Wednesday, November 29, 2006

 

The Placebo that is Sarbanes-Oxley

The headline says it all: Five Years After Enron, Firms Seek Weaker Rules

“Business interests, seizing on concerns that a law passed in the wake of the Enron scandal has overreached, are advancing a broad agenda to limit government oversight of private industry, including making it tougher for investors to sue companies and auditors for fraud.”
Calling them “concerns” is a bit of an understatement – Sarbanes-Oxley (SOx) is one of the worst pieces of legislation to pass in recent memory. Passed in the wake of Enron, the law adds significant regulatory requirements for publicly-held companies while creaing a new oversight board for auditors (the Public Company Accounting Oversight Board.- PCAOB).

It’s fair to ask, I think, would SOx have prevented Enron? Doubtful. PCAOB wouldn’t have had done anything with Andersen – they were generally recognized as among the most prestigious of audit firms and some of the new regulations wouldn’t have directly dealt with the problems at Enron. For example, the requirement for independent outside audit committees doesn’t eliminate the fact that the directors on those independent committees are still getting a check from the corporation for their work as directors. No evidence that a typically assembled committee would have sniffed out the problems at Enron.

And let’s remember – the problems at Enron were sniffed out. The market reacted and people have gone to jail. How would that have been fundamentally different under SOx? Yes, investors lost money. Investors lose money everyday. But investing inherently involves risk. I never seriously thought of putting any money into Enron; not because I was prescient but because I could never quite explain what they did for a living.

…and just to keep things in perspective, let’s review all the changes and requirements Congress imposed on our UN contributions in the wake of Oil-for-Food.

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