"Corporate responsibility" and "corporate governance" are relatively new terms that have become quite popular following the sudden collapse of Enron. Stockholders, the general public and government officials were outraged by Enron's collapse and the wave of corporate accounting scandals that quickly followed. The ensuing national debate resulted in the enactment of the Sarbanes-Oxley (Corporate Responsibility Reform) Act on July 30, 2002.
As we have seen, weak corporate governance can result from many factors, including a lack of accounting transparency and substantial overreliance by boards of directors on the decisions of management. Historically, investors have depended on the diligence of outside auditors to independently verify the financial position of the firm and temper such risks. As the collapse of Enron illustrates, however, conflicts of interest  within auditing firms can disable safeguards and, in turn, weaken business practices and threaten investor trust.
Currently, more than 20 corporations are under investigation for corporate-accounting scandals. Yet, the number of publicly traded commercial banks facing such scandals has been small. Why? No one knows for sure, but one difference is clear: Commercial banks are subject to an extra layer of independent oversight because of the bank examination process.
Through the risk-focused examination process, bank examiners complement the function of independent auditors. Bank examiners:
Bank examiners also operate under a strict code of ethics and do not engage in consulting activities with the banks they supervise. As a result, there are no conflicts of interest, and a bank examiner truly can offer an independent assessment of a bank's risks.
Regulators are responsible for furthering the stability of the banking system. Effective corporate governance and oversight by bank supervisory agencies support this objective by encouraging safe and sound banking practices. This, in turn, helps to build and maintain the public's trust.
Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.