Sarbanes & Oxley Act Pointless?

The Sarbanes & Oxley Act was created to protect investors by improving the accuracy and reliability of financial disclosures. It was signed into law in 2002. I found a recent article on businessweek that talked about a recent scandal with Refco whose CEO had hidden $430 million of debt. Refco's financial statements have been unreliable since 2002, which was when the Sarbanes & Oxley Act was passed. The issue has just surfaced and Refco has declared bankruptcy causing their shares to go from $28/share to under $1. Obvioulsy governmental regulations don't scare people enough to simply be honest and investors are losing millions of dollars over this type of fraud. Like Kevin Laundry said "If a CEO wanted to commit fraud, he could probably do it successfully." This unethical and immoral behavior is still going even though it's supposed to be more regulated. Maybe we need to start questioning these potential CEO's of their own ethics and morals before giving them such a powerful position. What do you think?


Tyler said...

I do not believe that government regulations are meant to scare people and business professionals alike into being honest. Government regulations such as the Sarbanes & Oxley act is implemented on the premise that business professionals are generally honest and ethical, but instead they are directional tools to guide the company, protect the government, investors and with that any stakeholder in the corporation.

Dr. Tufte said...

-1 on Tyler's comment for grammatical errors.

I have a lot of trouble with the general principle underlying something like Sarbanes-Oxley. This is command-and-control regulation at its worst. The paperwork is a disincentive for the honest to engage in business, and it doesn't do much to the dishonest who are probably already lying on paperwork produces by their firm.

A lot of this could have been avoided if investors had remembered the old adage that "dividends are proof that the cash is actually there".