Running head: ETHICS AND FINANCE

Ethics and Finance

A case of corporate financial abuse related to the Sarbanes Oxley Act of 2002 is SEC v.
Baker, No. A-12-CA-285-SS, 2012, WL 5499497 (W.D. Tex. Nov. 13, 2012). In this case it was held
that corporate executives could lose their financial bonuses and other incentive compensation if their
company is required to revise its financial statements as a result of misconduct, even if the
executives did nothing improper.
The mistakes made by the company ArthroCare Corporation were that frauds were
committed by two senior vice presidents of Arthrocare, John Raffle and David Applegate. The SEC
brought action under Sec. 304 of the SOX for statutory reimbursement of cash bonuses, incentives,
and equity based compensation earned by ArthoCares CEO, Michael Baker, and its CFO Michael
Gluk during the periods which were restated (Litvak, 2014). The mistakes made by the firm were
paying its CEO and CFO bonus and incentive compensation even though fraud had been committed
by two senior Vice Presidents.
If the digital marketing firm is a public company, and a fraud is perpetrated by top executives
to such an extent that the financial statements of the company have to be re-stated, then the
bonuses and cash incentives of the CEO and the CFO will be disgorged under section 340 of SOX. It
does not matter that the CEO and the CFO were not involved in the fraud. The lesson the digital

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marketing firm should learn is that its CEO and CFO should identify and stop any fraud being
committed as soon as possible. The magnitude of the fraud should be kept so low that it does not
require restatement of past financial statements. The CEO and the CFO could have identified the
frauds being committed and prevented the perpetration of frauds for years. This would have
mitigated the repercussions.
Market pressure leads to unethical behavior. Market pressure may take the form of
aggressive competitors, price cutting, or loss of market share. This leads to unethical behavior. The
unethical behavior may take the form of corruption, providing customers what they want even though
it may be bad for others, and compromising on quality. The market pressure in the context of
Sarbanes Oxley Act means pressure from the stock markets to satisfy their expectation. Unethical
actions may be taken to meet market expectations of revenue, profits, and growth. Currently, stock
options are given to executives. The executives become interesting in keeping the price of stocks
high. Unethical actions are taken to satisfy market pressures so that the prices of shares do not
decline.
The influence of basics of finance in unethical behavior is that the perpetrators take a risk
when they commit a fraud. Further, when they succumb to market forces they are trying to keep their
investments liquid. Time value of money or getting results today motivates unethical behavior.
Sarbanes Oxley Act of 2002 has changed this by strengthening the control environment, making
documentation more reliable, and increasing audit committee involvement. The Sarbanes Oxley Act
of 2002 has compelled companies to have more standardized processes for information technology,
better internal control within partner companies, and improved automated controls/manual controls.

ETHICS AND FINANCE

Section 404 of SOX has been effective in creating an environment where there is lower possibility of
fraud. The impact is that there is better protection for shareholders.
The behavior of companies has become more ethical. Because of the rules laid down in
Sarbanes Oxley Act of 2002 and because of the penalties prescribed in the act, the behavior of
companies has become more ethical. The top executives are required to certify the financial
statements of the company and penalties for giving false statements are high. Everyone agrees that
corporate governance has improved with SOX. From the deontological ethical perspective
companies now follow the rules and do their duties more diligently than before (Banerjee, 2015).
The change that companies had to make was in the preparation and presentation of the
financial statements. The Sarbanes Oxley Act of 2002 requires that executives take individual
responsibility for accuracy and completeness of corporate financial reports. It specifies the
responsibility of corporate officers for accuracy and validity of corporate financial reports. Now
section 302 of SOX requires that the Chief Executive Officer and the Chief Financial Officer certify
and approve the integrity of their companys financial reports every quarter (Banerjee, 2015). In
addition, there must be increased reporting of off balance sheet transactions, pro-forma figures, and
stock transactions of corporate officers. The SOX also requires timely reporting of material changes
in financial condition and specific enhanced reviews by SEC (Sun, 2014).
Digital Marketing means promotion of products or brands through electronic media.
Specifically, this means marketing of products or services using digital technologies. These include
the internet, mobile phones, display advertising, and digital media (Sun, 2014). The effect of
Sarbanes Oxley Act of 2002 on this industry is limited to Public Companies. Public companies who

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are in the industry of Digital marketing gain from Sarbanes Oxley Act of 2002. The investor
confidence in such companys increases, the reliability of their financial statements goes up, and
there is enhanced fraud prevention. Public companies in the digital marketing industry have to incur
additional costs such as external auditor fees, directors & officers insurance, board compensation,
and lost productivity because of compliance with provisions of SOX. Overall, after the SOX digital
marketing companies that are public companies will have better credibility and have enhanced ability
to raise capital or borrow funds.

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References

Banerjee, Suman, Mark Humphery-Jenner, and Vikram Nanda. "Restraining overconfident

CEOs through improved governance: Evidence from the Sarbanes-Oxley Act." Review of Financial
Studies (2015)
Brainmass. (n.d.). BrainMass Solution Library. Retrieved May 26, 2016, from
https://brainmass.com/solution-library
Litvak, Kate. "Defensive Management: Does the Sarbanes-Oxley Act Discourage Corporate
Risk-Taking." U. Ill. L. Rev. (2014)
Sun, Jerry, George Lan, and Zhenzhong Ma. "Investment opportunity set, board
independence, and firm performance: The impact of the Sarbanes-Oxley Act." Managerial Finance
40.5 (2014)