US businesses failing to make ethics disclosures

Companies are dodging ethics disclosures that were put in place to deal with the types of misconduct that brought about the downfall of energy giant Enron in 2001, according to the authors of a new study.

Conducted by University of Georgia law professor Usha Rodrigues and Texas Tech University professor Mike Stegemoller, the study examined the disclosure of related party transactions that are required under section 406 of the US Sarbanes-Oxley act, which requires public companies to disclose the code of ethics, or explain the lack of one. It also requires companies to reveal immediately whenever it grants a waiver of that code to its top three corporate officers.

The results of the study, which will be published in the March edition of Virginia Law Review, found that companies are either delaying such disclosures, or have failed to do so altogether, according to a report published in Compliance Week. What is more, the authors also found no evidence that the US Securities and Exchange Commission has ever sought to enforce non-compliance of the rule.

“Companies aren’t disclosing the information the way they’re supposed to. They are not labelling it correctly and they are delaying the disclosure,” Ms Rodrigues told the trade publication.

In conducting the study, the authors examined US corporate filings between 2003 and 2008. They found that during the entire period, there were only 36 instances where waivers for section 406 were filed with the SEC. The report noted that section 406 was drafted in reaction to the Enron accounting scandal of 2001, in which special purpose entities were used by senior corporate officers to keep debts off the energy giant’s balance sheet and off the public radar.

To mask their failure to make the required ethics waiver disclosures, the authors said one tactic adopted by companies is to make the disclosure for related party transactions in the annual proxy statement, which are filed separately, instead.

In other cases, companies have watered down their ethics codes so that they did not disallow the types of violations that led to section 406’s adoption. This meant they were able to minimise the need for disclosure.

The authors said they believe that one reason why companies have chosen to shy away from making the required disclosures is because they were unfamiliar in dealing with corporate codes of ethics, which have only been recently introduced to many organisations. They believe companies did not yet have a system in place to flag violations or waivers as they happen. Alternatively, they said other companies may have intentionally chosen to ignore the disclosure requirements because the SEC is unlikely to enforce it, the report said.

To address concerns, the authors suggest that the ethics waiver disclosure requirements be eliminated altogether. Instead, all public companies should require its CEO, CFO, or chief accounting officer to disclose related party transactions immediately, rather than in the annual 8-K filing, they argued.