Page 145 - Accounting Information Systems

116 PART I Overview of Accounting Information Systems

company time or outside of work hours? Is there a difference if some profit-making activity takes place
rather than, for example, using the computer to write a personal letter? Does it make a difference if a
profit-making activity takes place during or outside working hours? Is it okay to look through paper files
that clearly belong to someone else? Is there any difference between paper files and computer files?

SARBANES-OXLEY ACT AND ETHICAL ISSUES
Public outcry surrounding ethical misconduct and fraudulent acts by executives of Enron, Global Cross-
ing, Tyco, Adelphia, WorldCom, and others spurred Congress into passing the American Competitive-
ness and Corporate Accountability Act of 2002. This wide-sweeping legislation, more commonly known
as the Sarbanes-Oxley Act (SOX), is the most significant securities law since the Securities and
Exchange Commission (SEC) Acts of 1933 and 1934. SOX has many provisions designed to deal with
specific problems relating to capital markets, corporate governance, and the auditing profession. Several
of these are discussed later in the chapter. At this point, we are concerned primarily with Section 406 of
the act, which pertains to ethical issues.

Section 406—Code of Ethics for Senior Financial Officers
Section 406 of SOX requires public companies to disclose to the SEC whether they have adopted a code
of ethics that applies to the organization’s chief executive officer (CEO), CFO, controller, or persons per-
forming similar functions. If the company has not adopted such a code, it must explain why. A public
company may disclose its code of ethics in several ways: (1) included as an exhibit to its annual report,
(2) as a posting to its Web site, or (3) by agreeing to provide copies of the code upon request.
Whereas Section 406 applies specifically to executive and financial officers of a company, a com-
pany’s code of ethics should apply equally to all employees. Top management’s attitude toward ethics
sets the tone for business practice, but it is also the responsibility of lower-level managers and nonmanag-
ers to uphold a firm’s ethical standards. Ethical violations can occur throughout an organization from the
boardroom to the receiving dock. Methods must therefore be developed for including all management
and employees in the firm’s ethics schema. The SEC has ruled that compliance with Section 406 necessi-
tates a written code of ethics that addresses the following ethical issues.

CONFLICTS OF INTEREST. The company’s code of ethics should outline procedures for dealing
with actual or apparent conflicts of interest between personal and professional relationships. Note that the
issue here is in dealing with conflicts of interest, not prohibiting them. Whereas avoidance is the best pol-
icy, sometimes conflicts are unavoidable. Thus, one’s handling and full disclosure of the matter become
the ethical concern. Managers and employees alike should be made aware of the firm’s code of ethics, be
given decision models, and participate in training programs that explore conflict of interest issues.

FULL AND FAIR DISCLOSURES. This provision states that the organization should provide full, fair,
accurate, timely, and understandable disclosures in the documents, reports, and financial statements that it
submits to the SEC and to the public. Overly complex and misleading accounting techniques were used to
camouflage questionable activities that lie at the heart of many recent financial scandals. The objective of
this rule is to ensure that future disclosures are candid, open, truthful, and void of such deceptions.

LEGAL COMPLIANCE. Codes of ethics should require employees to follow applicable governmental
laws, rules, and regulations. As stated previously, we must not confuse ethical issues with legal issues.
Nevertheless, doing the right thing requires sensitivity to laws, rules, regulations, and societal expecta-
tions. To accomplish this, organizations must provide employees with training and guidance.

INTERNAL REPORTING OF CODE VIOLATIONS. The code of ethics must provide a mechanism
to permit prompt internal reporting of ethics violations. This provision is similar in nature to Sections 301
and 806, which were designed to encourage and protect whistle-blowers. Employee ethics hotlines are
emerging as the mechanism for dealing with these related requirements. Because SOX requires this function
to be confidential, many companies are outsourcing their employee hotline service to independent vendors.