It is common that the whole group is affected by the actions of the few. This happens anytime there is a group and someone in charge. In Kindergarten, little Sammy never washes his hands before lunch, even after finding a dead bird at recess. To make sure his hands are clean, a new rule is instituted. Everyone must wash hands before lunch. The position of Washing Monitor has been created and all children are observed washing their hands before lunch, and marked on a checklist. This is then shown to the teacher who signs and dates it, filing it away as proof of the washing. Any non-washing is immediately addressed and rectified. It takes longer to get to the lunchroom and the added positions of monitors has increased the goodies and rewards budget but all hands are clean and lunch is eaten without fear of bird germs.
Time goes by, kids grow up, Sammy quits playing with dead birds and ends up being a relatively clean person. Scandal then rocks the business world. A couple of big companies don't quite tell all of the truth in their financial statements and their stockholders and employees are hurt because they based financial decisions on this faulty information. The companies collapsed, accountants and executives went to jail, and Justice was served. In an effort to prevent this from happening again, Congress (someone in charge) stepped in and made a rule (Sarbanes-Oxley Act) for all publicly traded companies (the group.)
At first glance, it seems a little over-reactive to create sweeping legislation just because there was a little fraud going on. After doing some research, it’s clear there was a lot more than a little fraud going on. Several large companies were deeply embroiled in financial scandals. For example, Tyco had a few key executives indicted for fraud. The former CEO, CFO, and General Counsel were accused of wheeling and dealing themselves millions of dollars at the stockholders expense. Between making themselves unauthorized loans for low or no interest and forgiving those loans, undisclosed bonuses, and fraudulent security sales, these three men made off with over $600 million.
Perhaps the most well known fraud case that brought about the legislative act is that involving Enron[i]. Talk about accounting gone wild! In a matter of a year or two, Enron went from one of the largest companies in the world, with its stock trading at $90 a share to a name synonymous with fraud and a stock price under $1 per share. How did they do that?
There was lots of creative accounting going on but the biggest issue was the use of non-consolidated special-purpose entities (SPE’s) to buy and sell stock and commodities to itself. Moving the assets from one SPE to another and recognizing the revenue each time greatly impacted the financials, overstating revenue, net income, and stockholder’s equity.
In my opinion, the biggest problem with Enron wasn’t the financial shenanigans going on but that they were allowed to do it. The Board of Directors, meeting the SEC requirements of financial expertise, was aware of the dealings with the SPE’s. The Audit Committee reviewed and signed off on the accounting. The outside attorneys reviewed and approved the partnerships. The Arthur Andersen CPA firm audited and signed off on the financials every year since 1985. Arthur Anderson! This was one of the biggest and most respected accounting firms in the country!
No wonder Congress enacted Sarbanes-Oxley – someone needed to restore faith in the accountants and financial managers of the nation. Perhaps if the Federal Government says you have to follow the rules, the rules will be followed. Or at least make it much harder to commit fraud and get away with it.
Perhaps this is more than punishing the many for the wrongs of the few.
[i] In 2002, The Journal of Accounting and Public Policy, which publishes research papers focusing on accounting and public policy, published a paper written by George Benston and Al Hartgraves titled “Enron: what happened and what we can learn from it.” My ideas regarding Enron stem from reading this article. If you’re interested in reading it, you can find it at http://bbs.cenet.org.cn/uploadimages/200311294124115529.pdf. Also, CNN published a very informative article regarding the Tyco indictments in 2002 that is still available at http://edition.cnn.com/2002/BUSINESS/asia/09/12/us.tyco/.
Time goes by, kids grow up, Sammy quits playing with dead birds and ends up being a relatively clean person. Scandal then rocks the business world. A couple of big companies don't quite tell all of the truth in their financial statements and their stockholders and employees are hurt because they based financial decisions on this faulty information. The companies collapsed, accountants and executives went to jail, and Justice was served. In an effort to prevent this from happening again, Congress (someone in charge) stepped in and made a rule (Sarbanes-Oxley Act) for all publicly traded companies (the group.)
At first glance, it seems a little over-reactive to create sweeping legislation just because there was a little fraud going on. After doing some research, it’s clear there was a lot more than a little fraud going on. Several large companies were deeply embroiled in financial scandals. For example, Tyco had a few key executives indicted for fraud. The former CEO, CFO, and General Counsel were accused of wheeling and dealing themselves millions of dollars at the stockholders expense. Between making themselves unauthorized loans for low or no interest and forgiving those loans, undisclosed bonuses, and fraudulent security sales, these three men made off with over $600 million.
Perhaps the most well known fraud case that brought about the legislative act is that involving Enron[i]. Talk about accounting gone wild! In a matter of a year or two, Enron went from one of the largest companies in the world, with its stock trading at $90 a share to a name synonymous with fraud and a stock price under $1 per share. How did they do that?
There was lots of creative accounting going on but the biggest issue was the use of non-consolidated special-purpose entities (SPE’s) to buy and sell stock and commodities to itself. Moving the assets from one SPE to another and recognizing the revenue each time greatly impacted the financials, overstating revenue, net income, and stockholder’s equity.
In my opinion, the biggest problem with Enron wasn’t the financial shenanigans going on but that they were allowed to do it. The Board of Directors, meeting the SEC requirements of financial expertise, was aware of the dealings with the SPE’s. The Audit Committee reviewed and signed off on the accounting. The outside attorneys reviewed and approved the partnerships. The Arthur Andersen CPA firm audited and signed off on the financials every year since 1985. Arthur Anderson! This was one of the biggest and most respected accounting firms in the country!
No wonder Congress enacted Sarbanes-Oxley – someone needed to restore faith in the accountants and financial managers of the nation. Perhaps if the Federal Government says you have to follow the rules, the rules will be followed. Or at least make it much harder to commit fraud and get away with it.
Perhaps this is more than punishing the many for the wrongs of the few.
[i] In 2002, The Journal of Accounting and Public Policy, which publishes research papers focusing on accounting and public policy, published a paper written by George Benston and Al Hartgraves titled “Enron: what happened and what we can learn from it.” My ideas regarding Enron stem from reading this article. If you’re interested in reading it, you can find it at http://bbs.cenet.org.cn/uploadimages/200311294124115529.pdf. Also, CNN published a very informative article regarding the Tyco indictments in 2002 that is still available at http://edition.cnn.com/2002/BUSINESS/asia/09/12/us.tyco/.
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