1、Business EthicsLecture 13:Ethics in accounting and financial practicesTuesday,Dec.2,2014Outline The Enron scandal Creative accounting,insider trading,conflict of interest The SarbanesOxley Act Corporate governance Definition and standards Independent directorsThe Enron scandal In Dec.2001,the Americ
2、an energy giant,Enron Corp.(安然)filed for bankruptcy.Enrons$63.4 billion in assets made it the largest corporate bankruptcy in U.S.by the time.Following investigations revealed a series of accounting frauds which shocked US and the whole world.Consequences:Public distrust,disclosure of similar scanda
3、ls in Worldcom,Xerox,Merck,etc.,stock market downturn in 2002 Downfall of Arthur Anderson,the worlds 5th largest audit firm.The passage of the Sarbanes-Oxley Act(萨班斯-奥克斯利法案)Creative accounting(创造性会计)Definition:non-standard accounting practices which are not forbidden by existing laws or accounting r
4、ules but certainly deviates from their spirits.Objective:misleading investors and regulators.Euphemism of cooking the books(做假账).The Enron case:Using off-balance-sheet entities(表外实体)controlled by Enrons executives to hide$13 billion of debt.Artificially inflating profits(虚报利润)by$600 million since 19
5、97.Using complex transactions to hide its status of a trading intermediary Forwarding future earning without discounting for potential risksInsider trading(内幕交易)Definition:the trading of a public companys stock or other securities by individuals with access to non-public information about the compan
6、y.Recent examples:Rat trading(老鼠仓),Everbright Securities(光大证券)erroneous trading The Enron case:The CEO Kenneth Lay started to sell his shares in Enron when the stock price peaked at$90 in Aug.2000.Other executives followed suit soon after.As the stock price declined due to their collective dumping a
7、nd mounting doubt on Enrons financial health,Lay declared that everything is going fine and encouraged public investors to buy in.Professional ethics(职业道德)Auditor:Gatekeepers(把关人)of the free market economy Verifying companies financial status Helping investors avoid frauds Professional ethics refers
8、 to the fiduciary duties(受托责任)embodied in professional roles:the moral obligation not to override the clients interest with his/her personal interest.Conflict of interest(利益冲突)Definition:a situation occurring when an individual or organization is involved in multiple interests,one of which could pos
9、sibly corrupt the motivation of another.The Enron Case:Enrons auditor,Arthur Andersen,earned$25 million in audit fees and$27 million in consulting fees during 2000.Arthur Anderson The pressure to earn consulting fees from the same companies they are auditing clearly undermines the auditors independe
10、nce and induces them to commit breach of trust(背信罪).The SarbanesOxley Act(萨班斯-奥克斯利法案)The SOX Act was enacted in July 2002,just 7 months after the outbreak of the Enron scandal.Major elements:Creating Public Company Accounting Oversight Board(PCAOB)to oversee public accounting firms.Setting up standa
11、rds for auditing independence,e.g.,restricting auditing firms from providing consulting services to the same clients.Enhanced disclosure requirements for financial transactions,including off-balance-sheet transactions.Requiring senior executives to take individual responsibilities for the accuracy a
12、nd completeness of the companys financial reports.Increasing criminal penalties for manipulation,destruction or alteration of financial records or other interference with investigations,while providing certain protections for whistle-blowers.Repercussions of the SOX Act Sarbanes Oxley Act has been p
13、raised for:Improving investor confidence by forcing companies to provide more accurate,reliable financial reports.Nurturing an ethical culture as it forces top management to be transparent and employees to be responsible for their acts whilst protecting whistleblowers.I am surprised that the Sarbane
14、sOxley Act,so rapidly developed and enacted,has functioned as well as it has.the act importantly reinforced the principle that shareholders own our corporations and that corporate managers should be working on behalf of shareholders to allocate business resources to their optimum use.Former Federal
15、Reserve Chairman Alan Greenspan,2005The surge of restatementsCriticism of the SOX Act Increasing compliance costs for public companies,reducing IPO.According to a survey by Korn/Ferry International,SarbanesOxley cost Fortune 500 companies an average of$5.1 million in compliance expenses in 2004.A st
16、udy by the law firm of Foley and Lardner found the Act increased costs associated with becoming a publicly held company by 130 percent.A paper titled Regulation and Bonding:Sarbanes Oxley Act and the Flow of International Listings published in the Journal of Accounting Research in 2008 by top busine
17、ss schools researchers found that following the acts passage,smaller international companies were more likely to list in stock exchanges in the U.K.rather than U.S.stock exchanges.During the financial crisis of 20072010,critics blamed SarbanesOxley for the low number of Initial Public Offerings(IPOs
18、)on American stock exchanges during 2008.One reason the U.S.economy isnt creating enough jobs is that its not creating enough employers.For the third year in a row the worlds leading exchange for new stock offerings was located not in New York,but in Hong Kong.Given that the U.S.is still home to the
19、 worlds largest economy,theres no reason it shouldnt have the most vibrant equity marketsunless regulation is holding back the creation of new public companies.On that score its getting harder for backers of the Sarbanes-Oxley accounting law to explain away each disappointing year since its 2002 ena
20、ctment as some kind of temporary or unrelated setback.A Wall St.Journal editorial,2012 The return of consulting after 2009Corporate governance Definition:mechanisms,processes and relations by which corporations are controlled and directed.Governance structure:the distribution of rights and responsib
21、ilities among different participants in the corporation(such as the board of directors,managers,shareholders,creditors,auditors,regulators,and other stakeholders)Newell and Wilson,A premium for good governance,The McKinsey Quarterly,no.3(2002).Investigation on 188 companies from India,South Korea,Ma
22、lasia,Mexico,Turkey,and Taiwan.Conclusion:PB ratio(price/book value)is 10-20%higher for companies with good governance structure.Standards of corporate governance OECD Principles of Corporate Governance Published in 1999 and revised in 2004,United Nations Intergovernmental Working Group of Experts o
23、n International Standards of Accounting and Reporting(ISAR)Including 50 distinct disclosure items across five broad categories Auditing Board and management structure and process Corporate responsibility and compliance in organization Financial transparency and information disclosure Ownership struc
24、ture and exercise of control rightsStock Exchange Listing Standards Companies listed on the New York Stock Exchange(NYSE)and other stock exchanges are required to meet the following governance principles:Independent directors:Listed companies must have a majority of independent directors.Board meeti
25、ngs that exclude management:To empower non-management directors to serve as a more effective check on management,the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.Boards organize their members into committees with specific resp
26、onsibilities defined by charters:Listed companies must have a nominating/auditing/compensation committee composed entirely of independent directors.Independent directors(独立董事)Definition:a director who does not have a material or pecuniary relationship with company or related persons,except sitting f
27、ees.ID do not own shares in the company.Birth of the ID system:the Investment Company Act(1940)Objective:avoiding insider control,protecting small shareholders interest Rise in popularity:dispersion of ownership exacerbated insider control in 1960-1970s.Independent director system in China Securitie
28、s Regulatory Committee(2001)，Guidelines for the establishment of IDS of listed companies(中国证监会2001年颁布的关于在上市公司建立独立董事制度的指导意见)At least 1/3 of board members should be ID.ID should include at least one accounting professional.One person cannot be ID for more than 5 companies.Problems of IDS in China Lack
29、 of independence Low compensation,low status US min.$50,000 Money-funneling(利益输送)In Oct.2013,after the publication of a stature which forbade govt.officials to take part-time jobs in enterprises,200+public companies lost their ID.Corporate social responsibility IDs responsibilities:protecting small shareholders-protecting other stakeholders
