Global Ethics

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Global Ethics Corporate Governance

• GBU 355

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• What is Corporate Governance?

The systems and processes an organization has in
place to protect the interests of its diverse
stakeholder groups (e.g., shareholders,
employees, customers, vendors, the
community) International Vs. Domestic
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• Success of our Capital Markets
• Total cost of recent corporate scandals estimated
  at 200B with more than 1M workers losing their
  jobs
• The Costs of Corporate Recklessness
• 189 public companies with 382B in assets filed
  bankruptcy in 2002 PricewaterhouseCoopers March
  3, 2003
• Fraud and abuse costs US organizations more than
  400B annually Association of Certified Fraud
  Examiners Report to the Nation 2002

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The Changes

• I dont see how one can effectively legislate
  morality or character, but what you can do is try
  to create an environment and a legal structure
  which significantly penalizes malfeasance.
• Alan Greenspan
• July 17, 2002

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Sarbanes-Oxley Act of 2002 (SOX)

• Primary architects of SOX are
• Senator Paul Sarbanes (D-Maryland)
• Representative Michael Oxley (R-Ohio)
• The Sarbanes-Oxley Act of 2002
• Creates new financial reporting requirements for
  issuers
• Creates new criminal laws relating to corporate
  conduct
• Creates a new Public Company Accounting Oversight
  Board
• Mandates corporate governance reforms
• Enhances the role and independence of audit
  committees
• Creates new auditor independence restrictions

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Main Points of SOX

• The scope of an external audit firm has been
  restricted -CPAs no longer have the right to set
  standards for their practice.
• There are new duties for boards of directors and
  for audit committees in particular.
• There are new requirements for the CEO and CFO.
• Each SEC filing (10K and 10Q) stating that
• The report fairly represents in all material
  respects the companys operations and financial
  condition.
• The report does not contain any material
  misstatements or omit to state a material fact
  necessary in order to make the statements made,
  in light of the circumstances under which the
  statements were made, not misleading.
• The report containing financial statements
  complies with section 13(a) or 15(d) of the
  Securities and Exchange Act of 1934.
• The companys control system is in place and
  effective.

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Section 404

• Section 404 requires management to file an
  internal control report with the annual report.
  The internal control report must articulate the
  following
• Managements responsibilities to establish and
  maintain adequate controls and procedures for
  financial reporting.
• A statement identifying the framework used by
  management to evaluate the effectiveness of
  internal controls for the company.
• Managements conclusions as to the effectiveness
  of these internal controls and procedures for
  financial reporting, based on managements
  evaluation of them, at year end.
• A statement that its auditor has issued an
  attestation report on managements assessment.

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International Implications

• 470 NYSE Listed Companies headquartered outside
  US must comply
• Potential to deter some joint venture or partner
  activities
• Dealings with US companies restricted - off
  balance sheet arrangements between non-US and US
  companies less likely
• Joint ventures may fall under the act if
  financial records are consolidated under the US
  company
• Australia
• France Loi de Securite Financiere

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Recap

• Sarbanes Oxley Act of 2002
• Section 404
• International Implications