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The Institutionalization of Business Ethics

Chapter 4: the Institutionalization of Business Ethics

In Chapter 3, the ethical issue of fraud has been adequately addressed with the law from Chapter 4 known as the Sarbanes-Oxley Act of 2002 (SOX). The law created a federal oversight body to oversee corporate accounting practices (Ferrell, O. C., Ferrel, L., & Fraedrich, 2015). Moreover, reporting of falsified financial statements was made a criminal offense and corporate fraud penalties were strengthened.

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The law aimed to curb intentional fraudulent practices that were aimed at pursuing personal or organizational interests. Studies have shown that organizations across the world lose over $3.5trillion per year as a result of fraud. This translates to an average of approximately 5% of annual revenues (Ferrell et al., 2015). SOX has been instrumental in dealing with corporate fraud, although did not manage to completely eradicate this vice. For instance, the former AIG CEO Maurice Greenberg and his associates were charged with fraud and forced to pay $115 million to AIG shareholders for misleading investors.

One of the advantages of this law is that it protects innocent investors from losing their funds by investing in a financially unstable organization. The law also led to fundamental changes in the way accountants reported their financial statements. It created a strict code of conduct that had to be adhered to by all accountants. It defined the concepts of integrity, independence, objectivity, and due diligence that had not been clearly stipulated in the previous code of conduct. SOX addressed organizational fraud by prohibiting accounting firms from carrying out both consulting and auditing services for the same organization.

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In conclusion, the Sarbanes-Oxley Act of 2002 was implemented to eliminate fraudulent reporting of financial statements. Although the law has been instrumental in changing the concepts of accounting, it did manage to completely eradicate fraud. Nevertheless, the new measures that had been implemented led to the conviction of several company executives and introduced new accounting concepts.

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