Sarbanes - Oxley Analysis - cont.

Sarbanes - Oxley Analysis

To paraphrase Clarence Darrow, one of the things that is bad about history, is that it repeats itself. As such, one would think that the stock market crash of 1929, and the resultant laws that passed, such as the Securities Act of 1933, and the Securities Exchange Act of 193, would have prevented the financial crises that have occurred in the new millennium.

A prudent person wouldn't think that lightning could strike in the same place twice. S/he could not envision that mere decades later, another round of similar legislation in the form of the Sarbanes-Oxley (SOX) Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 would be required. Yet, this has proven to be the case, and the nation collectively wonders, why?

Could it be that corporate leaders employ one set of ethics for their professional responsibilities, another for familial duties, and yet another for personal activities. This begs the question: Is it lack of legislation, or lack of ethics, that gets American business into trouble.

Business Ethics in the American Economy

Ethical Survey Findings

To garner a sense of the current state of business ethos, we shall look at the 2011 National Business Ethics Survey (NBES). The survey conducted by the Ethics Resource Center (ERC) presents a dichotomized pattern and portrayal, unlike that of any other year.

As compared to previous years, there were lower levels of misconduct in the workplaces of America.  In 2007, there was a record high of 55 percent of workers witnessing misconduct in the workplace.  The wide pattern of misconduct ran the gamut from; abuse of company resources, violations of employee benefits, conflicts of interest, to the egregious, stealing, financial record misrepresentation, sexual harassment, discrimination, and environmental violations. By 2011, the percentage of employees who had witnessed misconduct at work fell to a low of 45 percent, down from the previous survey period of 2008, which had reported 49 percent.

The 2011 survey also reported record high levels of employee who were willing to come forward on misconduct they had seen.  In 2011, 65 percent were willing to do so, up from 63 percent in 2009, and 53 percent in 2005.

 While these findings may seem to portend that ethical conduct in the workplace has taken a turn for the better, sadly this is not the case. Though more employees were willing to become whistle-blowers, the levels of repercussions that they face has risen dramatically  In 2011, 22 percent who came forward on misconduct, experienced repercussions, as contrasted with 15 percent in 2009, and 12 percent in 2007.

There was also an uptick in the companies with weak ethical cultures, from 35 percent in 2009, to 42 percent in 2011. One causal factor that is unique and challenging is the use of social networking in the workplace.  Workers who were heavy social network users were found to be more likely to experience pressure to compromise ethics standards.  The rate for retaliation for whistle-blowing was 56 percent, as compared to the 18 percent of workers who did not utilize social networks as much.

Inadequate ethics training. Can it be that business schools are not adequately preparing future business leaders with the ethical skill-sets they need (Korten 2009). Business schools emphasize analytical skills in the furtherance of the bottom line, without concern for the ethical ramifications, is the assertion of many critics. (Mitroff et al., 2004)

Business schools traditionally have taught agency theory, which has as its underpinnings self-interest as a motivating factor (Profitt, 2000).  Students have been taught "artificial value" transactions-based economy (Makansi, 2009) laissez-faire capitalism, and emphasis on short-term profits at the expense of long-term profitability and responsibility to stakeholders (Mitroff,  2004). From the emphasis placed on these theories in business school curriculum, it would be quite easy to infer that business student do not feel they are bound by ethical constraints (Goshal, 2005).

Laws Governing the Securities Industry

Prior to Sarbanes-Oxley

 Detractors of Sarbanes-Oxley state that implementing SOX would produce a financial hardship to many corporations. They assert that the economic toll would cause jobs to be lost, and force many American companies to leave the country. They also allege that there was already enough legislation on the books, and that additional legislation was not required.

 Securities Act of 1933. This act is colloquially known as the truth in securities law. This law mandates that investors receive financial and other relevant information on securities that was being offered for public sale. The law also proscribe against fraud, deceit, and misrepresentation in the sale of securities.

Securities Exchange Act of 1934.  The Securities and Exchange Commission (SEC) was created by this act.  The SEC is tasked with the registration, regulation, and oversight of brokerage firms, transfer agents, and clearing agencies. The SEC also regulates the New York Stock Exchange, American Stock Exchange and National Association of Securities Dealers. The SEC also has disciplinary powers over all persons and entities under its purview.

Trust Indenture Act of 1939. This act regulates the sale and transfer bonds, notes, and, debentures.

Investment Company Act of 1940. This act was promulgated to prevent conflicts of interest in companies whose primary function is the trading, and investing of securities. Under this act, companies are mandated to disclose their investment policies and financial condition to investors.

Investment Advisers Act of 1940.  This act regulates security investment entities, and requires that they register with the SEC.

Post Sarbanes-Oxley

Sarbanes-Oxley Act of 2002. Due to the financial turmoil caused by Adelphia, Arthur Anderson British Petroleum, Dynegy Halliburton, Quest, Tyco, WorldCom, and most ignominiously Enron, SOX was passed into law to reform American business practices. SOX mandates enhanced financial disclosures, and corporate responsibility. In furtherance of this, the Public Company Accounting Oversight Board (PCAOB) was created to supervise the activities of the auditing profession.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  This act was designed to restructure regulations of corporate governance and disclosure, credit ratings consumer protection, trade restrictions, and financial products.


 It can be postulated that the financial debacles that we have experienced in the 21th century were not merely due to lapses in ethics, or lack of legislation. Rather, it was the synergy between the two, which resulted in a financial perfect storm. As such, business schools should not have just one ethics course, but should apply ethical tenets throughout all courses in the curriculum, to ensure that the business leaders of tomorrow, receive the ethical training, they will need, today. We must also be vigilant in our legislative enforcement, and mindful of the financial missteps that befell us in 1929, and in this century, for "those who fail to learn from history are doomed to repeat it". Click here for references.