Free Enterprise Fund V. Public Company Case Study

In this paper, we will be discussing how Sarbanes Oxley has affected the American business and if it has accomplished its goals. The goal of the Sarbanes-Oxley Act (SOX) is to convey confidence in the stock exchange, but it does not defer all immoral activities that take place on the stock exchange. People no matter the law, are responsible for the quality of their work and are accountable for the integrity of themselves and their company. Their own ethical values can take precedence over those set by Sarbanes-Oxley. Not all values are equal in quality, and a person may go above the rules delegated by Sarbanes-Oxley, however, there is another side. Sarbanes-Oxley has created a fear among business practitioners that this new set of standards

Section 180 says that a person must perform his duties with care and diligence that a director of a company in same position and situation would perform. In this case, the board member negligently made a financial report and was shown profit instead of loss. Harvey one of the directors could not show the errors in the board while James who is also a non-executive director did not ask any questions regarding the

In general, the main criticisms of the PCAOB are that it has not made sufficient it’s regulatory power, it is slow to act in its investigations of enforcement cases, and that it targets enforcement on smaller firms in order to protect the Big 4 firms, which are regarded as “too big to fail.” While I do not disagree with the fact that the PCAOB is slow and has not produced a significant amount of regulation, I do disagree with the criticism of the PCAOB as a regulatory body in general. I feel that certain members of the public desire absolute transparency in financial reporting, but do not understand the economy required to so. It is nearly impossible, not to mention impractical, to breakdown every aspect of a multi-billion dollar corporation to ensure that every transaction is accounted for

The Sarbanes-Oxley is a U.S. federal law that has generated much controversy, and involved the response to the financial scandals of some large corporations such as Enron, Tyco International, WorldCom and Peregrine Systems. These scandals brought down the public confidence in auditing and accounting firms. The law is named after Senator Paul Sarbanes Democratic Party and GOP Congressman Michael G. Oxley. It was passed by large majorities in both Congress and the Senate and covers and sets new performance standards for boards of directors and managers of companies and accounting mechanisms of all publicly traded companies in America. It also introduces criminal liability for the board of directors and a requirement by

In order to ensure effective regulation, the Sarbanes-Oxley legislation contains eleven sections that describe responsibilities of corporate boards (Engel, Hayes, & Wang, 2007). In case these responsibilities are not performed, criminal penalties are applied. The need for stricter financial governance laws created the global trend and such countries as Canada, Germany, France, Australia, Israel, Turkey and others also enacted the same type of regulations (Damianides, 2005). Today, the Sarbanes-Oxley legislation continues to play a fundamental role in the process of protecting the rights of investors and supporting a high level of investment attractiveness of the United States and companies that operate in the country. That is why this particular legislation can be considered as extremely benefiting for the national economy as well as investors.

Your honors, this case is about the fundamental right of shareholder protection. The right of a small businesswoman to pursue her goals and not be punished for her initiative and contribution that is so essential to American business. That is the right

The decision of the case of “Free Enterprise Fund v. Public Company Accounting Oversight Board” was that the breaking of the separation of power was not broken. This allowed The decision to be in the favor of the board and it’s members. They found that board can and will be removed if there acts are unconditional. Since the president has control over the SEC and is allowed to remove whom ever with good reasoning.

People often question whether corporate boards matter because their day-today impact is difficult to observe. But, when things go wrong, they can become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom, in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of pocket. As a consequence of these scandals and ongoing concerns about corporate governance, boards have been at the center of the policy

Before the Free Enterprise Fund v. PCAOB ruling, there was a double for cause removal system. The PCAOB board members and SEC commissioners were only able to be removed from their positions if there was “for cause” rationale. This rationale stated that they could only be removed for inefficiency, neglect of duties or malfeasance in office. This allowed the PCAOB board members to be independent of the SEC. This independence and job security allowed them to regulate public accounting firms without fear of retaliation.

Sarbanes-Oxley only indirectly addresses the problem of the inclusion of executive compensation in financial statements. Title I, Section 108 of the Act requires audits to follow generally accepted accounting practices for the preparation of corporate financial statements. It makes no judgment as to the treatment of options by corporate auditors. This leaves it to the newly created Oversight Board to determine what standards are acceptable in the treatment of options. As noted by Mr. Buffett, supra, this leaves open the loopholes created by the 1994 Securities Act. There is no requirement that corporations accurately reflect executive compensation as an expense on their financial reports. Thus, it is still possible that earnings statements by corporations remain 3-5% higher than actual corporate earnings, even with the enactment of Sarbanes-Oxley. This can become problematic, as shareholders will not have accurate information upon which they can act to ensure accountability in their Boards of Directors. C.f., In re Walt Disney Co. Derivative Litigation (where shareholders challenged compensation programs awarding astounding amounts of money to Michael Ovitz as part of a "golden parachute").

In Bezirdjian v. O’Reilly, the plaintiff (Bezirdjian) files a shareholder derivative complaint on behalf of Chevron Corporation citing that current and certain former member of Board of Directors (BOD) breached fiduciary duties, grossly managed the corporation, were involved in constructive fraud, and wasted corporate assets “in connection with illicit payments Chevron allegedly made to Saddam Hussein in exchange for Iraqi oil from 2000 to 2003.” Bezirdjian has a legal right to bring an action against the alleged party because he believes that harm has been done to Chevron in connection to illicit payments made to Saddam Hussein but the corporation itself has not taken any action against the offenders.

There were several large scandals in the beginning years of the 2000’s. The public had a lack of trust within the capital markets and investors who had invested their capital would soon find out that they had lost a substantial amount, as share prices decreased. Senator Paul Sarbanes and Representative Michael Oxley both came together and were part of creating legislation which would deter future scandals such as Enron, WorldCom, Tyco amongst other frauds that led the public lose trust in the markets- to never happen again. Sarbanes-Oxley Act of 2002 is comprised of 11 sections, and one of them is the creation of the (PCAOB) Public Company Accounting Oversight Board, PCAOB definition “The PCAOB is a nonprofit

Bennett, 47 N.Y.2d 619 (N.Y. 1979) states, “the responsibility for business judgments must rest with the corporate directors; their individual capabilities and experience peculiarly qualify them for the discharge of that responsibility.” In other words, the court will allow some leeway in their corporate decisions due to their background and experience so the business judgment rule will apply. This case presents a three-person select committee that serves on behalf of the entire board of directors to handle special litigation for this corporation. A shareholder’s derivative action was brought against four of the board of directors in which this special litigation committee decided to terminate it. The shareholder’s felt this was unfair since the three-person committee is not a full representation of the board and the shareholders therefore, they should not be able to make those decisions. The three-person committee is unaffiliated with the 15 member board to keep decisions of the corporation fair. The court of appeals found no evidence proving the three-person committee was not unable to represent the full board and is protected by their decisions under the business judgment

"The conduct of AWB and its officers was due to a failure in corporate culture…is a closed culture of superiority and impregnability, of dominance and self-importance. Legislation cannot destroy such a culture or create a satisfactory one. That is the task of boards and the management of companies. The starting point is an ethical base. At AWB the Board and management failed to create, instill or maintain a culture of ethical dealing" (AGD 2006).

Mr. Sears blatantly breaches the conflict of interest laws at Boeing. Mr. Sears was hoping that by meeting with Ms. Druyun that he would secure the tanker contract and hire her when she retires from the Air Force. By asking her to cover up the meeting, Mr. Sears clearly shows he knows what he violating and that it is reprehensible. The chairman of the board should have asked who Mr. Sears talked to and about what. Then he should have conducted an investigation with more knowledge. He could have easily contacted Ms. Druyun to not come back until her retirement.