Make the argument that it is fair and equitable to find CEOs liable if a subordinate has committed fraud or worse? Recent legislation requires CEOs of public corporations to sign an affidavit...
Make the argument that it is fair and equitable to find CEOs liable if a subordinate has committed fraud or worse?
Recent legislation requires CEOs of public corporations to sign an affidavit stating that all accounting put forth by the company is accurate and not misleading. Obviously, the CEOs do not personally perform this accounting; instead,they rely on the accuracy of employees assigned to perform such tasks.
To make this argument, we need to rely on the idea that the CEO is the head of the company and is therefore responsible for all major decisions made by the firm. The CEO should therefore be aware of everything very important that is happening in the firm. The sorts of financial statements that CEOs have to certify under Sarbanes-Oxley certainly qualify as important things.
If we do not hold CEOs accountable, you can argue, they will have no incentive to care about the accuracy of these statements. Instead, they might put pressure on their subordinates to make the statements look the way the CEO wants them. This would give the CEO an incentive to push subordinates to cheat and would also allow them to disclaim responsibility for what their subordinates did.
Because CEOs are responsible for all major firm activities, and because it is important to keep them from pressuring their subordinates to issue misleading statements, it is fair and equitable to require them to certify the statements.
The Sarbanes-Oxley Act of 2002 (SOX), introduced in the United States of America in the aftermath of Enron, has fundamental governance implications for listed American companies, their foreign subsidiaries and foreign companies that have US listings. It applies to all Securities and Exchange Commission (SEC) registered organizations, irrespective of where their trading activities are geographically based.
The management of the company headed by CEO is responsible for the corporate governance of the organization along with CFO and Independent Auditor as under.
- Quarterly certification of financial reports
- Disclosure of all known control deficiencies
- Disclose acts of fraud
- Management annually certify internal controls
- Independent accountant must attest report
- Quarterly change reviews
- Monitor operational risks
- Material event reporting
- ‘Real-time’ implications – 4 business days for report to be filed
Though individuals are also personally responsible for the frauds done by them but it is the management responsibility to have system in place that all such frauds are readily detectable. Hence if the frauds are not detected, it is a management failure and if detected and not disclosed then again it is a management failure. In both cases CEO is responsible.