•What are the implications of conflicts of interest and how do they impact corporations?

Using the Sarbanes-Oxley Act of 2002, give an example of a potential conflict of interest that could arise in business, and your recommendation for how that conflict or potential conflict could be resolved.

1 Answer

  • Jared
    Lv 6
    8 years ago
    Best Answer

    Sarbanes-Oxley largely came about due to the Enron and WorldCom (among many... Tyco, Adelphia, etc.) accounting frauds. Enron is most famous in this category because it's CFO (Andy Fastow) was ALSO the managing partner of a company that made millions doing business with Enron. Due to his financial machinations, the financial statements of the company were wrong. S-O Act makes it to where the CEO and CFO must sign off on the accuracy of those financial statements.

    Being part of the management structure of a for-profit company that does business with your company is a definite conflict of interest. Notifying the Board of Directors that you are considering doing something like that; having them say it's okay; AND -- most importantly -- providing them with detailed statements regarding your profit and loss in that business venture compared to your compensation from the Company -- is a way to mitigate, but not necessarily resolve, the conflict.

    For instance...

    I'm a Vice-President of XYZ Corp. I make $100,000 yearly in salary and $50,000 in potential performance bonuses.

    ABC Corp. does business with XYZ Corp. I'm offered a job and an investment opportunity with XYZ Corp (taking a job with ABC Corp. would really be something your boss could okay, but having both job and investment opportunity brings you closer to what you're talking about). If you make $10,000 a year in wages with the potential for $1,500 in bonuses, you're conflict is minimal.

    If you make $10,000 in wages and $1.5 million in investment gains, then you have a major problem, especially if you hold a role like CFO. That conflict could only be mitigated by you leaving XYZ to go work full-time for ABC.

    Another example would be you are an accountant for Enron and a lawyer for Vinson & Elkins that works on Enron accounting affairs. You'd find yourself being a person responsible for producing part of the accounting statements that Enron presents to investors, at the same time you are responsible for ensuring that Enron accountants (aka YOU) do not break any laws in the process of doing such accounting work. You audit yourself. Impact: company management, the Board, investors, government regulators, rating agencies... the IRS... nobody should trust Enron's financial statements. If the CFO or CEO signs off on financial statements produced in this manner, knows you have such a conflict, and doesn't get it okay'd by the Board OR knows that it led to misrepresented financial statements, then he or she will be criminally liable. It is fraud.

    Again, Impact: investors lose money; bondholders lose money -- that means the company loses value (net worth). Customers suffer, and take their business elsewhere. This reduces revenues, and thus profits. Investors and bondholders lose more money. The company has even less money now to to do business. Follow the vicious cycle to its end, and you end up being Enron, and like Andy Fastow and Jeff Skilling -- in prison.

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