Integrating Sarbanes-Oxley, Leadership, and Ethics

By Koestenbaum, Peter; Keys, Patrick J. et al. | The CPA Journal, April 2005 | Go to article overview

Integrating Sarbanes-Oxley, Leadership, and Ethics


Koestenbaum, Peter, Keys, Patrick J., Weirich, Thomas R., The CPA Journal


The current lack of confidence in corporate financial reporting has been a contributing factor to the recent slowdown in U.S. capital markets. Congress' response, the Sarbanes-Oxley Act of 2002 (SOA), has created a new system of checks and balances that will have a significant and long-lasting impact on corporate America as well as on independent public accountants.

To implement SOA. various bodies, including the SEC and the Public Company Accounting Oversight Board (PCAOB). are developing many new rules and guidelines. Nonetheless, SOA compliance will not by itself ensure that corporate scandals do not recur. Legislation rarely stops unethical acts or immoral behavior; rather, it provides a way to deal with such behavior within the legal system. Individual professionals and businesspeople have an enormous stake in preventing future corporate scandals.

Investor trust is premised on a strong and viable corporate control system. At its foundation is a code of ethical behavior that aligns the long-term interests of the corporation with the long-term interests of the shareholders. In a 2002 CNN/USA Today/Gallup Poll, 73% of respondents said that CEOs could not be trusted.

Setting the Tone at the Top

An important challenge to corporations and CEOs is the creation of a "tone at the top" that promotes ethical conduct and permeates the corporate culture. Such an environment would ideally deter misconduct before it takes place rather than punishing it after the damage has been done. A major determinant of such a proactive ethical environment is strong, high-quality leadership provided by senior executives. We need a new business model in which ethics and profitability are treated as complementary rather than as mutually exclusive. SOA underscores this need by requiring public registrants to have corporate codes of ethics.

Developing a comprehensive solution to mitigate an organization's exposure to unethical activity will be difficult. A comprehensive solution should address more than one fundamental issue or cause. We must resist the temptation to implement quick fixes. Current and future business leaders are products of business schools, which often teach that money always comes before ethics. Because the foundations of the business establishment have been shaken by the examples of insider trading, manipulative accounting, and blatant fraud, any solution must address and rebuild those foundations. Sustainable solutions will involve profound paradigm shifts and self-improvement.

Compliance with SOA and punishment for noncompliance are critical parts of the solution. The remainder consists of components that address:

* Sustainability;

* The role of leadership:

* Behaviors and attitudes throughout the corporation; and

* Continuous improvement.

Boards of directors will still demand results that meet or exceed past performance. Stock analysts will continue to focus on bottom-line results. Shareholders will continue to demand return for their ownership of the company. In fact, one could argue that the post-SOA scrutiny has put more pressure on executives to drive outstanding corporate results. There is certainly more scrutiny from the press and the sec. Customers, investors, the government, activist groups, and the media are all more aware and involved than before.

Crucial to determining the components of a sustainable solution is determining the fundamental causes of the scandals. The fact that the perpetrators did not follow established processes, or that the established process and procedures were weak, is not the fundamental issue. Regardless of how much pressure the perpetrators experienced from company leadership, the board of directors, and the marketplace, the fundamental issue is that the perpetrators chose to participate in unethical behavior.

Ethics as a Corporate Asset

Each company must develop a mechanism for successfully communicating and integrating appropriate ethical values into the corporate culture. …

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