Problem
Corporate Governance
Corporate governance is defined as the structure by which corporations are managed, directed, and controlled towards the objectives of fairness, accountability, and transparency. The structure generally will determine the relationship between the board of directors, the shareholders or owners of the firm, and the firm's executives or management. At the heart of the biggest ethical and business failures of the past decade were aspects of financial and accounting misconduct, ranging from manipulating special purpose entities to defraud lenders, to cooking the books, to instituting questionable tax dodges, to Ponzi schemes,, to insider trading, to excessive pay for executives, to questionable investments in sub-prime mortgages and hedge funds, to risky credit default swaps. Ethics in the governance and financial areas have been the most visible issue in business ethics in the last 10 years. Accounting and investment firms that were once considered the guardians of integrity in financial dealings have now been exposed as corrupt violators of the fiduciary responsibilities entrusted to them by their stakeholders.
Professional Duties and Conflicts of Interest
The watershed event that brought the ethics of finance and accounting to prominence at the beginning of the century was the collapse of Enron and its accounting firm, Arthur Anderson, as detailed in the movie you previously viewed, Enron: The Smartest Guys in the Room. Read the article by C. William Thomas, The Rise and Fall of Enron. The article details the steps that led to the downfall of those companies, including using complex special purpose entities to access capital or hedge risk. Ethical responsibilities of accountants were not unheard of prior to Enron, but the events that led to Enron's demise brought into focus the necessity of independence of auditors and the responsibilities of accountants like never before. Accounting is one of several professions that serve very important functions within the economic system itself. It is universally recognized that markets must function within the law and they must be free from fraud and deception. Many argue that only government regulations can ensure that the rules will be followed. Others argue that enforcement of these rules is the responsibility of important internal controls that exist within market-based economies. Business and economic markets require that attorneys, auditors, accountants, and financial analysts act with integrity and fairness. The record of the past ten years is a testament to what happens when they don't. These professionals act as gatekeepers. The most basic ethical issue facing professional gatekeepers and intermediaries in business contexts involves conflicts of interest. A conflict of interest exists where a person holds a position of trust that requires he or she exercise judgment on behalf of others, but where his or her personal interests and/or obligations conflict with those of others. Conflicts of interest can also arise when a person's ethical obligations in his or her professional duties clash with personal interests. Such professional are said to have fiduciary duties. In one sense, the ethical issues regarding such professional responsibilities are clear. Because professional gatekeeper duties are necessary conditions for the fair and effective functioning of the economic markets, they should trump other responsibilities to one's employer. But knowing one's duties and fulfilling one's duties are two separate issues. If we recognize that the gatekeeper function is necessary for the effective functioning of the markets, and if we also recognize that self-interest can make it difficult for individuals to fulfill their gatekeeper duties, then society has a responsibility to create institutions and structures that will minimize these conflicts.
The Sarbanes-Oxley Act of 2002
The string of corporate scandals since the beginning of the 21st century has taken its tolls on investor confidence. The more the investor as well as s the average citizen sees the deceit, chicanery, evasiveness, and cutting corners that goes on in the market and in the corporate environment, the less trustworthy those engaged in financial services become. As it became clear that reliance on corporate boards to police themselves did not seem to be working, Congress passed the Public Accounting Reform and Investor Protection Act of 2002, commonly known as the Sarbanes-Oxley Act, which is enforced by the Securities and Exchange Commission. The act applies to over 15,000 publicly held companies in the U.S. and some foreign issuers. Many states followed with legislation similar to Sarbanes-Oxley that apply to private firms, and some non-profit firms have begun to hold themselves to the same standards even though they are not subject to the standards. The following articles discuss the parameters and costs of Sarbanes-Oxley.
After reviewing the textual material, what do you believe are the greatest challenge(s) to corporate governance in American companies today? Explain your answer. You may use your experiences from the Simulations to support your response.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.