Sarbanes Oxley and the Bailout

Is anyone NOT confused this week? I have been reading about the economy all morning and just when I think I’ve wrapped my head around it, another wrinkle emerges. The American economy seems almost infinitely complex. (I think we need another cartoon from Ryan to clear things up.) As an accountant, one thing caught my eye more than the rest: Sarbanes Oxley.

What is Sarbanes Oxley?

In case you don’t know, Sarbanes Oxley (or SOX) is legislation drafted in 2002 in response to various accounting scandals, most notably Enron. The sketchy accounting practices of many companies caused their stock prices to collapse, resulting in what was at that time a huge loss of public confidence in Wall Street. How can we invest our money if executives can cook the books? According to George Bush, SOX represents “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt.”

There’s that word again: reforms.

Anyway… SOX established tighter controls for all U.S. publicly traded companies and was designed to restore confidence in the markets by ensuring financial statements accurately reflected the true position of a given company (rather than what some executives might wish it were – say if their bonuses were dependent on certain figures). Opponents claim SOX has imposed an overly complex regulatory environment on U.S. companies and as a result has diminished our international competitive advantage. They say it’s made doing business here more expensive relative to other countries. But that investment was supposed to pay off in a healthier economy, right?

It would seem that SOX was implemented to prevent the type of problems we’re seeing today. Guess not.

According to Mike Huckabee we ought to kill SOX. It’s not working, he says.

Democrats aren’t too keen on SOX either. A spokesperson for Nancy Pelosi told The New York Sun in 2006:

“We cannot afford to disadvantage small companies with overly burdensome regulatory requirements.

How Would SOX Affect a Bailout?

If the government takes on the ‘bad’ loans of troubled financial institutions, they would conceivably be subject to the SOX mark to market rule. This would require sub-prime mortgages be written down to their present market value. But if there are no buyers, what is the market value?

Truth in 2008, a campaign aimed at transparency of government accounting, asks:

To help the bankers, one presumes that the government would have to buy these “illiquid” assets at prices higher than today’s book value—whatever that number is. To pay more, we have to convince ourselves that such higher prices will be realized in a future market that would more objectively estimate the likelihood of repayment by the borrowers. But, if Sarbanes-Oxley is good for the private sector, why shouldn’t the government be subject to the same bookkeeping requirements? 

Newt Gingrich thinks we need to suspend the mark-to-market rule (followed by a repeal of SOX).

So let me get this straight. We’re in agreement that government oversight hasn’t worked. And yet… here’s a big blank check? What do you think? Or are you like me – just too confused by all the noise to form an opinion?

  • Yesterday at the beginning of class a fellow classmate in my 300 person Finance lecture asked the professor what her opinion was on the $700 billion buyout. She did not seem happy that he asked, most likely because she herself was confused with the entire mess and didn’t know what to say on the spot in front of 300 eager-to-learn students.

    Today in my law discussion, my T.A., a law student, said one of his most intelligent professors, a “tax genius”, who normally has all the answers was as well baffled.

    Myself, being a student, am not very sure what to think at all! I try to watch CNN every day and grab a copy of the WSJ, but I must say, I am like you and am simply too confused!

  • Ann Laurence

    I worked for Xerox. We had to abide by all of the financial guideline laid on us by SOX. What I want to know is why SOX was NOT used against the CEO’s of Lehman, Fannie’s, AIG, etc. Why were these CEO’s NOT held “personally liable” for bad deals done by their corporations?

    I know that my Finanacial CFO’s and CEO were “held personally responsible” and could have faced both heavy fines and even prison time.

    It is a mystery to me why this legislative tool is NOT being used. Can you explain this to me?

    Clearly, the “media” is clueless.

  • Lela

    You’re the first blogger I’ve encountered this week to discuss the implication of SOX in all of this bewilderment. I too feel many a wrinkles forming as I try to grasp my mind around the current state of our market. However each time I begin understanding just a little bit, I’m bombarded with news of something with of even greater confusion. I consider my self fairly well educated, and I can’t imagine the thoughts of the average working class citizen. Perhaps the media is being used as a tool to initiate this confusion? If there is a fire with out smoke, how do we identify where the real fire is? Please keep in mind that our trade deficit is reaching the $7TRILLION dollar markSource Wonder how they’re treating those accounting figures. You made an excellent point with the write downs to PV. If we have AAA debt and CCC debt being combined in multiple packages (bonds) which have been broken up and reassembled countless times, what are actually in these packages. A piece of paper saying “IOU”? If the SOX law is not removed this might further complicate the assessment of the bonds leading to more opaque government actions. I say we just go back to basic cash accounting and call it a day. Have a great weekend everyone!

  • Back it up

    I have not read SOX so I can’t say I’m an expert. But, I have a funny feeling if I did, it would prove ineffective in preventing the problems we have now.

    My understanding of SOX is that it is about enforcing accounting disclosure and transparency.

    The current crisis is about two things: government reducing the interest rate too low for too long and financial institutions leveraging the created excess capital (excess created the by the Fed’s low rates) and then spurring selling of mortgages and other weird, opaque, or what every you want to call it dept instruments in excess (if not in some cases in fraudulent or negligent ways).

    So, again SOX given they way it seems to work doesn’t cover this problem at all.

  • Bill

    SOX has cost too many companies absorbent costs and affected their profits. Who benefited; the lawyers and auditors. SOX has chased too many companies out of the US and weakened our infrastructure. The lawyers changed an important word “unethical” and made it legal… I know right from wrong. SOX crippled our establishment. Financial controls; blaa… you want the truth or unethical truth!

  • jb

    My view of SOX is that it requires CEOs and CFOs to “mean it” when the sign off on their financial statements. Fundamentally, they are standing by its accuracy. Is there an increased price for accuracy – of course there is. But Enron and others showed us the downside of having CEO’s who don’t take responsibility for the accurate presentation of financial statements.

    Why does “mark to market” make sense – it says that if an asset is not worth what you paid for it, then deal with it. financial statements are supposed to be an accurate snapshot in time, Does this have adverse implications? Of course it does. And it should!

  • To repeal Sarbanes is to buy into having government buy out all these worthless loans, along with the idea that they will somehow be worth something in the future. Sarbanes simply made publicly traded companies tell the truth about the health of their companies. It is relevant to the discussion only in the sense that to suspend it might allow the current (failed) bailout plan to work. It should be no surprise that the Bush government is pushing another version of relaxing regulations on big business. Isn’t that how we got here in the first place? Evolve!