Until recently, the SEC was reluctant to hit companies with big fines for wrongdoing because the…

Until recently, the SEC was reluctant to hit companies with big fines for wrongdoing because the penalties hurt shareholders whose stock prices had already been hammered by scandal. But the Sarbanes-Oxley Act now lets the SEC use the fine funds to repay stockholders. For example, accounting frauds cost WorldCom (now MCI Inc. ) $750 million and Adelphia $715 million in fines. Recent pressure from Congress has encouraged the SEC to try to create some objective measures for fines so there can be continuity from case to case. The SEC has been trying to define which behaviors should get which punishments. The SEC wants a series of objective measures so there can be continuity from case to case. Many believe a good starting point is whether a company benefited from its wrongdoing, in which case fines would be higher. Commissioners also debated how much credit a company should get for cooperating with the SEC, in which case fines would be lower. Some individuals argue that any signposts will be better than today’s unmarked landscape.

Instructions

With a group of students identified by your instructor, write a one-page discussion that uses Exhibit 21–1 to identify how SEC policies have the potential to change managers’ decision processes. In particular, focus on decisions managers make when considering whether to commit fraud. Consider the relevant costs and earnings that managers might consider in making this type of decision. Use the ideas in this chapter that are related to what is relevant to a particular decision to help with your analysis. In the conclusion of your paper, state whether your group thinks objective measures for fines will change the decision processes of managers who are considering fraud.

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