Corporate ethics in the post-Enron era from the role of a policy analyst



Glossary

SOX: Sarbanes-Oxley Act

GAAS: Generally Accepted Auditing Standards

SAS: Statement on Auditing Standards

PCAOB: Public Company Accounting Oversight Board

AICPA: American Institute of Certified Public AccountantsCorporate Ethics in the Post-Enron Era

Introduction

Corporate Governance is essentially about what is business for and in whose interests companies should be run, i.e. the shareholders. The paper attempts to explicate findings on stricter regulations around corporate governance and different perspectives on how it has changed the corporate world. Beginning with agency problems, some results are found around regulations.

Discussion

After passing the Sarbanes-Oxley Law followed a loss of $1.4 trillion in shareholder wealth. Steve Schwarzman, CEO of private-equity juggernaut Blackstone, recently said that Sarbanes-Oxley "is probably the best thing that's happened to our business and one of the worst things that has happened to America." One reason may be that many public corporations find SOX so costly that they are trying to go private. From Public to Private to Avoid the Act. After its implementation, many companies have realized how timely and costly the SOX Act is. Public companies' (those entities that have active investors) first inclination to the Act was to “go private” (Frank, 2009).

According to Christian Leuz, going-private transactions are determined by the entities themselves along with internal management, who decide to take less than three hundred shareholders for their company. This allows the companies to deregister from the Securities Exchange Commission (SEC). Going private is commonly known as “going dark” because privatizing entities takes away their ability to finance investments and innovations for the companies, as it changes the entire organizational form. It involves a recapitalization or concentration of ownership. However, remaining a public firm with fully invested shareholders allows companies to continue their growth through means of financing. The difficult decision to stay Public while increasing the level of regulation within the companies, or go private and losing most investors is far from being simple, especially when it comes to compliance with Sarbanes-Oxley (Leuz, 2007).

Major factors in determining whether to go private include not only expenses of implementation, but the tendency to overspend on attempting to strengthen internal control. It is stated that firms that have strong formal internal controls find it easier to adjust with the additional SOX requirements than firms that have fewer and less formal controls; no doubt this is due to the fact that companies with more efficient internal controls are spending less money on strengthening internal controls themselves since they are already seen as effective (Leuz, 2007).

Of course, the companies with weak internal controls may consider going-private more than companies who are healthier control-wise. However, as long as companies are still staying competitive in the market, whether they are private or public, they are still actively contributing to the economy. It can be inferred that it is better to change your company's position (public to private) than to have the stress and expenses of complying with SOX (Hastings, 2010).

Sarbanes-Oxley covers a range of rules for public ...