Custom «Ethics and Finance» Essay Paper Sample
The Congress passed the Sarbanes-Oxley Act to improve the accuracy and the reliability of all the corporate disclosures pertaining the financial matters. The Act gave the Securities and Exchange Commission (SEC) the power to enforce this law. It does not just apply to the U.S. registered companies but to foreign ones as well if they are listed in the U.S. Since the downfall of World Com followed by Global Crossing, there have been few telecom firms having violated the SOX on such scale that companies had the Act been extant by then. However, some like the Nortel have run the SEC afoul of the behaviors that the SEC considered contrary to the SOX. This essay seeks to explore the application of the Act in the telecoms industry with a particular focus on the Nortel including the mistakes the company made, the steps the leadership could have taken to mitigate the issues, the role of market pressures in the issues, and the impact of the SOX on the industry.
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Nortel is a telecommunications company that is based in Ontario, Canada but operates in both Canada and the U.S. In 2007, five years after the passage of the SOX, SEC filed its complaint against Nortel (Ben-Ishai, 2007). To explain, the complaint alleged that Nortel was involved in the accounting activities that were fraudulent. According to the SEC, the company committed the deliberate accounting malpractice of overstating its revenues (revenue recognition fraud) and then fraud incorporating the management of earnings. The stakeholder’s equity is the difference between the assets and liabilities of the company (Ross, Westerfield, Jaffe & Jordan, 2015). Thus, inflating the assets and understand the liabilities could create the illusion of a well performing company.
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The leadership of the Nortel could have taken several steps to forestall the repercussions of the fallout from the issue. In the first place, the company could have used uncontroversial but sound accounting principles which did not involve the overstating of earnings for the particular periods. Secondly, rather than the company waiting till the SEC is charged in Canada, the company’s board of directors could have handled the suspected corporate fraud by its senior management in a more careful manner. The actions of the directors, while acting in good faith, are one of the main reasons the company has struggled financially since then.
The SOX was passed to stop the pressure of markets from convincing the companies’ management from perusing the unethical accounting and audit procedures in the pursuit of the big profit margins. Actually, in the Wall Street companies are at a significant pressure to surpluses or, at the very least, match their projected revenues (Burrows, 2008). As seen in the case of WorldCom and other similar companies, Telecom Service Providers had on numerous occasions misled to misread the communications boom, either deliberately or inadvertently. What is more, these companies had invested heavily in the infrastructure. So, with a competitive and an ultra-competitive industry that was also contracting, some of these companies falsified their revenues in order to avoid a drop in the margins which would have led to a drop in the share prices too.
The SOX had a great impact on finance in the companies, especially public ones. In corporate finance financial reporting is an important part as it not only indicates the financial performance of the company but is also acts as a gauge for outside investors and shareholders (Doyle, Ge & McVey, 2007). While this is the case, as seen in the example, company management would manipulate the reporting as to keep the share prices high which would not only be unethical but also outright deceit. Notably, the SOX sought to stop these practices by trying to pass the decisions of the company to the senior management and in such a way they now would have to consent to all the financial decisions (Burrows, 2008). It also gave the power to hire and control the auditors of the audit committee of the board of directors. It goes without saying that the SOX has had a great impact on the ethical practices in the business. Afraid of the outcomes of both civil and criminal consequences of flouting the Act, most of the company managements have been cautious in their dealings and financial reporting.
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So as to comply with the Sarbanes-Oxley Act companies have to take certain measures regarding their financial reporting. To start with, the Act requires public companies to submit an annual assessment of the effectiveness of their internal auditing processes to the SEC (Doyle, Ge, McVey, 2007). Furthermore, they are required to produce such financial reports that the SEC and others can verify via traceable source data which must remain intact. The Act disallows the undocumented revisions. In case there is a revision of any sort, they have to indicate who changed it and when exactly. These, in addition to the Act requiring senior managers to append their signatures to most of the financial transactions, are features that were unique to the new Act.
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The telecommunications industry was one of the reasons that prompted the passage of the Act after the bankruptcy of WorldCom and Global Crossings. While it has encouraged the companies in the telecommunication businesses to reduce risks and the lofty expectations that would invariably lead to fraud, it has also complicated a multitude of the matters in the industry such as boards of directors which became more conservative in their financial dealings. Markedly, this has occurred even in the countries outside the U.S. where the laws similar to the SOX were passed. An example is the case of the Nortel where an overzealous board led to the demise of the company after it fired the senior management leading to the plummeting of the share prices, lack of public confidence, and the bankruptcy of the once thriving company (Ben-Ishai, 2007). Hence, in the telecom industry the SOX regulation has had both advantages and drawbacks.