INTRODUCTION

The Sarbanes-Oxley Act of 2002 is a legislative response to a number of corporate scandals

that sent a shockwave through the world of financial markets. Since investors need to know
that the financial information they rely is truthful, and that an independent 3 rd party has
verified its accuracy. This law was passed by the United States Congress on 30 July to
protect investors from corporate financial fraud. It also called for stringent amendments of
current securities laws and imposes strict new sanctions on breakers of the rules, such as
the SOX Act of 2002 and the Corporate Responsibility Act of 2002.

At the beginning of the 2000s, the 2002 Sarbanes-Oxley Act came about as a reaction to
financial scandals involving corporations like Enron Corporation, Tyco International, and
WorldCom. The act took its name from its two sponsors—Sen. Paul S. Sarbanes (D-Md.) and
Rep. Michael G. Oxley (R-Ohio).

The high-profile frauds had shaken investor confidence and prompted many to demand a
revamp of the decades-old regulatory norms. Outrage over ethical and financial misconduct
by the senior management of public companies led to the passage of historic legislation
redefining the roles and responsibilities of corporations and those who serve them. While
companies are expected to maintain high level of business ethics in conducting their
business, other agencies are out there to keep a check on the practices followed by the
firms. It attempts to strengthen corporate oversight and improve internal corporate control.

Greed (manifest in the personal enrichment and abuse of accounting standards at the
detriment of shareholders) posed several concerns about the ideals of the leaders of public
market organisations, the structure of checks and balances that exists. In the Sarbanes-
Oxley Act 2002, the rules and compliance policies revised or supplemented existing
legislation concerning security regulations, including the Securities Exchange Act of 1934
and other laws implemented by the Securities and Exchange Commission (SEC). 
Reforms and additions were developed in the new law in four main areas namely Corporate
responsibility, Increased criminal penalty, Control on accounts and New protective
measures.

Extending the SOX amends, SEC (Security Exchange Board) now demands public companies
to disclose the fundamental values by which they operate, and by which the conduct of
executives may be measured. Senior managers and directors are asked to review their
businesses' "tone at the top" and to stress ethics and honesty in their business decisions.

What was the trigger ?

Enron's failure was preceded by the company's misguided decision by its board to expressly
waive the Company's ethics code. That decision allowed the CFO of Enron to profit from the
company's transactions. The accurate details in the decisions of the directors have been
widely published and the New York Stock Exchange has suggested changes that have been
amended and implemented under Sarbanes-Oxley Section 406.

What is Section 406?

Section 406 requires public companies to disclose whether they have codes of ethics and
also to disclose any waivers of those codes for certain members of senior management.
New Item 406(a) of Regulation S-K requires companies to disclose:

 Whether they have a written code of ethics that applies to their principal executive
officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions;
 Any waivers of the code of ethics for these individuals; and
 Any changes to the code of ethics.
If companies do not have a code of ethics, they must explain why they have not adopted
one. A company may either file its code as an exhibit to the annual report, post the code on
the company's Web site, or agree to provide a copy of the code upon request and without
charge.

What is Code of Ethics ?

A code of ethics outlines a set of fundamental principles. These principles can be used to
support organisational standards (things that needs to be done) and operational
prohibitions (things one must not do). Typically, an ethical code is built upon core beliefs or
values. These principles are explained by examples of behaviour. In circumstances where
the code does not directly discuss, those that are subject to the code may recognise,
internalise and use the principles. Organizations expect the standards to apply in all cases,
once they are articulated and explained, and failure to apply them may be a reason for
disciplinary measures.

The Importance of an Effective Ethics Program

In addition to the existing ethics code, a number of support mechanisms usually decide if
the overall ethics policy of the organisation is successful. A structured curriculum for
communicating the corporate principles to company employees is at the heart of these.
These systems are far more critical than the words of the code as well as the behaviour and
participation of the senior management.

The development and implementation of an effective ethics programme will give businesses
significant legal and performance metrics advantages. Clear values are valuable because
they provide a touchstone that minimises the risk of personal values of any individual being
contrary to those of the organisation. The lack of an ethical tone could also adversely affect
the image of the organisation and may lead to legal problems.
Referring to Lynne Sharpe Paine from “Managing for Organizational Integrity” Rarely do
character flaws of a lone actor fully explain corporate misconduct. More typically, unethical
business practice involves the tacit, if not explicit, cooperation of others and reflects the
values, attitudes, beliefs, language, and behavioural patterns that define an organizational
operating culture. Managers who fail to provide leadership and to institute systems that
facilitate ethical conduct share responsibility with those who conceive, execute, and
knowingly benefit from corporate misdeeds.

Is having code of ethics enough to run a company ethically ?

A code of ethics does not guarantee that there will not be any misconduct. Recent incidents
show that people will look for ways to distort the intentions of the code, whether in ways
that is subtle or subconscious, or just as obvious as fraud or other criminal behaviour. An
effective programme of ethics needs continuous strengthening of strong principles. A Code
of Ethics or comprehensive protocol designed to favour total communication on its own is
not a substitution for good and honest management, staff and directors who work best for
the shareholders and those responsible for it. A valid discussion point in the boardroom is
ethics and community.