Arguments for and Against Strict Corporate Governance Term Paper

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¶ … Against Strict Compliance

Arguments for and Against Strict Corporate Governance

The rise in corporate governance and its associated disclosure requirements and costs are forcing unnecessarily higher costs and demands on businesses, draining their ability to be globally competitive, the accumulated costs and time requirements imposed on corporations to be in compliance with a multitude of regulations including the Sarbanes-Oxley Act of 2002 (SOX) in turn are directly responsible for higher costs of production, selling, and service thereby increasing the costs of products to consumers as well. In addition, many companies are choosing to become privately held as a result of these costs of being in compliance with progressing more stringent and unreasonable regulations and laws (Engel, Hayes, Wang, 2007. p. 116). In addition to choosing to go private vs. having to comply with increasingly costly and time-consuming regulations, the majority of companies are outsourcing the most essential tasks that will enable them to be complaint. The Economist (2006, pp. 3, 4) reports that one of every three dollars earned by Indian outsourcers is the result of the higher demands for compliance to government regulations, making SOX one of outsourcers' greatest potential revenue sources globally.Get full Download Microsoft Word File access
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Term Paper on Arguments for and Against Strict Corporate Governance Assignment

Conversely, the massive scandals of Enron, MCI, Tyco and dozens of other corporations illustrate the need for enforcing much higher levels of financial and regulatory compliance than ever before. Collectively these scandals had the potential to cripple the U.S. And broader global economy at such a fundamental level that the 2002 recession could have easily been transformed into a global economic depression. The bottom line is that corporate governance in the form of increased legislation and the Sarbanes-Oxley Act of 2002 (SOX) were necessary for restoring investors' confidence in the capital markets (Grumet, 2007, p. 7). When signed into law on July 30, 2002, SOX immediately led to the creation of the Public Company Accounting Oversight Board (PCAOB) that specifically is focused on financial oversight of publicly-held companies (Grumet, 2007, p. 7). SOX required companies to bring much-needed improvements to their internal financial auditing processes, development of their financial statements, oversight of auditors (as was seen as critical in the case of Arthur Anderson's fraudulent activity at Enron), and much-needed improvements in internal process controls and accounting functions of companies. Soon the need to coordinate compliance activities across entire organizations led to the development of governance as a strategic priority in many organizations. The growth of Governance, Risk and Compliance (GRC) initiatives within many organizations encapsulates this trend towards enterprise-wide compliance.

Arguing Against Legislated Compliance and Governance

The costs, both from a financial and time standpoint for organizations to stay in compliance with the near tidal wave of regulations and laws is seriously impacting their ability to stay globally competitive and in some case, financially viable as well. Simply put the costs of compliance from a financial and resource standpoint are so debilitating and distracting from their core businesses that often the only alternative is to de-list their equity and stock from public exchanges, file with the Securities and Exchange Commission (SEC) to go private. In one study completed (Engel, Hayes, Wang. 2007. p. 116), there was a 30% increase in the number of companies choosing to go private vs. stay public and be subjected to the major costs of led to record numbers of companies in one ninety day period going private to alleviate the high costs of getting in and staying within compliance.

It is common for many smaller publicly held organizations to choose to go private due to cost savings alone. One of the major catalysts of this strategy on the part of smaller firms is the fact that much of the compliance and governance legislation is specifically written for larger, more diverse organizations (Grumet, 2007, p. 7) who have more advanced reporting and auditing processes and it-related software applications in place. The combination of the laws being written for larger organizations and the implied assumption of more advanced reporting and analysis tools available makes the option of going private a clear one for many smaller organizations.

A second major cost catalyst that is against forcing higher levels of compliance and governance on organizations is the fact that many companies simply do not have the expertise in-house to complete compliance projects. As a result the majority of smaller companies often outsource their compliance efforts to Indian outsourcers. This has lead to as much as 30% of top-line revenue earned by Indian outsourcers coming from American-based companies needing to be in compliance to the Sarbanes-Oxley Act (Survey: Virtual Champions, 2006, pp. 3, 4). In addition to not having the necessary expertise in-house, not being able to afford hiring staff just for compliance initiatives, there is also the time constraint that SOX specifically forces on many organizations in conjunction with the need of reporting material events within 72 hours to be in compliance with Section 404 of the Act. This forces many organizations' Information Technologies (it) costs and complexity to exponentially increase to bring an organization into consistent compliance to SOX legislation and other regulatory requirements (Meiselman, 2007, p. 40). Compounding this are the capital expenses of multinational corporations who must coordinate and synchronize all governance and compliance reporting across each nation they sell into, have partnerships in, or even source products from. The complexities of ensuring global compliance lead many organizations to create a Global Public Policy Network (GPPN) (Detomasi, 2007. pp. 325, 329) which requires significant investment to continually functioning correctly on its own as well. The development of GPPNs forces scalability and sustainability of processes globally, and consolidation reporting functions (Kolk, 2008, p. 1)

Finally there is the irony that while compliance and governance are meant to lessen risk, these laws and regulations actually leads to exponentially higher levels of it, especially in merger and acquisition (M&a) scenarios. According to published research (Mueller, Yurtoglu 2007, p. 879) compliance and governance regulations exponentially increase the complexity, costs and risks of mergers and acquisitions (M&a) and infuse them with much greater levels of risk than would have otherwise been the case. This is primarily due to the fact that SOX, compliance and governance laws like it are still maturing as laws (Montana 2007, pp. 52, 53)

Why Governance Is Critical for Global Stability & Growth

The level of corruption, fraud and malfeasance had reached a level prior to the passage of SOX that if left unchecked would have plunged the U.S. economy into a far deeper recession and potential economic depression that would have been the case through cyclical or normal economic cycles. Over and above the need for quantifying trust and verifying the ethics of an organizations' Boards of Directors and senior management, compliance and governance legislation is critical for resorting confidence and capital markets while re-vamping and in many cases completely redesigning business processes internally.

In fact the growth of Business Process Management (BPM) and Business Process Outsourcing (BPO) can be directly attributed to the corresponding growth in compliance and governance legislation, which has forced many companies to completely re-align their internal financial reporting processes. As part of the process redefinition, there continues to be a fine-tuning of auditing processes, which has lead to greater cost savings. Compliance has become the catalyst for re-aligning processes within companies, significantly reducing the costs of essential processes (Grumet, 2007, p. 7). The standardization of these processes has made many organizations significantly more efficient, capable of attaining lean manufacturing objectives for the first time.

With the increasing focus on accountability, the fine-tuning and tailoring of auditing, the streamlining of processes, many organizations also report a shift in their corporate cultures to focus more on results and less on purely activity. The shift to measurable results has accentuated the need for continually evaluating strategies in terms of their effectiveness and not merely being satisfied that there is much going on. it's the effectiveness of what's going on in terms of strategies in all departments of an organization that matter most. This cultural shift would not have happened without compliance and governance significantly changing the process and audit procedures within organizations.

The increase in compliance and governance legislation has also led to a significant increase in the number of whistleblower programs defined at the strategic level in many organizations. The logic of these programs is based on having employees act as auditors to any activity that is unethical and therefore potentially very costly for an organization if and when an auditor finds it. Instead of paying the penalties to an auditor's agency the organizations reason it is better to become self-regulating and have active whistleblower programs

The passage of SOX specifically has led to a rapid growth in whistle blowing programs on a corporate-wide basis, leading to a 34% increase in fraudulent activity (Eaton & Akers. 2007, pp. 65, 66). The use of whistle blowing programs in many organizations is seen as a continuous self-auditing strategy.

Conclusion

The new reality for any publicly-held organization is that compliance and governance legislation is significantly changing their core business… [END OF PREVIEW] . . . READ MORE

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