by Deb Cupples | At the beginning of the new millennium, thousands of ordinary investors watched their retirement accounts and children's college funds shrivel due partly to fraudulent accounting, as we learned from scandal-ridden companies like Enron, WorldCom, Tyco, Adelphia.... To protect us ordinary investors, Congress passed the Sarbanes-Oxley Act in 2002.
Many corporate- and accounting-industry folks didn't like the idea of being subjected to greater scrutiny and stricter rules. Naturally. Some were the same people who would personally benefit from essentially robbing the nest eggs of ordinary folks like you and me.
Some of those accountability-averse people filed suit, hoping to get Sarbanes-Oxley struck down. Yesterday, a U.S. appellate court upheld the law, as the Washington Post reports:
"The U.S. Court of Appeals for the District of Columbia Circuit rejected a challenge to the heart of the act, the creation of a nonprofit board to set auditing requirements and police the accounting firms that audit public companies.
"The legislation, adopted in response to devastating accounting abuses at companies such as Enron and WorldCom, was meant to restore public confidence in the stock market, make executives more accountable and improve the audits, on which shareholders depend, to keep companies honest. Among other things, it required top executives to certify corporate financial statements and subjected audit firms to periodic inspections by the new board." (Washington Post)
What a shocking concept! Imagine forcing top corporate executives (some of whom pocket tens or hundreds of millions of shareholder dollars a year) to actually be accountable for the financial reports they order their underlings to file. The Washington Post continues:
"Businesses have protested that the act imposed costly burdens and provided too little benefit. The legal challenge was brought by Beckstead and Watts, a Nevada accounting firm that the oversight board accused of performing flawed audits, and the Free Enterprise Fund, which advocates reduced taxes and limited government, according to court papers...."
"Under the old system, big audit firms inspected each other and found little to criticize. They pursued lucrative consulting contracts from the companies they audited, giving auditors another reason to curry favor with their clients. Their main lobbying organization wrote auditing rules that made it hard to hold auditors accountable for fraud or negligence, and they faced little discipline.
"Under Sarbanes-Oxley, consulting was restricted, and the new board replaced the lobbying group as the auditors' overseer. In the years since President Bush signed the law, corrections to corporate financial statements became more commonplace, as have disclosures that companies had serious weaknesses in their internal controls. Accounting firms received consolation in the form of expanded audit work--and bigger audit fees." (Washington Post)
Yesterday's court ruling is a victory for us ordinary investors, but don't get lulled into a sense of safety, because Sarbanes-Oxley didn't fully fix our broken system in the first place.
For example, corporate executives can still take home millions of shareholder dollars a year, even if the company they manage is doing badly.
And executives can still pocket millions in stock options (which are, in fact, expenses) without listing those options on their financial reports -- thus, giving investors the impression that a company is worth more than it really is. I think execs can still take personal loans from their companies, too.
Interesting side note: the two attorneys who challenged Sarbanes-Oxley have big corporate and big Republican ties: Michael Carvin, who represented George Bush in litigation over Florida's 2000 election recount; and Ken Starr, a so-called "conservative" who spent about 50 million tax dollars investigating Bill Clinton (about 10% of that amount went toward probing Clinton's "relationship" with Monica Lewinsky).
Other Buck Naked Politics Posts:
* Probe Begins re: Falsified Documents Justifying Iraq War
* Anti-Regulation Guy to be Top Energy Regulator
* Americans Held in China for Protesting
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