Likely Effects of Stock Exchange Governance Proposals and Sarbanes-Oxley on Corporate Boards and Financial Reporting

By Klein, April | Accounting Horizons, December 2003 | Go to article overview

Likely Effects of Stock Exchange Governance Proposals and Sarbanes-Oxley on Corporate Boards and Financial Reporting


Klein, April, Accounting Horizons


SYNOPSIS: One of the primary aims of the Sarbanes-Oxley Act of 2002, the New York Stock Exchange, and the NASDAQ corporate governance proposals is to improve the reporting systems for publicly traded companies. Many of the exchange proposals redefine the composition and duties of firms' boards of directors and their compensation and nominating committees. Sarbanes-Oxley places new duties on audit committees and provides oversight and restraints on public accounting companies. This paper describes many of the exchange proposals and puts them in their historical context. I also present the likely effects of the new corporate governance proposals on future boards of directors and assess their impact on the financial reporting system.

INTRODUCTION

The NYSE and the NASDAQ increasingly are banking on the ability of independent boards and board-monitoring committees to improve the financial reporting system. The move began in December 1999 when the NYSE and the NASDAQ adopted new listing requirements aimed at strengthening the independence requirement of audit committees for listed firms. December 1999 also ushered in strict and more explicit definitions of who is an independent audit committee director. However, despite these new requirements, a spate of highly publicized financial accounting failures occurred during 2000-2002. These failures included Enron, WorldCom, and Xerox, each Fortune 500 firms. Simultaneously, the Dow Jones 30 Index and the NASDAQ Composite Index lost 24 percent and 66 percent of their values, respectively, over this three-year period. Although much of their declines were related to recessionary factors, one cannot totally discount the adverse effects that the accounting scandals had on market values.

The NYSE and the NASDAQ responded to these financial accounting irregularities and erosion of shareholder confidence in the market system by proposing new corporate governance rules for listed firms. Quoting from the NYSE's August 1, 2002 press release:

   The New York Stock Exchange's board of directors today approved
   significant changes in its listing standards aimed at helping to
   restore investor confidence by empowering and ensuring the
   independence of directors and strengthening corporate-governance
   practices.

Simultaneously, the U.S. Congress amended the Securities Exchange Act of 1934 by passing the Sarbanes-Oxley Act of 2002. While this Act tangentially touches on board and audit committee independence issues, it provides a series of other corporate governance mechanisms and requirements intended to improve public companies' financial reporting systems. These mechanisms include creating an accounting oversight board, requiring CEOs and CFOs to certify their financial reports, and mandating fuller disclosures of off-balance-sheet items. The Sarbanes-Oxley Act also expands the power and scope of audit committees.

This essay describes and comments on the exchanges' corporate governance proposals. After a brief outline of the entire scope of the proposals, (1) I discuss the December 1999 audit committee regulations, highlighting their relationship to the proposed regulations. In particular, overall director independence, as defined in the current proposals, is related closely to the 1999 definitions of an independent audit committee member. Although the paper focuses on the NYSE and NASDAQ proposals related to overall board of directors and specific board-monitoring committees, I also discuss how Sarbanes-Oxley both complements and reinforces the exchange proposals.

As appropriate, I review existing academic studies that examine whether discernible links exist between the presence of independent directors on boards and board committees and the financial accounting reporting system. This review aids in understanding both the December 1999 listing requirements for audit committees and the new proposals seeking to strengthen the independence of the overall board and the board's nominating and compensation committees. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Likely Effects of Stock Exchange Governance Proposals and Sarbanes-Oxley on Corporate Boards and Financial Reporting
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.