Mgt 320 - Sarbanes-Oxley and the Federal Government

Final Paper

MGT 320

The Legal Environment of Business

I have been asked what changes, if any, I would recommend to the Federal government to increase the effectiveness of corporate governance. The topic of corporate governance came to the forefront in 2001 when the accounting fraud scandal at Enron led to the collapse of the company and the loss of about $11 billion for the shareholders, many of whom were retirees. A lack of oversight from the company’s board and questionable auditing practices led to the fall of the company. The result was a quick response from Congress with the Sarbanes-Oxley Act (SOX) which calls for more transparency in financial reporting and more layers of auditing to insure accuracy.

Corporate governance is defined as “the rights and responsibilities among different corporate participants (including stakeholders) and spells out the rules and procedures for making decisions on corporate affairs” (Cross & Miller, 2009). Basically, it demands that the boards of directors perform their duties with both eyes on the best interest of shareholders and not their own personal gain.

Sarbanes-Oxley created rules for financial reporting and demands personal accountability of officers. Specifically, section 302 determines that when a company’s financial statement is submitted, it is signed by the CEO and CFO attesting to the accuracy of the report. This section outlines the officer’s responsibilities and liabilities in ensuring a truthful report is submitted. The act also requires independent auditing by third party auditors.

The Sarbanes-Oxley act led to the creation of the Public Company Accounting Oversight Board (PCAOB). The PCAOB is under the control of the Securities Exchange Commission (SEC). They are tasked with ensuring the auditors of companies conduct their audits in a manner that complies with SOX rules (Hilzenrath, D. 2010).

My first suggestion would be to eliminate the Public Company Accounting Oversight Board (PCAOB). I believe that the PCAOB, which is the primary oversight and enforcement arm for the Sarbanes-Oxley Act, is redundant and those duties should be completed by the Securities Exchange Commission. Whenever you add another layer of oversight to any program, specifically in the case of government agencies, things are automatically complicated. As things are currently designed, the SEC oversees the PCAOB and appoints its directors. Additionally, with a 2011 budget of $204 million, there would surely be savings to be had in the elimination of redundant support services.

One of the issues brought to light with the PCAOB and its relationship with the SEC, is that the U. S. Supreme Court found that “the legal structure of the Sarbanes-Oxley enforcement

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