Question

Three decades ago, corporations and corporate directors were rarely prosecuted for crimes, and penalties for corporate crimes were relatively light. Today, this is no longer true. Under the corporate sentencing guidelines and the Sarbanes-Oxley Act, corporate wrongdoers can receive substantial penalties. Do these developments mean that corporations are committing more crimes today than in the past? Will stricter laws be effective in curbing corporate criminal activity? How can a company avoid liability for crimes committed by its employees? ​explain in two paragraphs

Answer 1

Sarbanes-Oxley Act was established in response to corporate scandals that took place in large corporations such as Enron and Worldcom. The objective of this act is to encourage more financial transparency and prevent accounting/financial frauds by making the management responsible for developing internal control systems and ensuring accuracy and correctness of data/information provided in the financial statements. Based on the strictness of this law and the measures proposed by this act to curb corporate frauds, it can be concluded that corporations are committing more crimes today than in the past.

Definitely stricter laws will be effective in curbing corporate criminal activity. It is because once the management has been made accountable for their actions, they know that any kind of accounting fraud or misstatment in the financial statements can affect their position in the organzation and can also cause serious harm to the reputation and creditoworthiness of the company, thereby, resulting in legal actions taken against them/company. Further, investors may pull out their money from the company affecting its financial position and stability.

The company can avoid liability for crimes committed by its employees only if it can establish the fact that the employee was acting outside the authority granted to him/her and that the company has not benefited in any form from the fraudulent/criminal conduct of the employee. It is important for any company to ensure that the employees comply with ethical policies and conduct their activities in accordance with established business procedures. The company should also inform the employees of any disciplinary action that may be taken in case they are found to be engaged in fraudulent activities or outside the scope of their job responsilities. Proper internal control systems to detect and prevent fraud and regular review of accounting procedures can go a long way in reducing the potential for financial frauds and criminal activities within the organization.