Magazine article Strategic Finance

Will Sarbanes-Oxley Improve Ethics?

Magazine article Strategic Finance

Will Sarbanes-Oxley Improve Ethics?

Article excerpt

A LOT OF ATTENTION HAS BEEN PAID TO SECTION 404 of the Sarbanes-Oxley Act of 2002 (SOX) and its requirements for management certification and external auditor attestation of internal controls. But it's the ethics aspects of SOX that may be more important to achieving the law's objectives. And almost forgotten is the axiom that controls are only as effective as the control environment allows them to be. The "tone at the top" is critically important.

Section 406 of SOX requires all public companies to have a code of conduct for senior management and financial officers that contains appropriate compliance and enforcement procedures. Pursuant to SOX, the stock exchanges have expanded this requirement to require the code to cover all directors, officers, and employees and have made it a condition of continued listing.

There are several determinants of success for a code of conduct. First is an awareness of the code and sensitivity to its application. Codes that are put into an employee manual and never referred to become meaningless. The New York Stock Exchange believes so much in publicity for a company's code that it is required to be published on a company's website.

SEC Chairman William Donaldson has also addressed the importance of ethics in corporate governance as well as the importance of the board of directors. He has advised that companies, management, directors, and the gatekeepers who serve them must go beyond simply conforming with the letter of the new laws and regulations that have been adopted in response to corporate scandals. In a speech at the 2003 Washington Economic Policy Conference, Donaldson encouraged boards to "define the culture of ethics that they expect all aspects of the company to embrace. The philosophy that they articulate must pertain not only to the board's selection of a chief executive officer, but also to the spirit and very DNA of the corporate body itself--from top to bottom and from bottom to top" (speech available at www.sec.gov/news/speech/spch032403 whd.htm). In spite of the need for more director involvement in matters of ethics, research at the 2003 Conference Board Business Ethics Conference showed that 73% of companies hadn't provided ethics training to members of the board of directors.

Another and perhaps even more important factor in achieving an ethical control environment and successful compliance program is the willingness for people to step forward with information that may indicate wrongdoing. …

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