It imposes harsh penalties on violators, creates an elaborate system for governing and regulating auditors for public companies, and requires the securities industrys self-regulatory organizations to adopt rules to prevent conflicts of interest and enhance the independence of securities analysts. Even casual observers of the political reaction to the stunning disclosures about Enron, WorldCom and Tycos deceitful financial practices might have predicted some such legislative response (Jennings, 2010, p. 212). Legislated Ethical Issues in SOX
The legislation of ethics is not just a modern occurrence, but the feeling that an individual can do so is debatable. Just because an individual keeps the letter of the law, does not necessarily make him or her ethical. Graham (1995) argues that ethical decisions come not from those in authority (of which is the law), but are independently arrived at principled beliefs that are used creatively in the analysis and resolution of moral dilemmas (p. 47). SOX outlines and legislates several areas which are common sense, and moral fiber should indicate the domain of ethics, and resolved voluntarily by the parties involved. This focus of SOX on where the line is tends to baffle the true purpose of the laws, which is to encourage principals to meet the obligations impose on them by their positions; of meeting their fiduciary duties in an exemplary and competent manner, without conflict of interest, or exerting unfair advantage over others because of their position, or knowledge. In short, asking them to act in a manner that they would expect others to act if those individual (s) were in their position.
There are many sections to SOX that should have been treated as a matter of ethics, rather than legislated (although if an individual has no principled beliefs, how is he or she to determine what is right from wrong?). Several of the sections identify means of investigating, inspecting, and enforcing compliance (Jennings, 2010, p. 215) in terms of conflict of interest between knowledgeable parties in the accounting area. For example, Part II regards Auditor Independence in terms of public accounting firms and the firms that they are to audit. It does not require much brain power to figure out a potential conflict of interest exists if work is performed and then inspected by the same group or individuals. Part II is a statutory code of ethics for public accounting firms (p. 213) that identifies that accounting firms cannot audit a company that they have performed other financial consulting work for, or for firms that have as senior management former employees of the firm.
It is ethical for an individuals word to be binding as a written contract. If an individual signs his or her name to a document this should assume that the individual has read, understands it contents, and agrees in all material respects (Jennings, 2010, p. 213) with the information it conveys. This should be just as true for the company financial statements. It is the duty of the CEO and CFO to know about the operations and activities of their company (p. 213). Part III of SOX requires these officers to certify that the financial statements that a company files are representative of the companys actual condition. This implies a form of oath that everything is true and free from errors.
Unethical individuals, who have demonstrated their lack of ethics in the financial arena, should not be placed in positions of fiduciary trust. You wouldnt give a drug addict keys to a pharmacy or an alcoholic access to the bar? While this seems to be a no brainer, SOX does in fact have provisions that make what seems obvious the law. For example in Part III of SOX it identifies that executives who have engaged in insider training, or backdating of stock options, or any other violation of securities laws cannot serve as an officer or director of a publicly traded company (Jennings, 2010, p. 214).