The Costs of Behaving Badly: Corporate Scandal and the Sarbanes Oxley Act

Strict government regulations are necessary to make companies behave ethically.It was not so long ago that businesses viewed business ethics as a necessary paper compliance with legal standards and associated internal codes and regulations. Today, however, the unfavorable actions of several prominent corporations have drastically changed the corporate mindset in regards to ethical behavior and social responsibility. Specifically, companies are increasingly being held accountable for their actions as shareholders and government alike have demanded that companies institute greater ethical principles.

After the corporate scandals broke out at the beginning of the millennium, government figures in response to investor outrage rightfully chose to react by instituting the Sarbanes-Oxley Act of 2002. Had corporate entities been left to their own ambitions millions if not billions of additional investor dollars would have been exploited. The following is a rundown of information retrieved from Bizmarts.com which illustrates the cost of recorded scandals prior to the SOX implementation.

The Enron scandal consisted of a maze of off-the-book partnerships which hid the debts and losses of the company. Lost jobs totaled 4,500 and a loss of $80 billion in market value precipitated their bankruptcy filing. In contrast, CEO Ken lay received $33.5 million in total compensation for 2000. WorldCom hid $3.9 billion in expenses in order to increase their company's bottom line. This scorcher led to the loss of 17,000 jobs and took a company worth $100 billion to bankruptcy in 2002. Once again however, CEO Bernard Ebbers received compensation in the amount of $13.2 million in compensation for 2001. Finally, Qwest Communications inflated revenues for 2000 and 2001 through capacity swaps and equipment sales. Their actions put 11,000 employees out of work and drove a $32.5 billion market value loss from its peak share price in one year. Qwest compensated CEO Joseph Nacchio for his part with $103.9 million in total compensation for 2001.
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Under the Sarbanes-Oxley Act top management has, rightfully so, had the reins pulled in on them. CEO's are now required to vouch for their company's statements and provide significant documented evidence that their internal controls are instituted and satisfactory, if not, inadequacies could result in jail time. Additionally, outside auditors must be convinced that the internal controls are substantial and a guarantee must be provided to the Securities and Exchange Commission.

Corporations and CEO's may find the SOX requirements momentous; however, they provide the shareholder with more confidence that the corporation is running efficiently by limiting operational failures, fraud and litigation. Ethically speaking, management is responsible for maximizing shareholder wealth and should therefore also protect past, present, and future investments by making their company a safe and reliable place for investors to place their money.

References

The cost of corporate recklessness. Retrieved September 11, 2006 from: http://www.bizmarts.com/rec/ccreport.pdf#search='dollars%20lost%20due%20to%20corporate%20scandals'