Financial statements insurance enhances corporate governance in a Sarbanes–Oxley environment

Abstract

The Sarbanes–Oxley Act has sought to reform the existing corporate governance mechanisms in order to alter the circumstances that led to the accounting debacles at Enron, WorldCom and so on. But other than adding and injecting additional regulatory layers, the Act stops short of providing a workable operating definition of corporate governance and does not effectively deal with the perverse incentives that have generated the ‘urge’ to ‘cook the books’. This paper claims that at the very core of proper corporate governance is the communication of information that managers of corporations possess to outside investors. It is important that this communication be both relevant and truthful. This paper describes a mechanism that is designed to remedy corporate governance failures by realigning incentives of outside auditors with those of the shareholders. This is accomplished by insuring financial statements against losses incurred by shareholders that are caused by omissions or misrepresentations.