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?