Federal Regulations, Ethics and the Legal System| Sarbanes-Oxley Act: Revealing Corruption at Wal-Mart | Ethics in Action| 9/30/2012 | In July 2002, a corporate reform bill was passed into United States Federal law by the U. S. Senate and the U. S. House of Representatives. This legislation introduced new and amended ethical standards regarding financial practice and corporate governance for all publicly traded U. S. companies, as well as for management and accounting organizations. U. S. Senator Paul Sarbanes and U. S. Representative Michael G.
Oxley spearheaded the Sarbanes-Oxley (SOX) Act (Pub. L. 107-204) (Sarbanes & Oxley, 2002). This was originally known as “Public Company Accounting Reform and Investor Protection Act” (S. 2673) (Sarbanes, 2002) in the senate, and “Corporate and Auditing Accountability and Responsibility Act” (H. R. 3763) (Oxley, 2002) in the House of Representatives. The U. S. House of Representatives approved the act with a vote of 423 in favor, 3 opposed, and 8 abstaining, while the U. S. Senate approved with a vote of 99 in favor and only 1 abstaining (Sarbanes & Oxley, 2002).
The act was signed into federal law by President George W. Bush on July 30, 2002. The President adamantly vowed for stiffer punishments to corporate offenders. Mr. Bush declared that this law meant, “No more easy money for corporate criminals, just hard time”. According to Bush, SOX was, “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt. ” His message to corporate business was clear, “The era of low standards and false profits is over. No boardroom in America is above or beyond the law” (Bumiller, 2002).
This law was just the beginning of the complete overhaul of corporate fraud, securities and accounting practices. It generated governing panels with fact-finding and prosecution powers to watch over the accounting industry and penalize corrupt auditors. New standards were established for prosecuting ethics violations, and comprehensive protection for corporate whistle-blowers was instituted. As a result, long term prison sentences and hefty fines were put in place to discourage corporate executives from defrauding their investors.
The Sarbanes-Oxley Act was formally enacted as a result of a number of major corporate and accounting scandals, including those involving Enron, Peregrine Systems, WorldCom, and Lehman Brothers. These corporations ultimately lost billions of investors’ dollars from fraud and misrepresenting financial statements, resulting in a devastating decline in company share prices and ultimately bankruptcy. Due to the ethical and financial misconduct by executive senior management in these companies, the legislation requires any publicly owned businesses to disclose the fundamental business principles or values under which it operates.
These principles, or code of ethics, are required to be disclosed by all public companies, stating the conduct or governing rules by which directors, officers, and employees shall operate. SOX is comprised of eleven sections or titles, these sections cover a multitude of requirements, ranging from criminal penalties and executive management responsibilities to establishing an oversight board by the Securities and Exchange Commission (SEC). These titles restrict or establish requirements for companies to follow. The most prominent title governs filing financial reports with the SEC.
The report needs to include an internal control report declaring that the administration is responsible for internal control structure and procedures with reporting financial documents. The act requires the chief executive officer (CEO) and the chief financial officer (CFO) to sign all financial documents that will be filed with the SEC, as well as annual federal income tax returns ultimately stating they contain true statements and are free from material errors (Welytok, 2002). Under SOX, companies must report if they have implemented a code of ethics for their executives and if their audit board seats a member that is a financial expert.
Unfortunately, the creation of SOX and a code of ethics in no way guarantee’s that everyone will follow the rules; people will always find a way to circumvent the system or misrepresent the code’s intentions. Even the most robust ethics program needs constant oversight to remain effective. The pressure to increase profits and market share can lead executives to push the boundaries of ethical business behavior. Despite the passage of SOX, some of the largest and most well-established companies are currently crossing those boundaries.
In recent news, an alleged Sarbanes-Oxley Act violation has been revealed at the United States based corporate giant, Wal-Mart, where executives are accused of engaging in bribing Mexican officials to facilitate corporate growth throughout the country. In September 2005, a former senior executive from Wal-Mart de Mexico sent an email to a high-ranking Wal-Mart lawyer, referencing on how Wal-Mart de Mexico had bribed foreign officials to expedite permits to win market control in Mexico. The emails and subsequent conversations gave specific names, dates and bribe amounts.
Wal-Mart followed up with an internal investigation and eventually found a paper trail of suspect payments. In addition, they found documentation implicating that, not only did the top Wal-Mart de Mexico executives know about the payments, but they had also taken pre-cautions to hide them. The lead investigator documented the findings by stating “There is reasonable suspicion to believe that Mexican and USA laws have been violated” (Barstow, 2012). The lead investigator recommended that the internal investigation be expanded, but instead Wal-Mart’s leaders disregarded and dismissed the case.
Later in December 2005, Wal-Mart discovered that the New York Times was running an investigative report on allegations of hidden bribery payments to Mexican officials based on information provided by a company insider. Wal-Mart immediately informed the United States Justice Department of possible violations to the Foreign Corrupt Practices Act. Wal-Mart remarked that they found possible issues with how permits were obtained, but stated that the problems were limited. In August 2012, during investigations into SOX violations, two U. S. ongressmen, Elijah Cummings and Henry Waxman, claim they received internal documentation suggesting that Wal-Mart may have committed other illegal activities involving tax evasion and money laundering in Mexico. Based on this information, the SEC requested all related documentation, but Wal-Mart has yet to provide a single document, internal review report, or any specific information about the findings of the internal investigation on the company’s anti-corruption policies. As a result, Cummings and Waxman combined their claims in a letter to Michael Duke, the chief executive at Wal-Mart, on August 14, 2012.
They expressed their concerns with the violations and their apprehension with the lack of cooperation on the company’s part. The letter further stated that the company needs to release the previously requested documents by August 28, 2012 (Hines, 2012). As of September 30, 2012, nothing else has been documented publicly on Wal-Mart’s cooperation or the government’s intentions to move forward with the allegations. Even with the statute of limitations on the SOX violations being five years, Wal-Mart could still be charged with conspiracy if it is found they attempted to cover-up the criminal actions within the past five years.
At this time, the government could take this opportunity to use Wal-Mart as a prime example of how big business can no longer get away with unethical behavior under the oversight of SOX restrictions. With the alleged Sarbanes-Oxley Act and Foreign Corrupt Practices Act (FCPA) violations, the government could be motivated to prosecute the chief executive officer (CEO) and the chief financial officer (CFO) who certified the all financial reports fully complied with the Securities Exchange Act of 1934.
Corporate fines for these violations may cost Wal-Mart up to 2% of the company’s annual revenue, which equates to billions of dollars. Wal-Mart executives found to be involved in SOX violations could face both imprisonment and fines. Ultimately, Federal prosecutors could potentially file charges of obstruction of justice under the SOX act if evidence suggests Wal-Mart executives covered-up or destroyed records with intent to block, hinder, or sway the investigation. The Mexican bribery payments are reported to be less than $50 million, although that number could potentially be found to be higher after further investigations.
As a result, the overall costs to Wal-Mart for legal and accounting fees during the investigation, in addition to possible penalties and fines will most likely far exceed the bribery payments. Wal-Mart’s senior executives demonstrated the type of unethical behavior that bankrupted Enron, and lead to the creation of the Sarbanes-Oxley Act. The SOX Act could be an effective tool that allows the United States Justice Department and SEC to investigate smaller issues that may be indicative of larger problems.
If properly utilized, SOX could help corporate America rebuild trust with investors, build the confidence needed to shore up the economy and guide executives to operate and lead more ethical organizations. References Barstow, David. (2012, April 21). Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle. The New York Times on the Web. Retrieved September 17, 2012, from http://www. nytimes. com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced. html? _r=3& Bumiller, Elisabeth. (2002, July 31). CORPORATE CONDUCT: THE PRESIDENT; Bush Signs Bill Aimed at Fraud In Corporations.
The New York Times on the Web. Retrieved September 16, 2012, from http://www. nytimes. com/2002/07/31/business/corporate-conduct-the-president-bush-signs-bill-aimed-at-fraud-in-corporations. html? src=pm. Henning, Peter J. (2012, April 23). Weighing the Legal Ramifications of the Wal-Mart Bribery Case. The New York Times on the Web. Retrieved September 9, 2012, from http://dealbook. nytimes. com/2012/04/23/weighing-the-legal-ramifications-of-the-wal-mart-bribery-case/ Hines, Alice. (2012, August 15). Walmart Not Handing Over Documents For Congressional Bribery Investigation Despite Pleas.
The Huffington Post on the Web. Retrieved September 9, 2012, from http://www. huffingtonpost. com/2012/08/15/walmart-bribery-investigation-congress_n_1778687. html Marro, Robert. (2012, May 4). Could Wal-Mart’s Bribery Allegations also be a Serious SOX Matter?. ICS Risk Advisors. Retrieved September 8, 2012, from http://insights. icsriskadvisors. com/blog/bid/125398/Could-Wal-Mart-s-Bribery-Allegations-also-be-a-Serious-SOX-Matter References cont. Rezaee, Zabihollah. (© 2007). Corporate governance post-Sarbanes-Oxley: regulations, requirements, and integrated processes. Books24x7 version] Available from http://common. books24x7. com/toc. aspx? bookid=16884. United States 107th Congress. (2002). Public Law 107-104. (DOCID: f:publ204. 107). Washington, DC: U. S. Government Printing Office. Retrieved from http://www. gpo. gov/fdsys/pkg/PLAW-107publ204/html/PLAW-107publ204. htm United States 107th Congress. (2002). S. 2673. Washington, DC: U. S. Government Printing Office. Retrieved from http://thomas. loc. gov/cgi-bin/bdquery/z? d107:SN02673:@@@D&summ2=m& United States 107th Congress. (2002). H. R. 3763. Washington, DC: U. S.