiduciaryduties—aprofessionalandethicalobligation—totheirclients,dutiesthatoverridetheirownpersonalinterests.

DecisionPoint

HowtoSolvethe“AgencyProblem”

ThisDecisionPointexploreswhatmanyobserverscall“adeepproblem”attheheartofmoderncapitalisteconomies.Moderneconomiesrelyonsomeindividuals,called“agents,”whoworkforthebestinterestsofothers,the“principals.”Forthesystemtowork,agentsmustbeloyalrepresentativesoftheirprincipal’sinterests,eveninthosesituationswhentheirownpersonalinterestisatstake.Forexample,amemberofaboardofdirectorsactsasanagentforthestockholders,executivesactasagentsofboards,andattorneysandaccountantsactasagentsfortheirclients.Thisagent-principalmodelassumesthatindividualscanputtheirowninterestsonhold,andbesufficientlymotivatedtoactonbehalfofanother.But,thiswouldseemtoruncountertoaviewofhumannaturethatisassumedbymuchofmoderneconomictheory:individualsareself-interested.Thus,the“agencyproblem.”Howcanwetrustself-interestedindividualstoactforthewell-beingofothersincaseswheretheirownself-interestmustbesacrificed?

Manyoftheethicalfailuresdescribedinthischaptercanbeseenasexamplesoftheagencyproblem.Thesearepreciselythosesituationswhereboardshavefailedtoprotecttheinterestsofstockholders,executiveshavefailedtoservetheirboards,accountants,lawyers,andfinancialanalystshavefailedtoactonbehalfoftheirclients.

Economicsandmanagementtheoristshaveofferedseveralsolutionstotheagencyproblem.Somearguethatthebestsolutionistocreateincentivesthatconnecttheagent’sself-interestwiththeself-interestoftheprincipal.Linkingexecutivecompensationtoperformancebymakingbonusescontingentonstockpricemeansthatanexecutivegainsonlywhenstockholdersgain.Anotherapproachistocreatestructuresandinstitutionsthatrestrictanagent’sactions.Strictlegalconstraintswouldbethemostobviousversionofthisapproach.Agentshavespecificlegaldutiesofloyalty,confidentiality,andobedienceandfacecriminalpunishmentsiftheyfailtoupholdthoseduties.Professionalorcorporatecodesofconductandotherformsofself-regulationarealsoversionsofthisapproach.

Thesetwomostcommonanswersshareafundamentalfeature;theagencyproblemcanbesolvedbyconnectingmotivationtoactontheprincipal’sbehalfbacktotheagent’sownself-interest.Inthefirstcase,motivationisintheformofthe“carrot”andtheagentbenefitsbyservingtheprincipal;inthesecondcase,motivationisintheformofthe“stick,”andtheagentsuffersifshefailstoserveherprincipal.

Athirdanswertotheagencyproblemdeniesthattheretrulyisaproblembydenyingthatself-interestdominateshumanmotivation.Thisthirdapproachpointsoutthat,infact,humansregularlyactfromloyalty,trust,andaltruism.Humanrelationshipsarebuiltontrustandreliability;andthesemotivationsarejustasbasic,justascommon,asself-interest.Thus,thisapproachwouldencouragecorporationstolooktomoralcharacteranddeveloppoliciesandpracticesthatreinforce,shape,andconditionpeopletowanttodotherightthing.

Studentsshouldconsiderthefollowingquestionswhenassessingthisscenario:

Canyouthinkofexamplesinyourownexperiencewheresomeoneisrequiredtoworkasanagentforanother,orwhenyouwereinvolvedasanagent?Howistheagentmotivatedinthisparticularcase?

Ifyouwereaskedtodesignapolicythatwouldprovideasolutiontotheagencyprobleminthecompanythatyouwork,wherewouldyoubegin?

ReviewthesectiononvirtueethicsinChapterThreeandexplainhowtheagencyproblemwouldbeviewedfromthatperspective.

Underwhatcircumstances,orforwhatkindsoftasks,doyouthinkagencyproblemsaremostlikelytobeachallenge?

Manyoftheseprofessionalintermediariesarepaidbythebusinessesoverwhichtheykeepwatch,andperhapsarealsoemployedbyyetanotherbusiness.

Forexample,DavidDuncanwastheprincipalaccountingprofessionalemployedbyArthurAndersen,thoughhewashiredbyandassignedtoworkatEnron.

AstheArthurAndersencasesoclearlydemonstrated,thissituationcancreaterealconflictsbetweenaprofessional’sresponsibilityandhisorherfinancialinterests.

Certifiedpublicaccountants(CPAs)haveaprofessionalresponsibilitytothepublic.Buttheirclients’financialinterestsarenotalwaysservedbyfull,accurate,andindependentdisclosureoffinancialinformation.

CPAsworkdailywithandarehiredbyamanagementteamthatitselfmighthaveintereststhatconflictwiththeinterestsofthefirmrepresentedbytheboardofdirectors.

Realandcomplexconflictscanexistbetweenprofessionaldutiesandaprofessional’sself-interest.

*Reference:Figure10.1–ConflictsofInterestinPublicCPAActivity*

Inonesense,theethicalissuesregardingsuchprofessionalresponsibilitiesareclear.

Becauseprofessionalgatekeeperdutiesarenecessaryconditionsforeconomiclegitimacy,theyshouldtrumpotherresponsibilitiesanemployeemighthave.

Example:DavidDuncan’sresponsibilitiesasanauditorshouldhaveoverriddenhisroleasanAndersenemployee,inlargepartbecausehewashiredasanauditor.

But,knowingonesdutiesandfulfillingthosedutiesaretwoseparateissues.

DecisionPoint

WhattoDoWhenFacedWithConflictsofInterests.

Conflictsofinterestarequitecommoninmoderncommerce,andinlifemoregenerally,duetothelargenumberofsituationsinwhichindividualsneedtoputtheirtrustintheadviceorjudgmentofotherpeople.Wetrustourdoctorstotakecareofuswhenweareill;wetrustourlawyerstogiveusgoodlegaladvice;andwetrustourinvestmentadvisortogiveusgoodadviceregardinginvestments.Ineachcase,wewouldrightlyworryifwefoundthattheprofessionalwearerelyingonhadsomeinterest,suchasafinancialorpersonalinterest,intheissueathand.Weexpectthemtofocusonourinterests,nottheirs.

Itisimportanttoseethatconflictofinterestisnotanaccusation—itisasituation.Youcaneasilyfindyourselfinaconflictofinterest,throughnofaultofyourown.Sometimesconflictsofinterestareimpossibletoavoidentirely.Therealquestion,fromanethicalpointofview,ishowyouhandlethesituation.

Onesolutionthatisgenerallynotappropriateissimplyto“tryhard”toactinanunbiasedway.Thatis,individualintegrityisnotasolution.Manybiasesareunconscious,and,wheninaconflictofinterest,evenapersonofthehighestintegrityhasreasontomistrusthisorherownjudgment.

Herearethestandardstepsthatmostexpertsrecommend,whenyoufindyourselfinaconflictofinterest:

Notifytherelevantstakeholders.(Ifyou’reonahiringcommittee,forexample,andyounoticeyoursister’sCVinthepile,youshouldspeakupimmediatelytonotifytherestofthecommitteethatyouareinaconflictofinterest.)

Ifpossible,removeyourselffromthedecisionmaking.(Inthehiringexample,youshouldexcuseyourselffromthecommitteeentirely,ifpossible.Ifthat’simpossible—perhapsyouhavespecialexpertisethatthecommitteeisrelyingon—thenyoushouldatleastleavetheroomwhileyoursister’sCVisbeingconsideredandranked.Butthatisadistantsecondbest!

EthicalImplications:Agencyresponsibilitiesgeneratemanyethicalimplications.

Ifwerecognizethatthegatekeeperfunctionisnecessaryfortheveryfunctioningofeconomicmarkets,andifwealsorecognizethatself-interestcanmakeitdifficultforindividualstofulfilltheirgatekeeperduties,thensocietyhasaresponsibilitytocreateinstitutionsandstructuresthatwillminimizetheseconflicts.

Forexample:Aslongasauditorsarepaidbytheclientsonwhomtheyaresupposedtoreport,therewillalwaysbeanapparentconflictofinterestbetweentheirdutiesasauditorsandtheirpersonalfinancialinterests.

Thisconflictisagoodreasontomakestructuralchangesinhowpublicaccountingoperates.

Perhapsboardsratherthanmanagementoughttohireandworkwithauditorsbecauseauditorsaremorelikelyreportingonthemanagementactivitiesratherthanthoseoftheboard.

Perhapspublicaccountingsomehowoughttobepaidbypublicfees.

Perhapslegalprotectionorsanctionsoughttobecreatedtoshieldprofessionalsfromconflictsofinterests.

Thesechangeswouldremoveboththeapparentaswellastheactualconflictsofinterestcreatedbythemultipleroles—andthereforemultipleresponsibilities—oftheseprofessionals.

Fromtheperspectiveofsocialethics,certainstructuralchangeswouldbeanappropriateresponsetotheaccountingscandalsofrecentyears.

BrokenTrust:PerhapsthemostdevastatingaspectofthebankingindustrymeltdownofthefirstdecadeofthiscenturywastheresultingdeteriorationoftrustthatthepublichasinthemarketandincorporateAmerica.

Decision-makersinlargeinvestmentbanksandotherfinancialinstitutionsignoredtheirfiduciarydutiestoshareholders,employees,andthepublicinfavorofpersonalgain.

Thiswasadirectconflictofinterestleadingnotonlytoextraordinarypersonalruinbutalsotothedemiseofsomeofthelargestinvestmentbanksintheworld.

ThefactisthatmajorfederallegislationenactedafterEnrontoprovideregulatorychecksonsuchbehaviorfailedtopreventitfromhappening.

Despitethesegovernmentrules,thewatchdogsstillhavelittleabilitytopreventharm.

Changeswithintheaccountingindustrystemmingfromtheconsolidationofmajorfirmsandavid“cross-selling”ofservicessuchasconsultingandauditingwithinsinglefirmshavevirtuallyinstitutionalizedconflictsofinterests.

Answerstotheseinherentchallengesarenoteasytoidentify.

Imagineanexecutiveispaidbasedonhowmuchheorsheimpactsthesharepriceandwillbeoustedifthatimpactisnotsignificantlypositive.

Alargeboostinshareprice,evenfortheshortterm,servesasaneffectivedefensetohostiletakeoversandboostsafirm’sequityleverageforexternalexpansion.

Inaddition,withstockoptionsasamajorcomponentofexecutivecompensationstructures,ahighersharepriceisanextremelycompellingquesttothoseinleadershiproles.

Thatsameexecutive,however,hasafiduciarydutytodowhatisbestforthestakeholdersinthelongterm,anobligationthatisoftenatoddswiththatexecutive’spersonalinterests.

Theseconflictscreateaverychallengingenvironmentforexecutivedecision-making.ConsidertheoptionsavailableintheDecisionPoint,“CronyCapitalism:IsGovernment-BusinessPartnershiptheAnswer?”

DecisionPoint

CronyCapitalism:IsGovernmentBusinessPartnershiptheAnswer?

Thiscaseexploresthepoliticalvaluesatstakewhengovernmentcooperatestoocloselywithbusinessorganizations.Justasindividualswithinanorganizationcanfaceconflictsofinterests,socangovernmentregulators,theverystructurethatisdesignedtoaddressfraudandmalfeasance.

TheSarbanes-OxleyActof2002

GovernmentIntervention:Thestringofcorporatescandalssincethebeginningofthemillenniumhastakenitstolloninvestorconfidence.Themoreitisclearthatdeceit,evasivenessandcuttingcornersgooninthemarketsandinthecorporateenvironment,thelesstrustworthythoseengagedinfinancialservicesbecome.

Becauserelianceoncorporateboardstopolicethemselveswasnotworking,CongresspassedthePublicAccountingReformandInvestorProtectionActof2002,commonlyknownastheSarbanes-OxleyAct,whichisenforcedbytheSecuritiesandExchangeCommission(SEC).

Theactappliestoover15,000publiclyheldcompaniesintheUnitedStatesandsomeforeignissuers.

Inaddition,anumberofstateshaveenactedlegislationsimilartoSarbanes-Oxleythatapplytoprivatefirmsandsomeprivatefor-profitsandnonprofitshavebeguntoholdthemselvestoSarbanes-Oxleystandardseventhoughtheyarenotnecessarilysubjecttoitsrequirements.

*ChapterObjective3DiscussedBelow*

RegulationandProtection:Sarbanes-Oxleystrivedtorespondtothescandalsbyregulatingsafeguardsagainstunethicalbehavior.

Becauseonecannotnecessarilypredicteachandeverylapseofjudgment,noregulatory“fix”isperfect.However,theactisintendedtoprovideprotectionwhereoversightdidnotpreviouslyexist.

Sarbanes-Oxleyseekstoprovideoversightintermsofdirectlinesofaccountabilityandresponsibility.

Thefollowingprovisionshavethemostsignificantimpactoncorporategovernanceandboards:

Section201:Servicesoutsidethescopeofauditors(prohibitsvariousformsofprofessionalservicesthataredeterminedtobeconsultingratherthanauditing).

Section301:Publiccompanyauditcommittees(requiresindependence),mandatingmajorityofindependentsonanyboard(andallonauditcommittee)andtotalabsenceofcurrentorpriorbusinessrelationships.

Section307:Rulesofprofessionalresponsibilityforattorneys(requireslawyerstoreportconcernsofwrongdoingifnotaddressed).

Section404:Managementassessmentofinternalcontrols(requiresthatmanagementfileaninternalcontrolreportwithitsannualreporteachyeartodelineatehowmanagementhasestablishedandmaintainedeffectiveinternalcontrolsoverfinancialreporting).

Section406:Codesofethicsforseniorfinancialofficers(required).

Section407:Disclosureofauditcommitteefinancialexpert(requiresthattheyactuallyhaveanexpert).

Sarbanes-Oxleyincludesrequirementsforcertificationofthedocumentsbyofficers.

Whenafirm’sexecutivesandauditorsarerequiredtoliterallysignoffonthesestatements,certifyingtheirveracity,fairness,andcompleteness,theyaremorelikelytopersonallyensuretheirtruth.

Oneofthemostsignificantcriticismsoftheactisthatitimposesextraordinaryfinancialcostsonthefirms.Andthecostsareevenhigherthananticipated.

A2005surveyoffirmswithaveragerevenuesof$4billionconductedbyFinancialExecutivesInternationalreportsthatsection404complianceaveraged$4.36million,whichis39percentmorethanthosefirmsthoughtitwouldcostin2004.

Thesurveyalsoreportedthatmorethanhalfthefirmsbelievedthatsection404givesinvestorsandotherstakeholdersmoreconfidenceintheirfinancialreports,makingitavaluableasset.

Thechallengeisinthebalanceofcostsandbenefits:

Somesaythatsection404iswellintentioned,buttheimplementationeffortcanbeoverkill.

Inresponse,oneyearafteritsimplementation,inMay2005,thePublicCompanyAccountingOversightBoard(PCAOB)releasedastatementpubliclyacknowledgingthehighcostsandissuingguidanceforimplementation“inamannerthatcapturesthebenefitsoftheprocesswithoutunnecessaryandunsustainablecosts.”

ThePCAOBnowadvocatesamorerisk-basedapproachwherethefocusofinternalauditassessmentsisbetteralignedwithhigh-riskareasthanthosewithlesspotentialforamaterialimpact.

ForacomparisonoftheapplicationofSarbanes-OxleyintheEuropeanUnion,seetheRealityCheck,“GlobalConsis