What problems is Sarbanes Oxley trying to solve? Thanks. 247



  • This post is deleted!


  • This post is deleted!


  • This post is deleted!


  • This post is deleted!


  • Hi%0AHope this provides the background to why SOx came into being.%0AEnron once labelled as Americas most innovative company every year from 1996 to 2001 by Fortune Magazine became one of the largest bankruptcies in U.S. history in December 2001. The companies’ collapse centered around the disclosure that it had falsified financial reports by making false profit claims. These claims being delivered using accountancy practices that failed to meet what was generally accepted as standard practices. The companies’ internal procedures and controls failed to detect discrepancies for many years, as did its external auditing firm Arthur Anderson.%0AIn 2001 a failed partnership deal with home movie giant Blockbuster Inc. started what was to be their most turbulent and in the end final year of trading. In the first quarter Enron announced that it was owed over USD500 million from companies that were already declared bankrupt. On October the 16th 2001 the company declared a USD618 million loss for the third quarter. One day later the company announced that it had made an error in their financial statement and had overcooked the companies net value by more than USD1 billion.%0AShare prices in Enron started to fall as investors woke up to the reality of the companies’ announcements. Just as Enron thought things couldn’t get any worse the Securities and Exchange Commission (SEC) opened up an investigation into the companies dealings. What they uncovered was a web of complex dealings that added to the real losses the company had been hiding for several years. Under the pressure of this investigation Enron declared yet another inconsistency in their profit declarations stating that they had overstated their profits by USD568 million for the previous four years.%0AThese dealings were set up by Enron in order to grow the company at an accelerated rate, which in turn would have a positive effect on the companies share price. Enron formed large numbers of partnerships between Enron directors and other companies. This allowed much of Enron’s trade to be effectively off the official balance sheet which provided a suitable cover for mounting debts to be hidden, which were increasing due to failed deals, bad debts and investments in yet more partnerships.%0AThis led to a further decline in share value that in turn affected the companies’ credit rating. Many creditors not only refused to invest in Enron but also demanded their investments back. Enron made a last ditch attempt at remaining solvent by striking a deal with another company but this failed. With no credit available and no ability to pay off the large debts it owed the company filed for bankruptcy on the 2nd December 2001.%0AThe bad news did not stop there, the external auditing firm Arthur Anderson wound up in court over their failure to act properly and independently. During the court case it became clear that Andersons were making most of their money through offering consultancy services to Enron not from their other work in auditing Enron’s business practices and procedures. Andersons were receiving significant benefits in consultancy services from Anderson so were put in a position where they felt the could not cut of the hand that was feeding them by deep diving into Enron’s business methods. To cover up their failures Andersons destroyed many sensitive documents the moment it thought an investigation was likely. The outcome in court was to find them guilty of obstructing justice. Companies who purchased services from Andersons cancelled then and one of the worlds largest auditing firms quickly went under.%0AThe impact of the Enron collapse had severe implications for both the employees of the company and the major shareholders. Enron employees had their pension funds tied up directly to Enron stock. When the decline in share value started to hit home the employees saw their pension fund virtually destroyed as shares plummeted from USD90 to less than USD1. This freefall also hit major shareholders some of which were running other large pension schemes.%0AThese prominent failures led to a great loss of public trust in corporate accounting and reporting practices that had a direct influence on the New York Stock Exchange. The investors had lost their trust and feared that other organisations were also misleading them through creative accounting practices. Their mistrust was not misplaced. Between 2000 and 2002 nearly 33% was knocked off the largest companies share prices. During the same period over 700 companies had to declare previous earnings over a five-year period were incorrect, an admission that they too were using similar creative accounting methods.%0AOf course none of this went unnoticed in the general public thanks to the consistent media attention given to both Enron and Arthur Andersons during the last turbulent years of their existence. Many publications were polling the public for their opinions. %0A77% of the public believe that CEO greed and corruption have caused the U.S. financial meltdown CNN / USA Today Poll, July 2002. Need to find reference for this.%0A71% of investors say accounting fraud is rampant Survey of Main Street Investors, July 2002.%0A70% of the corporate frauds studied between 1987 and 1999 involved the CEO The Wall Street Journal, Auditors’ Methods Make It Hard to Catch Fraud by Executives, July 8, 2002.%0AWith public trust at an all time low and the stock market in a major decline the government had to act decisively.%0AThe rest as they say is history…%0A References %0APriceWaterhouseCoopers, July 2003 The Sarbanes-Oxley Act of 2002, Strategies for Meeting New Internal Control Reporting Challenges: A White Paper%0AUS Senate and House of Representatives, January 2002 The Sarbanes-Oxley Act of 2002%0AThe Wall Street Journal, July 8, 2002 Auditors’ Methods Make It Hard to Catch Fraud by Executives%0ASocialism Today, Issue 63 March 2002 The Enron Scandal%0AThe Corporate Library Scandals



  • Wow. Thank you.



  • Dynamite response to an all too well known subject. Even still, you explained it very well… Bravo.



  • But why did they have to resort to legislation. Why not a voluntary code that is prevalent in the UK?



  • Well, let’s see, in the UK they still have something called ‘honor’.
    Wheras in the US, we have supposedly upright(eous) business leaders with a tiny little compensation problem left over from when they didn’t get chosen for the team as little kids.
    Revenge = greed
    Does that clarify it for you?



  • Ross,
    Many thanks for the reply, you have made a point. I am still interested in the crux of the matter. Why legislation, and not the voluntary code, that has really stood the test of time in the UK? Meaning, there are no big corporate scandals in the UK in the recent past, unlike the US. Does the credit then goes to the Combined Code, or is the reason something else?
    Christine



  • The problem with SOX is that it is attempting to combat high level fraud by testing low level systems and controls. :roll:



  • Actually I’m not overly upset with 404, my issue is with the PCAOB AS2. That thing is a pig and imho does not address what 404 is all about. Do we really need to beat up A/P again??? I can see the review of entity wide controls, management overrides, high level accounting policies (rev recognition etc) and GCC’s possibly but most of the rest is simply beating up accounts and processes that are already beat up by other audits.
    When’s the last time a control deficiency in A/P resulted in a restatement? :x
    AS2 simply makes you rush to document and test hundreds of controls rather than focusing on those that MATTER…
    er, that’s my opinion 😄
    Chris.



  • Why legislation, and not the voluntary code, that has really stood the test of time in the UK? Meaning, there are no big corporate scandals in the UK in the recent past, unlike the US. Does the credit then goes to the Combined Code, or is the reason something else?
    Christine
    For many years, auditors have had the ‘privilege’ of self-regulating the profession. The reason for legislation and not a voluntary code is that, after Enron, Worldcom and others, you cannot pretend to build up trust in the markets by allowing again the profession to self-regulate a solution. Auditors have partly lost with these scandals their most valuable capital, which is their reputation. After all, the value of the audit report is directly linked to the reputation of the auditor which issues it. So, if the public investor believes that the auditor is not reliable, then the audit report will not have any credibility neither and the main purpose of auditing will be lost.
    I know it is a very simplified answer, but I think this is one of the points they took into consideration when drafting SOX.



  • IMHO it is the accounting and auditing practices (related to financial reporting) that needs to be improved and reformed…
    I fail to see how applying controls over IT infrastructure will prevent another Enron.



  • Why legislation, and not the voluntary code, that has really stood the test of time in the UK? Meaning, there are no big corporate scandals in the UK in the recent past, unlike the US. Does the credit then goes to the Combined Code, or is the reason something else?
    Christine
    For many years, auditors have had the ‘privilege’ of self-regulating the profession. The reason for legislation and not a voluntary code is that, after Enron, Worldcom and others, you cannot pretend to build up trust in the markets by allowing again the profession to self-regulate a solution. Auditors have partly lost with these scandals their most valuable capital, which is their reputation. After all, the value of the audit report is directly linked to the reputation of the auditor which issues it. So, if the public investor believes that the auditor is not reliable, then the audit report will not have any credibility neither and the main purpose of auditing will be lost.
    I know it is a very simplified answer, but I think this is one of the points they took into consideration when drafting SOX.
    Actually, you could argue that the Enron/Arthur Andersen affair proved that legislation was not necessary to ensure the indepence of external auditors. Arthur Andersen was one of the largest accounting firms in the world, and it totally collapsed. Not due to legislation, but due to a swift and merciless reaction from the market. Andersen lost their credibility and were subsequently wiped out. I would think that what is now The Big Four have taken that lesson to heart.
    A voluntary code as opposed to legislation has the advantage that it is much more flexible and more adaptable to a dynamic world.



  • Every solution creates new problems. We all are familiar with the high costs associated with SOX but the act has created a new problem where a public firm elects to delist, thereby freeing itself of the costs and also from SEC oversight. One publically traded firm, Rexhall Industries, voluntarily delisted and it since has shamefully ignored the interests of its stranded outside shareholders. Since Bill Rex unilaterally unlisted, the price of the stock has plummented from about USD3.00 to less than a quarter.
    Can anyone suggest where I can go to find a list of delisted companies so that I might study how these firms have engaged in inverstor relations in the post delisting era?
    Thank you.



  • Here it is a sec page with all the delisting registered.
    sec.gov/rules/delist.shtml
    good luck.



  • Thanks for the list site but for some reason Rexhall Industries is not on the list. Could it be that since Bill Rex ‘voluntarily’ delisted, this firm is not listed?


Log in to reply