Question

QUESTION ONE

Corporate governance is said to be the way companies are run and controlled. The principle behind corporate governance is that owners of companies employ managers to take care of their interests. However, in situations like this a principal and agent relationship is entered into between the shareholders of the company as owners of the resources and the managers who work for them and execute the daily running of the company.

There are usually challenges in running companies whose owners are not available everyday resulting in moral hazards such as remoteness, complexity of operations, conflict of interest and consequence of error among others.

Corporate governance was largely for a long time ignored until the collapse of Enron an energy giant in the United States of America in 2000/2001 after taking advantage of the weaknesses in the principal/agent relationship process.

Required:

Discuss and describe any four (4) fundamental changes that were brought by the Sarbanes Oxley Act of 2002 that introduced the best practices regarding the management of corporate institutions after the collapse of Enron in 2001.

Answer 1

Sarbanes oxley Act 2002 has prescribed fundamental changes and they are as follows-

A. There were Harsher punishment which were introduced for obstruction of justice and committing fraud in the securities market to the extent of 25 years.

B. Sarbanes oxley act provided for the job securities to the whistleblowers and it completely eliminated the loans which are provided by the company to the executives of the company.

C. Sarbanes oxley act required chief executive officers and other higher officers of the company to personally verify the financial statement and it also stated their personal liability in case of fraud

D. Sarbanes-oxley Act also eliminated the probability of insider trading and it also provided for strict restrictions on various types of insider trading in order to manipulate the share price.