The Current Status of
Corporate
Governance in the
USA
An overview of the cause and
effect of recent legislation
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The is a lengthy history of corporate governance
in the US. Here is a short summary…
 19th
century legislation facilitated the rights of
corporations as sovereign entities with legal standing
 "The Modern Corporation and Private Property"
(Berle and Means, 1932) published shortly after the
1929 stock market crash continues to have a
profound influence on the concept of corporate
governance in scholarly debates today.
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
Fama & Jensen’s "The Separation of
Ownership and Control" (1983) firmly
established agency theory as a way of
understanding corporate governance.
 The
corporation is seen as a series of
contracts under which an agent represents
the interests of a principal.
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The current preoccupation with corporate
governance in the US can be traced to a series
of corporate crises which saw the collapse of
two big corporations: Enron and WorldCom, and
the ensuing scandals and collapses in other
organizations such as Arthur Andersen, Global
Crossing and Tyco.
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However, the story is far more complicated than
that…
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Corporate governance as we know it today
was legislated in 2002….
Anyone know the name of the bill?
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Sarbanes-Oxley Act (SOX)
The legislation is wide-ranging and establishes
new or enhanced standards for all U.S. public
company boards, management, and public
accounting firms. The Act contains 11 titles, or
sections, ranging from additional Corporate
Board responsibilities to criminal penalties, and
requires the Securities and Exchange
Commission (SEC) to implement rulings on
requirements to comply with the new law
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Sections of SOX
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TITLE I -- “Public Company Accounting Oversight Board
(PCAOB)” Title I establishes the Public Company Accounting
Oversight Board (PCAOB), to provide independent oversight
of public accounting firms providing audit services
("auditors"). It also creates a central oversight board tasked
with registering auditors, defining the specific processes and
procedures for compliance audits, inspecting and policing
conduct and quality control, and enforcing compliance with
the specific mandates of SOX. Title I consists of nine
sections.
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TITLE II -- “Auditors Independence”
Title II, which consists of nine sections, establishes
standards for external auditor independence, to
limit conflicts of interest. It also addresses new
auditor approval requirements, audit partner
rotation policy, conflict of interest issues and
auditor reporting requirements. Section 201 of this
title restricts auditing companies from doing other
kinds of business apart from auditing with the
same clients
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TITLE III -- “Corporate Responsibility”
Title III mandates that senior executives take individual
responsibility for the accuracy and completeness of corporate
financial reports. It defines the interaction of external auditors
and corporate audit committees, and specifies the
responsibility of corporate officers for the accuracy and
validity of corporate financial reports. It enumerates specific
limits on the behaviors of corporate officers and describes
specific forfeitures of benefits and civil penalties for noncompliance. For example, Section 302 implies that the
company board (Chief Executive Officer, Chief Financial
Officer) should certify and approve the integrity of their
company financial reports quarterly. This helps establish
accountability. Title III consists of eight sections.
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TITLE IV -- “Enhanced Financial Disclosures”
Title IV consists of nine sections. It describes enhanced
reporting requirements for financial transactions, including
off-balance sheet transactions, pro-forma figures and stock
transactions of corporate officers. It requires internal controls
for assuring the accuracy of financial reports and disclosures,
and mandates both audits and reports on those controls. It
also requires timely reporting of material changes in financial
condition and specific enhanced reviews by the SEC or its
agents of corporate reports.
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TITLE V -- “Analyst Conflicts of Interest”
Title V consists of only one section, which includes
measures designed to help restore investor
confidence in the reporting of securities analysts. It
defines the codes of conduct for securities analysts
and requires disclosure of knowable conflicts of
interest.
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TITLE VI -- “Commission Resources and
Authority”
 Title VI consists of four sections and defines
practices to restore investor confidence in
securities analysts. It also defines the SEC’s
authority to censure or bar securities professionals
from practice and defines conditions under which a
person can be barred from practicing as a broker,
adviser or dealer.
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TITLE VII -- “Studies and Reports”
Title VII consists of five sections. These sections 701 to 705
are concerned with conducting research for enforcing actions
against violations by the SEC registrants (companies) and
auditors. Studies and reports include the effects of
consolidation of public accounting firms, the role of credit
rating agencies in the operation of securities markets,
securities violations and enforcement actions, and whether
investment banks assisted Enron, Global Crossing and
others to manipulate earnings and obfuscate true financial
conditions.
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TITLE VIII -- “Corporate and Criminal Fraud
Accountability”
Title VIII consists of seven sections and it also
referred to as the “Corporate and Criminal Fraud
Act of 2002.” It describes specific criminal
penalties for fraud by manipulation, destruction or
alteration of financial records or other interference
with investigations, while providing certain
protections for whistle-blowers.
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TITLE IX -- “White Collar Crime Penalty
Enhancement”
Title IX consists of two sections. This section is
also called the “White Collar Crime Penalty
Enhancement Act of 2002.” This section increases
the criminal penalties associated with white-collar
crimes and conspiracies. It recommends stronger
sentencing guidelines and specifically adds failure
to certify corporate financial reports as a criminal
offense.
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TITLE X -- “Corporate Tax Returns”
Title X consists of one section. Section 1001 states
that the Chief Executive Officer should sign the
company tax return.
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TITLE XI -- “Corporate Fraud Accountability”
Title XI consists of seven sections. Section 1101
recommends a name for this title as “Corporate
Fraud Accountability Act of 2002” . It identifies
corporate fraud and records tampering as criminal
offenses and joins those offenses to specific
penalties. It also revises sentencing guidelines and
strengthens their penalties. This enables the SEC
to temporarily freeze large or unusual payments.
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OK, so how does all of this relate to
information systems?
Answer: SOX Sec 302 & Sec 404
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Sec 302
 Section 302 of the Act mandates a set of internal
procedures designed to ensure accurate financial
disclosure.
 The signing officers must certify that they are
“responsible for establishing and maintaining internal
controls” and “have designed such internal controls to
ensure that material information relating to the company
and its consolidated subsidiaries is made known to such
officers by others within those entities, particularly during
the period in which the periodic reports are being
prepared.”
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Lastly, Sec 302 requires…
 The officers must “have evaluated the
effectiveness of the company’s internal
controls as of a date within 90 days prior
to the report” and “have presented in the
report their conclusions about the
effectiveness of their internal controls
based on their evaluation as of that date.”
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Section 404
 Management is required to produce an
“internal control report”
 The report must affirm “the responsibility
of management for establishing and
maintaining an adequate internal control
structure and procedures for financial
reporting.”
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The report produced under Sec 404 must
be audited by the financial statement
auditors to determine whether or not the
assertions made by management are
generally relilable.
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Alright already, how is this related to
Information Systems?
Most, if not all, corporate financial
accounting is conducted within the
parameters of automated accounting
software that is directed link to almost
every other enterprise system!
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There are a lot of information systems
areas that require investigation and audit.
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Take about 10 minutes and on a sheet of paper
and list some areas of information systems that
would require audit under SOX.