Professional Documents
Culture Documents
The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002. The Act affected the responsibilities
of auditors, boards of directors, and corporate managers
with respect to financial reporting. Also, the act established the Public Companies Accounting
Oversight Board (PCAOB) that is now responsible for oversight of financial
statement audits of publicly-traded corporations and the establishment of auditing standards in the
U.S.
The primary purpose of SOX was to increase investor confidence in the financial reports provided by
corporations.
Further, SOX increased the responsibilities of corporate managers for producing reliable financial
reports and specified restrictions on the activities of external auditors to increase their
independence from their audit clients.
-external auditors.
The Sarbanes-Oxley Act affects corporations that are required to report financial information to the
Securities and Exchange Commission (SEC).
The reports signed by the CEO and CFO must state that:
the reports fairly present the companys financial condition and results of
operations
the officers are responsible (1) for establishing and maintaining an adequate
system of internal controls sufficient to ensure reliable financial reporting and (2)
the officers have disclosed to the companys audit committee and external
assessment and any significant changes in the controls and (2) any fraud
involving management or employees who have a significant role with respect to
internal controls.
SOX also effectively mandates that corporations create audit committees as part of their boards of
directors.Corporations also must disclose on a rapid and current basis material changes in their
financial conditions and operations. A corporation also must disclose whether it has a code of ethics
for its top managers.
SOX prohibits external auditors are from providing certain services to a client
actuarial services;
and any other service that the accounting board (PCAOB) determines, by
regulation, is impermissible.
Stewardship : This theory holds that there is no conflict of interest between managers and owners,
and that the goal of governance is,precisely, to find the mechanisms and structure that facilitate the
most effective coordination between the two parties.
The essential assumption underlying the prescriptions of Stewardship Theory is that the behaviors of
the manager are aligned with the interests of the principals. Stewardship Theory places greater
value on goal convergence among the parties involved in corporate governance than on the agents
self-interest
The economic benefit for the principal in a principal-steward relationship results from lower
transaction costs associated with
steward, as opposed to the agent, places greater value on collective rather than individual goals; the
steward understands the success of the company as his own achievement. Therefore, the major
difference between both theories is on the nature of motivation. Agency Theory places
more emphasis on extrinsic motivation, while Stewardship Theory is focused on intrinsic rewards
that are not easily quantified, such as growth, achievement, and duty.
Shareholder value theory sets the purpose of the firm as the maximization of financial returns for
shareholders. It is the dominant theory espoused and theory-in-use in business schools and in the
vast majority of businesses in capitalist economies.
stakeholder theorythe dominant theory espoused in the field of corporate social responsibility.
Stakeholder theory expresses the idea that business organizations are dependent upon stakeholders
for success, and stakeholders have some stake in the organization. Stakeholder theory suggests the
purpose of the firm is to serve broader societal interests beyond economic value creation for
shareholders alone.
three fundamental assumptions that lend support to the shareholder view of the firm
first is that the human, social, and environmental costs of doing business should be internalized only
to the extent required by law.
The second is that self-interest as the prime human motivator. people and organizations should and
will act rationally in their own self-interest to maximize efficiency and value for society.
The third is that the firm is fundamentally a nexus of contracts with primacy going to those contracts
that have the greatest impact on the profitability of the firm.
The intention of stakeholder theory is to offer an alternative purpose of the firm. Stakeholder theory
suggests the purpose of the firm is to serve broader societal interests beyond economic value
creation for shareholders alone. It is becoming central to the important story of business in society.
Stake holders - those individuals and constituencies that contributeto [the firms] wealth-creating
capacity and activities
A broad framework of stakeholders is offered by Wheeler and Sillanp (1997). They include four
categories of stakeholders: primary social, secondary social, primary non-social and secondary non-
social.