chief financial officer personally certify the firm’s financial statements. It also
requires real-time disclosure of changes in a firm’s financial condition. Fines
for violations can now reach $5 million (plus disgorgement), and violators can
go to prison for up to 20 years.^29
As a second response to the scandals, Congress strengthened the role of the
United States Sentencing Commission.^30 The commission’s job is to establish
effective penalties for organizations that violate federal laws. Its guidelines call for
increased penalties for organizations with a history of violations or of tolerance
for illegal activities. The guidelines also permit reduced penalties for firms that
report illegal activities, take responsibility for them, and cooperate with the pros-
ecuting authorities. Penalties are also reduced for organizations deemed to have
effective compliance and ethics programs. In 2004, the Commission strength-
ened the requirements for such compliance programs. To qualify for mitigation,
the program must include: (1) standards and procedures to prevent and detect
criminal conduct; (2) responsibility at all levels and adequate resources, and
authority for the program; (3) training at all levels; (4) auditing, monitoring,
and evaluating program effectiveness; (5) nonretaliatory internal reporting sys-
tems; (6) incentives and discipline to promote compliance; and (7) reasonable
steps, upon detection of a violation, to prevent further similar offenses. In short,
recent government policies are meant to provide strong incentives for firms to
prevent illegal behavior (and to expose it should it happen).
Nevertheless, questionable practices continued. After Lehman Brothers
failed in 2008, a report by the court-appointed examiner indicated that
Lehman had been using accounting tricks to make the company look as if it
were doing better than it was. Using repurchase agreements, Lehman would
temporarily remove questionable securities from its books at the end of each
quarter. However, rather than characterize these as repurchase agreements
(the truth), Lehman listed these as outright sales (a lie).616 Chapter 14 Asymmetric Information and Organizational Design(^29) Sarbanes-Oxley has not been without controversy. Some critics worry about the high compliance
costs. See, for example, “Will the SEC Embrace a Softer Sarbanes-Oxley,” Knowledge@Wharton
(http://knowledge.wharton.upenn.edu), April 18, 2007.
(^30) See “An Overview of the United States Sentencing Commission and the Federal Sentencing
Guidelines,” United States Sentencing Commission, 2004.
(^31) See R. Koenig, “Du Pont Plan Linking Pay to Fibers Profit Unravels,” The Wall Street Journal
(October 25, 1990), p. B1.
Incentive Pay at
Dupont’s Fiber
Division
Revisited
In October 1990, only two years into its three-year plan, DuPont announced that it was
ending its experiment to link workers’ compensation in its fibers division to division prof-
its.^31 Although it promised to give workers and managers a greater sense of responsibil-
ity for (and stake in) the success of the fiber business, the plan had a number of
unintended, though predictable, consequences. Instead of becoming more deeply
involved and paying greater attention to profitability, many workers grew more alienated,
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