11-year-long study supports financial Code of Ethics
After years of questions surrounding the effectiveness of the Sarbanes Oxley Act (major federal legislation passed in 2002 following the WorldCom and Enron accounting scandals), Belmont University Distinguished Professors of Leadership & Business Ethics, Drs. O.C. and Linda Ferrell recently co-authored a study validating section 406 of Sarbanes-Oxley: Requiring senior financial officers to adopt a code of ethics does, in fact, lower restatement of earnings often associated with financial mismanagement.
Sarbanes Oxley, commonly referenced as SOX, was implemented to address inherent risks public companies face in finance and accounting. Section 406 was intended to assist in reducing financial misconduct by requiring a company to state whether it has adopted a specific code of ethics for principal, financial and accounting officers. The research sought to determine the effectiveness of this requirement.
Co-authored with Saurabh Ahluwalia (University of New Mexico) and Dr. Terri Rittenberg (University of Wyoming), the Ferrells’ study began in 2005. At the time, only 67 of the 176 Fortune 500 public companies examined in the study had a specific code of ethics for chief financial officers. A decade later, that number had only increased to 77 of the 176 companies in their sample, despite the existing SOX federal legislation requirement. What was discovered, though, was that the companies who had implemented the specific code of ethics were catching misreporting earlier and seeing significant tapering in the number of financial restatements that were being made.
Dr. O.C. Ferrell said, “Our tracking over the course of a decade found that companies that had implemented a specific financial code of ethics engaged in much improved scrutiny of their own practices, catching problems more quickly and lowering the need for financial restatements.”
Dr. Linda Ferrell added, “Our results clearly confirm that the adoption of a financial code of ethics improves the integrity of financial reporting. This study should encourage all public companies to develop and implement a financial code of ethics, and public policy decision makers should continue to monitor and support SOX 406’s implementation.”
The Ferrells’ and their co-authors’ study was published last month in the prestigious Journal of Business Ethics.
Dr. O.C. Ferrell is President-Elect of the Academy of Marketing Science and has received numerous awards recognizing him as a distinguished educator. He serves as a board member for the NASBA Center for the Public Trust and serves on the advisory board of Savant Learning. The co-author of over 20 books and more than 100 articles, Ferrell’s academic research focuses on ethical decision making, stakeholder relationships and social responsibility. He has served as a consultant on numerous legal cases on the subject of ‘duty to warn.’
Dr. Linda Ferrell is immediate Past President of the Academy of Marketing Science. She serves on the NASBA, Center for the Public Trust board. She serves on the Direct Selling Education Foundation Board and Executive Committee. She also serves on the board of Mannatech, a NASDAQ listed health and wellness company. She has published in numerous business journals, serves as an expert witness in cases dealing with business ethics disputes and has assisted companies in the development of their ethics and compliance programs.