Posted on 11/30/2006 1:15:39 AM PST by Mrs Ivan
The US should rethink its regulation of firms and bosses to stay competitive, according to a group with close links to Treasury Secretary Henry Paulson. Revising rules under the Sarbanes-Oxley Act would make US markets more attractive, the Committee on Capital Markets Regulation (CCMR) said.
Businesses have been critical of legislation brought in after the collapse of Enron and other scandals.
They point to high regulatory costs and the fear of legal action and jail.
Mr Paulson said earlier this month that the Sarbanes-Oxley Act did not need changes, but added the US should look at how the rules were being enforced.
Tough choice
Critical voices have been gaining strength since the US toughened rules governing corporate governance to reassure investors, following the collapse of energy trading firm Enron and telecoms provider WorldCom.
According to the CCMR, there is now too much regulation, and the fear of being involved in litigation and legal battles may be putting foreign companies off listing their shares on US stock markets.
"Firms must choose to come to the US: they do not have to come," the group said in its 135-page report. "In the shift of regulatory intensity, balance has been lost to the competitive disadvantage of US financial markets."
"The evidence suggests that balance does need to be restored," it added. In its report, the CCMR said that US markets attracted 8% of global stock market flotations, or initial public offerings (IPOs).
That compares with almost 50% of IPOs in the 1990s, the CCMR said.
All but one of the world's biggest IPOs took place outside of the US this year.
Some of the changes could be put down to foreign markets becoming more efficient and improving trading platforms, but much of the shift was due to the US having a more aggressive regulatory and legal environment, the CCMR said.
'Risk aversion'
To redress the balance, the US should limit penalties for companies, rein-in costs, ease capital requirements for foreign firms, improve co-ordination between regulators and revise the Sarbanes-Oxley Act, the group argued.
"Taken together, the proposed changes would enhance shareholder value by reducing the cost of capital, increasing expected firm cash flows, and reducing excessive risk aversion of corporate managers, auditors and directors," it said.
Not everyone was convinced by the CCMR's argument.
According to James Cox, a professor at Duke University Law School, "close, empirical analysis doesn't support these reforms".
"It's just a classic situation of wrapping your ideas in basic fears and then you can sell it to the people," he said.
The influential CCMR is headed by former White House advisor Glenn Hubbard and ex-Goldman Sachs president John Thornton.
I agree that the Enron debacle was something to avoid repeating, but policy made on a knee-jerk basis like Sarbanes Oxley is often wrong.
Love, Ivan
As you know, Enron and the subsequent demise of TXU in Europe had severe effects on my market - it is not something that I would like to see repeated, but as you rightly say, knee jerk policy is rarely good policy.
Globalization of funds and investors has played a part in the reduction in importance of US equity capital markets. Investors used to care where a firm was listed, but as regulatory regimes have improved elsewhere it makes less difference.
There is no question that SOX has caused foreign firms to avoid US listings like the plague. The only exception seems to be hi-tech firms that feel they must be on the NASDAQ.
If they'd simply enforce the laws that had already existed and left no doubt in people's minds of the consequences, this travesty might have never been necessary.
Too many years people got away with literally, murder under the Clinton regieme. By comparision some felt "paper crimes" were hardly consequential, except for the thousands defrauded of their life savings. It was only when President Bush took office that the piper had to be paid.
Sarbanes-Oxley needs to be repealed, and the people who brought it to light need to be imprisoned for life just for the spite of it.
Certain sectors may be, but I cannot say that it has done the chemical majors any favours.
Sarbanes Oxley looks idiotic but look how it was passed by wide margins. Where were the Republicans? On automatic?
History (from Wikipedia)
The House passed Rep. Oxley's bill (H.R. 3763) on April 25, 2002, by a vote of 334 to 90. The House then referred the "Corporate and Auditing Accountability, Responsibility, and Transparency Act" or "CAARTA" to the Senate Banking Committee with the support of President Bush and the SEC. At the time, however, the Chairman of that Committee, Senator Paul Sarbanes (D-MD), was preparing his own proposal, Senate Bill 2673.
Senator Sarbanes’ bill passed the Senate Banking Committee on June 18, 2002, by a vote of 17 to 4. On June 25, 2002, WorldCom revealed it had overstated its earnings by more than $3.2 billion during the past five quarters, primarily by improperly accounting for its operating costs. Sen. Sarbanes introduced Senate Bill 2673 to the full Senate that same day, and it passed 97-0 less than three weeks later on July 15, 2002.
The House and the Senate formed a Conference Committee to reconcile the differences between Sen. Sarbanes' bill (S. 2673) and Rep. Oxley's bill (H.R. 3763). The conference committee relied heavily on S. 2673 and “most changes made by the conference committee strengthened the prescriptions of S. 2673 or added new prescriptions.” (John T. Bostelman, The Sarbanes-Oxley Deskbook § 2-31.)
The Committee approved the final conference bill on July 24, 2002, and gave it the name "the Sarbanes-Oxley Act of 2002." The next day, both houses of Congress voted on it without change, producing an overwhelming margin of victory: 423 to 3 in the House and 99 to 0 in the Senate. On July 30, 2002, President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." (Elisabeth Bumiller: "Bush Signs Bill Aimed at Fraud in Corporations", The New York Times, July 31, 2002, page A1).
I disagree I think its a good thing. If a publicly traded company issues a financial report, its not good enough for the board of director's to say "well thats what Bob in accounting says", the board of driectors should resonably KNOW that the report is accurate, and have the auditing tools inplace to verify that is was, else they are really kinda deceiving the investor. SOX is good for America, there is just going to be some growning pains in the process.
The main problem with SOX mostly has to do with the hiring of "consultants" that go around and convince companies they need them to "make them compliant". Of cource those consultants are going to suggest the strictest bulletproof implentation of complaince so as to make more work for themselves. The middle manager in audit is going to agree so as to cover his ass, and the buisiness units will comply so not to have any audit points. This isnt the laws fault, thats just bad buisness.
Spookadelic
They say that last year, 20% of private companies that could have gone public but didn't list SOX compliance as the main reason.
Average cost per company $4.3 million dollars per year.
This is an evil, evil law. Stockholders can protect themselves, if they're not demanding companies implement such protections themselves then the government has no business getting involved.
If you create a financial report, and you cannot attest to its accuracy nor will you stand behind its accuracy, and you you know that that report will be used by people investing millios of dollars in your company. Then I see that as fraud. We can talk about SOX until we are blue int he face. But this is the key point. You may not see it as fraud, but I do.
The only think SOX makes a company do is that it's board of directory must sign-off on financial reports as being accurate, and that they know they are acurate. Not trust that they are acurate, but know they are. The law holds the Board of Directors directly responsible for the accuracy of their reports which it should have done a long time ago.
The only penalty for non-compliance is to not have your stock listed on the stock exchange. Which it shouldnt be if your board of directors will not attest that they resonably KNOW their financial reports are accurate?
Since the board of directors is directly responsible for knowing that their financial reports are accurate, then if there is down right fraud being commited in those reports, and you signed off on those reports as being accurate, but you didnt have resonalbe controls in place to know they are acurate, then your guily of fraud and no-excuse... you go to jail. Blaming Bob in accounting isnt good enough anymore.
The funny thing to is that all this expediture that these companies are complaining about, is really an admition that their bord of directors really didnt know nor could they resonably attest to the accuracy of their financial reports. The truth comes out... and the law should mandate that.
That penalty is crucial...
"The Wall Street Journal reported that in 2000 "nine out of every 10 dollars raised by foreign companies through new stock offerings were done in New York....But by 2005, the reverse was true: Nine of every 10 dollars were raised through new company listings in London or Luxembourg...""
"A recent American Enterprise Institute study concluded that SOX has imposed a net cost on the American economy of $1.4 trillion. That is a 10% tax on the entire GDP of the United States. This hurts both employment growth and investors."
This law is nassacring foreign investment here. Depending on the size of the company, every dollar they they invest here up to 10% goes into compliance costs.
I disagree. Frankly, I don't think that SOX has inspired the slightest bit of an increase in investor confidence, and I think the costs of compliance are outrageous--costs, mind you, that could be used for growing the company or returning to shareholders. Again, as has already been pointed out, most companies operate "above the board," so why are we penalizing the 99% of companies that are honest simply in exchange for the government's ability to hang a high-profile scalp on the wall (which, incidentally, we were able to do with Enron despite that SOX wasn't around)?
Second, as far as Enron goes, the existing rules were MORE than adequate--Enron didn't use GAAP and its SEC filings were there for the world to see--as an investor, maybe I might wonder why Enron isn't using GAAP and counting profits from deals that haven't yet happened?
Third, I also think the provisions that require "noisy withdrawl" for corporate attorneys are also poor policy. It merely discourages companies from seeking legal advice that might otherwise lead to more beneficial results.
All in all, I believe it is was a short-sighted law that probably wasn't even read by most members of Congress before they voted on it. It ought to be pitched.
Shoot, even Ford--a massively huge company--is talking about going private. I find that disturbing.
As I said.. we can talk about SOX until we are blue in the face... the point is simple...
Is a board of directors that will not stand behind their financial reports commiting fraud (by looking the other way) knowing that those reports are being used by investors to determine if a company is worth investing in? Should that be legal?
This is really the only discussion to be had about this.
I dismiss that SOX is eating 10% of the GDP.
If a company is spending a lot of money to be compliant then they never were honest... they were defrauding their investors all this time by not assuring in a resonable maner that their financial reports are accurate... That may be ok with you... but I dont think its right, and I dont think it should be legal either...
We will just have to agree to disagree by what standards a board of directors should be held liable for thier financial reports.
It was more then Enron. The biggest factor in all of this was Arthur Anderson. They were suppose to be the watchdog and they acted more like the fox.
That was what shook everybody up.
SOX costs lots of money to implement and there are lots of additional hoops to jump through. Do you honestly think the SOX didn't impose any additional burdens on companies?
For instance, if a company reports according to GAAP and is honest in its reporting, why should it have to follow the labarynth of SOX rules simply because Enron and two or three other companies were cooking the books (especially when Enron didn't even follow GAAP!)?
Frankly, if you're a stockholder in a public company, you ought to be pretty upset about SOX, because every dollar spent in SOX compliance is money out of your pocket.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." -Manuel II Paleologus
A board can stand behind its financial reports without SOX. Why do you need additional regulations?
Besides, riddle me this: SOX was supposedly enacted to deal with fraud by Enron, Tyco, and MCI, right? But all the principals in those companies are in jail (for a long, long time) without SOX...so why is SOX necessary?
Everyone...
I would make one concession...
I would allow a public traded company to be non SOX compliant as long as they publily stated that they will not and cannot stand behind their financial reports. And do so on each financial report. And that that the name under which they do business, and the stock symbol by which their stock is traded under it suffixed by the characters "(nc)" (non compliant) or something like that.
I would be cool with that... then let the investor beware.
that is a funny thing... hehe
That's true, but AA was convicted without SOX (later overturned by bad jury instructions), so why was the passage of SOX necessary?
As a concept SOX was good, as implemented SOX is terrible. The strictest most bulletproof implementation is necessary because if you say you're SOX compliant and you turn out not to be you're in big trouble. It is the law's fault because the law is focused to heavily on absolutes and punishment.
Sorry, but SOX is a complete waste of time and resources.
I know because I'm up to my eyeballs in it from September to December every year, and it does NOTHING that contributes to the quality of the business. All it does is slow us down and keep us from getting things done.
There is also NOTHING about SOX that would have prevented the Enron or WorldCom scandals and those were prosecuted just fine without SOX.
Sure it cost all companies something.
When you make it clear to the board of directors that if...
1. Their financial reports are fradulent.
2. You steal money from the investors by issuing fradulent reports.
3. And your really had no clue what was going on inside he company that made that report you signed off on.
... then you go to jail.
Then yeah... there is going to be a lot of cover your ass. Not becuase SOX so much mandates that they have too... more than it doesn't give a free pass anymore.
You actually think SOX does any of that? SOX doesn't prevent or detect fraud. SOX is about controlling risk, but in stupid and counterproductive ways.
It's bad law. Plain and simple.
A free pass? I notice how you keep avoiding the fate of the principals from Enron, Tyco, and MCI.
But let's check the non-SOX scorecard, shall we?
Enron:
--Rieker: Investor Relations, pled guilty to insider trading.
--Calger: Energy trader, pled guilty to conspiracy.
--Causey: CAO, charged with 30 counts, including fraud, conspiracy, and money laundering. Pled guilty to securities fraud.
--Howard: CFO, Enron Broadband, convicted on conspiracy, wire fraud, and manipulating business records.
--Kopper: Managing Director, pled guilty to conspiracy.
--Koenig: Investor relations, pled guilty to securities fraud.
--Rice: CEO, Enron Broadband, pled guilty to securities fraud.
--Fastow, Andy: CFO, 10 years in prison, $25 million fine. (plea agreement for testimony against other executives).
--Fastow, Lea: Wife of Andy Fastow, five months in prison, one year of house arrest.
--Skilling: CEO/COO, convicted on multiple counts, 24 years, 4 months--not eligible for release until serving 20 years, 4 months. FINED $630 MILLION.
--Lay: CEO, dead. Was convicted and sentenced to 45 years in prison.
Tyco:
--Swartz: CFO, convicted on fraud and larceny charges. Sentenced to 8 to 25 years in prison. Ordered to repay $134 million to Tyco and fined an additional $35 million.
--Kozlowski: CEO, convicted on fraud and larceny charges. Sentenced to 8 to 25 years in prison. Ordered to repay $135 million to Tyco and fined an additional $70 million.
MCI:
--Ebbers: CEO, convicted on securities fraud and nine other felonies. Sentenced to 25 years in prison, not eligible for parole until 2028. MCI has sued Ebbers for $400 million.
Yep, these guys sure did get a free pass! Thank goodness we've got SOX. Nothing but a slap on the wrist for these guys!
We've known this for years!
However it is understandable.
The safeguards we had in place proved to be ineffective at prevention. The goal of SOX is not to punish those caught cheating, it is to prevent cheating by making it harder to game the system.
Now whether it actually does that or if the cost/benefit ratio is skewed is what we are currently debating.
I would say it that some reform was necessary if for no other reason then to restore investor confidence but that they went overboard with it.
SOX doesnt say how to control risk. Your auditors do that. If they do it in stupid and couter productive ways... well... its a free country I guess...
Some of those people got what they deserved, others didnt.
Most of them gave the "Larry in accounting" excuse. The goverment says thats not a good excuse anymore, and made it clear.
Now explain to me why a board member should not be thrown in jail if...
1. His company issued fradulent reports.
2. His company stole investors money by issueing fradulent reports.
3. And he didnt take resonable means ensure that the reports he signed off on were accurate.
"agree that the Enron debacle was something to avoid repeating, but policy made on a knee-jerk basis like Sarbanes Oxley is often wrong."
Hell, that's the only kind of policy congress makes anymore. Something happens, big reaction, flurry of laws passed with no thought of the consequences, economy takes another hit, and congress moves on to the next "crisis".
It's a pattern of pathological destruction....all members of congress need extensive shock therapy treatment.
You talk like a SOX consultant. That would explain why you don't seem to know much about it. Lots of high-sounding plattitudes and precious little of the real world. Sorry if that sounds condescending... but as Director of IT for a publicly-traded company I've been up to my butt in sox compliance for the last three years and frankly I've had just about enough. I'm sick of it.
There are large important and useful projects and deployments that we've been trying to do for years that we have NOT been able to do because we're mired down in SOX. It ticks me off. It's a useless paperwork excercise that serves no purpose. I've got real things I'd rather be doing.
You keep talking about fraud, but that's not what sox is about. You also keep talking about the board of directors, when it is really about the corporate *officers* moreso than the board.
I take exception to the idea that corporate officers must accept personal responsibility for corporate risk. This basically de-constructs the corporation as a legal entity. Every public corporate entity is now in reality a partnership instead. I think that's a mistake.
SOX was a poorly conceived, hastily written piece of feel-goodism that mistakes bureaucracy for oversight. Binders full of policies are not wisdom. Layers of approval are not control, and mountains of forms just let you hide more than before.
If you really want to make sure that nobody is ever found to be responsible for anything, bury the crime in a blizzard of bureaucracy so thick that nobody can find it.
Im an manager in IT working for a fortune 100 company...
You might have me on the corporate officers vs board or whatever every company structurs differntly (i.e many Board members are officers)... but I have watched my department have trouble with Sox compliance issues and none of it has to do with sox.
Im mostly familiar with COSO, COBIT 3.0 & 4.0, NIST best practices, blaa blaa blaa... and I have read most of them front to back. There is NOTHING in there that is bad. Show me one thing that is. There might be a few things that dont fit your buisiness model, on those things 75% risk might be good enough.
All trouble relates to how much risk the management is willing to accept. Our management wants to bulletproof everything and its not possible nor is it required by ANY auditing standard. Mabey 80% risk is good enough do we have to make it 99%? Management won't stand and explain their position to audit, or to those that audit works for, becuase they are afriad of audit point, never mind that EVERY known auditing policy states that audit should not run the buisiness. To upper management its easier to say "ok, all passwords must expire in 30 days", rather than debate the fact that in some very few instances mabey thats not such a good idea. If you boss whats audit to run your department then, I guess your company (and a lot of others) has the right to make bad decisions.
So, without sox you would ignore industy best practices?
Of course not.
It's just an unnecessary and wasteful excercise. I've got better things to do. If you don't... well, that's convenient.
Not really. The market punished Enron and Worldcom long before W came along with his burdensome regulations. It was falling stock prices based on rumors that forced them to disclose their misdeeds. If only we could do the same with Congress.
And the excessive federal spending the last six years has exceeded the losses from Worldcom and Enron. Perhaps if we had chipped in to buy W a veto pen that wouldn't have happened.
Investors are much more worried about fraud in government and stupid moves by the Federal Reserve than they are about the private sector.
Sorry... got blasted by the storm and the power was out for a few nights. Lockly I got a generator but couldn't get on the internet until the grid came online.
Anyways back to debate...
What specific thing has SOX tasked you with that you would rather not do? I know everything... but I was hoping for something more specific. Can you list a few things?
Perhaps I'm not making myself clear. It's not the standards and practices that are the problem. It's the audit.
There are days and weeks and months spent responding to and meeting with the auditors, and it is simply not time well spent. It is not worthwhile. The company gains nothing productive.
...and this is for an IT shop that's run pretty clean (if I do say so myself). We've never gotten anything but a totally clean opinion. But the process requires hundreds of man-hours from me and my staff in responding to them. We don't *have* time to spare on wasted effort. We've got plenty of good and useful things to do that we can't because we don't have time anymore.
This, is stupid. :-)
I work in IT. It is not just a bad law. It is downright evil. It is pure Fascist beuracracy. They don't call it the "IT full employment act" for nothing.
It's killing us and we are seriously trying to comply!
I don't know where John Galt is, bit he has most definitely left the country by now.
>>If you create a financial report, and you cannot attest to its accuracy nor will you stand behind its accuracy, and you you know that that report will be used by people investing millios of dollars in your company.<<
Ah, if only it was that simple. It isn't. It is affecting every area and process within a company. The paperwork is absolutely crippling. In a world where every company has to do it, the debilitating effect will merely be passed on to the end customer in the form of higher prices.
In an environment where not all companies have to comply (out of US for example) it will literally kill companies. Some will merely be aborted before they are born as has been pointed out in previous posts.
>>This is really the only discussion to be had about this. <<
Not really. High cost is a legitimate argument against it. If it costs more to prove you are in Sox complaince than to manufacture the product you hope to sell, it is a bad idea.
It was not thought out. But that is not surprising. It takes ability to get a job. Anybody can get elected.
I agree. It was already against the law to do what Enron and MCI did. Just throw their CEOs and other officers UNDER the jail for several decades, and other companies will get the idea. No need for a ton of additional controls that only add complexity and cost to the companies trying to do the right things.
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