Ethics and Financial Reporting
Reacting to a flood of accounting scandals and media outcry, the U.S. Congress passed the Sarbanes-Oxley Act (SOX) in July 2002. It is administered by the Securities and Exchange Commission (SEC). It sought to prevent future cases such as the one witnessed with Madoff Investment Securities, by improving the accuracy of public company financial statements. An important goal of SOX is to make these financials more meaningful (i.e., transparent) to their intended readers.
. It sets guidelines for the corporate board of directors, CEOs and CFOs, audit committees, internal audit function and internal control system. .
. Boards of directors are now expected to take a more …show more content…
The same has been noticed for CFOs, who are held more accountable for their actions (Collins, Masli, Reitenga & Sanchez, 2009). After the passage of SOX, the labor market has also sanctioned CEOs and CFOs issued from firms who had undergone a restatements procedure, since it indicated a failure in their performance and in internal control (p. 1). Accountability measures have increased for both CEOS and CFOs under SOX (section 406), since it specifically names them responsible for the preparation and filing of the annual and quarterly financial reports (p. 3). The measures are codified with severe sanctions specified for executives implicated in fraudulent financial reporting (p. 3). Accountability standards are higher now and corporate governance mechanisms have been reviewed and upgraded to minimize loopholes. Therefore, CEOs and CFOs of public companies now have to make sure the financial reporting process is fine tuned and respected internally. They are also responsible for having the right competencies and for bringing in results. Lastly, they are the first in line when it comes to the accuracy of financial reports, as they have the means to have them verified and controlled (i.e., the audit committee). Any involvement in financial misstatements has potential disastrous consequences on the careers of both CEOs and CFOs, as these “reputational effects” have long-term negative effects on finding future employment (p.4).