Is it enough? Does the Sarbanes-Oxley Act do what it was intended
to do? In a publication titled, “Reforming Corporate America,” Larry Bumgardner, JD, compares the SOX legislation to the Securities Act of 1933. There are certainly some parallels, including the drama relating to choosing the people in charge.
The Securities Act of 1933 was created as the government’s response to the stock market crash in 1929. It wasn’t an immediate response –there were congressional hearings, investigations, and discussions regarding all sorts of activities that inflated company’s stock prices (sound familiar?) There was an assortment of naughty things going on, including corporate family members selling stock to each other and paying publicists to make everything look good. After the presidential elections in 1932 and talk of high salaries and no interest loans to executives and selling cheap shares to a select few before the company went public, Legislators passed the Securities Act of 1933.
At that time, the government was hesitant to be too heavy handed and the Act simply didn’t do enough. A year later the Securities Exchange Act was passed. The new Act required companies to continuously disclose pertinent information and gave the government the right to prosecute for market manipulation. It also created the Securities and Exchange Commission (SEC).
There was a little drama concerning the staffing of the SEC; the President selected Joseph Kennedy, father of the future president, as Chairman. Kennedy was criticized for being a part of the manipulation of the market that the SEC was designed to prevent. The SOX version of that drama involved Harvey Pitt, the 2002 Chairman of the SEC, and his selection of key members of the PCAOB. His initial choice for Chairman, John Biggs, was eventually rejected as being too close to the market industry (he managed a large pension fund) and a second choice, William Webster, was made. It then came out that Webster had been on the audit committee of a company having its accounting practices investigated by the SEC. Both Biggs and Webster resigned over the issue. Looks like another situation of the fox guarding the henhouse!
It only took a year to realize the Securities Act of 1933 didn’t pack enough punch. What about the Sarbanes-Oxley Act? There seems to be quite a bit of wiggle room if you know where to look for it. There are lots of rules and regulations intricately defined in the Act and the punishment threat has been greatly increased; some sentencing maximums for CEO and CFO convictions have increased as much as ten times. But will these new tough guidelines be enforced? The PCAOB and SEC have the right to allow exceptions. Some of these “new” rules aren’t new at all, but were outlined in the Securities Exchange Act of 1934; what changed are the sentencing guidelines.
If there can be exceptions to the disclosure rules and the newly empowered audit committees only have to review processes, not actual documents, and the
prosecution has the burden to prove “knowingly”, does the Sarbanes-Oxley Act
pack enough punch? Was this whole thing just a feel good project to restore confidence in the stock market or are companies really changing the way the audit and present their financials?
to do? In a publication titled, “Reforming Corporate America,” Larry Bumgardner, JD, compares the SOX legislation to the Securities Act of 1933. There are certainly some parallels, including the drama relating to choosing the people in charge.
The Securities Act of 1933 was created as the government’s response to the stock market crash in 1929. It wasn’t an immediate response –there were congressional hearings, investigations, and discussions regarding all sorts of activities that inflated company’s stock prices (sound familiar?) There was an assortment of naughty things going on, including corporate family members selling stock to each other and paying publicists to make everything look good. After the presidential elections in 1932 and talk of high salaries and no interest loans to executives and selling cheap shares to a select few before the company went public, Legislators passed the Securities Act of 1933.
At that time, the government was hesitant to be too heavy handed and the Act simply didn’t do enough. A year later the Securities Exchange Act was passed. The new Act required companies to continuously disclose pertinent information and gave the government the right to prosecute for market manipulation. It also created the Securities and Exchange Commission (SEC).
There was a little drama concerning the staffing of the SEC; the President selected Joseph Kennedy, father of the future president, as Chairman. Kennedy was criticized for being a part of the manipulation of the market that the SEC was designed to prevent. The SOX version of that drama involved Harvey Pitt, the 2002 Chairman of the SEC, and his selection of key members of the PCAOB. His initial choice for Chairman, John Biggs, was eventually rejected as being too close to the market industry (he managed a large pension fund) and a second choice, William Webster, was made. It then came out that Webster had been on the audit committee of a company having its accounting practices investigated by the SEC. Both Biggs and Webster resigned over the issue. Looks like another situation of the fox guarding the henhouse!
It only took a year to realize the Securities Act of 1933 didn’t pack enough punch. What about the Sarbanes-Oxley Act? There seems to be quite a bit of wiggle room if you know where to look for it. There are lots of rules and regulations intricately defined in the Act and the punishment threat has been greatly increased; some sentencing maximums for CEO and CFO convictions have increased as much as ten times. But will these new tough guidelines be enforced? The PCAOB and SEC have the right to allow exceptions. Some of these “new” rules aren’t new at all, but were outlined in the Securities Exchange Act of 1934; what changed are the sentencing guidelines.
If there can be exceptions to the disclosure rules and the newly empowered audit committees only have to review processes, not actual documents, and the
prosecution has the burden to prove “knowingly”, does the Sarbanes-Oxley Act
pack enough punch? Was this whole thing just a feel good project to restore confidence in the stock market or are companies really changing the way the audit and present their financials?
| reforming_corporate_america.docx |
RSS Feed