The Effect of Unethical Behavior Analysis

The Effect of Unethical Behavior Analysis

Several large corporations have in recent years forced the compliance of the Sarbanes-Oxley Act. For many years these corporations set an unethical standard within their companies and financial reporting was no exception. Since 2002 when the act was injected into the business world, many large companies have found ways to bypass its affects. The Sarbanes-Oxley Act did

impact corporate America in many major ways with its many provisions. Provisions such as Section 301 of the Act requires audit committee members to be a mix of independent members and the board of directors (Block, 2004), is one of the many modifications that have caused many firms to seek ways around the act.

Sections 404 of the act compels companies to maintain financial records that reasonably and accurately reflect the transactions and outlook of the assets of the registered SEC company. Financial statements should also offer realistic conformation that transactions are recorded as necessary to allow financial statements to be prepared in accordance with GAAP. Section 404 also demands that sensible guarantees regarding the prevention and detection of unauthorized gains or uses of company assets that could affect the financial statement be reported in a timely manner (SEC Implements Internal Control Provisions Of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor , 2003).

The Sarbanes-Oxley Act was intended to set an ethical standard for financial reporting, but more and more businesses are starting to privatize (Block, 2004). When a company goes private their number of shareholders is reduced to fewer than 300, and in some cases the company unregisters itself with the SEC or goes "dark". Once this is done the company is not obligated to file reports with the SEC. If companies do not have to report to the SEC there is no reason for audits, and there is definitely no reason for executives to confirm the accurateness of their company's financial results (Block, 2004). This creates a loop hole for businesses who decide not to comply with the Sarbanes-Oxley Act. With no one to report financial findings to, these companies are free to report what they want even if it is not always truthful.

Since the 90's the number of companies going private has increased drastically. The number of firms going private in 1990 was in the single digits. By 1999, 30 companies were privatized (Block, 2004), but since 2003 more than 200 companies have gone "dark" (Block, 2004). Many experts report that this trend is starting to spread because it is less costly since the enactment of the Sarbanes-Oxley Act; which hiked the cost of being a publicly traded company from $900,000 to almost two million dollars. The cost to privatize in 2004 was between $50-100,000, a comparatively low cost compared to being public.

Clearly there are still some gray