The article by James C. Hyatt entitled “Birth of the Ethics Industry” appearing in Business Ethics Magazine deals with sweeping changes that occurred in corporate America with the passage of Sarbanes-Oxley Act. Corporations are investing time and effort into compliance with the legislation, but they are also working to increase internal controls by introducing “a vast new industry of consultants and suppliers,” creating a new profession and industry (Hyatt, 2005). New business emerges for compliance companies such as Los Angeles-based LRN that has signed a new contract with New York Times and providers of ethics hotlines like Oregon-based EthicsPoint. Section 301 of Sarbanes-Oxley has helped hotlines.
That “requires board audit committees to create a reporting system to receive complaints and tips” (Hyatt, 2005).
Virtually
a new profession has been created by the provisions of Sarbanes-Oxley that stipulated new tougher
ethics standards. On the search engine Craigslist, there have been posted “64 jobs in San Francisco
and 50 in Boston that included the word “Sarbanes” (Hyatt, 2005). Companies that produce
governance, risk, and compliance management software are also seeing increases in revenue.
Mass.-based OpenPages has created a software package named SOX Express, for instance.
Records management is becoming a profitable trend as companies were expected to spend over billion on compliance with Sarbanes-Oxley in 2005.
The positive impacts of electronification, be it in the realm of income statement processing or compliance with Sarbanes-Oxley, are difficult to overestimate (Jeffery, 2005). However, the article indicates that the act will also cost companies a lot of money, in addition to its positive implications. The requirements to comply will force some companies to invest in ethics industry, while others simply choose to “go dark”, becoming private (Diana, 2005, p. 26). The demands placed on public companies will drive some companies from public markets, for all their liquidity.
Speaking of my organization, it can hardly afford to purchase a similar compliance package since its cost may not be warranted by our revenues. I work for a medium-sized company; however, we can benefit from the shift in focus in how companies are managed described in the article. We can, for instance, strive “to incorporate an ethics focus” (Hyatt, 2005). This means that the management should start living the values prescribed in Sarbanes-Oxley and other similar acts, delivering long-term value to shareholders in addition to short-term profits.
On the formal level, we could introduce a code of ethics that would incorporate more stringent ethical standards and have employees discuss it and sign it. Also, we can conduct a training session for employees that will alert them to the need for compliance with laws and ethical standards. For instance, “Citigroup is adding annual ethics training for all 300,000 employees” (Hyatt, 2005). Although we surely have a much smaller budget than the world’s leading financial institution, we also have a smaller workforce, so the introduction of training would result in smaller costs.
Ethics in accounting and financial decision making is becoming a priority these days. Recent corporate scandals that led to downturns and ruin of the once venerable companies have left an impression that unethical actions will sooner or later be discovered. Accounting tricks can pass unnoticed for a few quarters, but they are bound to surface at some point in time, ruining the company with investigations and related turmoil. That is why responsible management is in compliance with ethical rules since this is the only way to deliver long-standing shareholder value.
One of the important achievements on the way of compliance with ethical rules was the passage of Sarbanes-Oxley Act in 2002. According to this act, CEOs and CFOs can no longer claim that they were unaware of the fraud that was going on in the company because of the requirement to sign on financial statements. Although the act targets only public companies and those with annual revenues under million were excluded for some time from compliance with Section 404, it can benefit all firms including private ones, helping them “get into the mindset of strict corporate governance” (Diana, 2005, p. 25). SOX requires greater auditor independence by prohibiting delivery of consulting services in addition to auditing, strengthens requirements for board independence, takes internal control to a new level, and envisages tougher penalties for corporate executives who committed fraud, up to imprisonment. Such stringent regulations will create a new atmosphere that will make fraud look less possible and more dangerous. Overall, the act helps create a new mode of thinking that will emphasize compliance with strict ethical standards.
References
Auditing Interpretations. (2005, November). Journal of Accountancy 200(5), 121-4.
Diana, T. (2005, May). Corporate Executives and Auditors Try on SOX. Business Credit,
24-30.
Jefferry, C. (2005, March). The Impact of Electronification on the Income Statement. Financial
Executive, 56.
Hyatt, J.C. (2005, July 1). Birth of the Ethics Industry. Business Ethics Magazine. Retrieved
April 27, 2006, from http://www.midicorp.com/articles.php?section=articles&id=89
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