Arnold Kling  

SarbOx and MF Global

Suicide and Sincerity... Today on the Eurozone Crisis...

There has been a lot of mention of Sarbanes-Oxley in the context of the failure of MF Global. This might be a good test of whether SarbOx is worth anything.

1. How much of MF Global's behavior was criminal pre-SarbOx? At the margin, will SarbOx result in the MF Global executives spending any more time in prison?

2. The Enron fiasco drove Arthur Andersen out of the auditing business. Shouldn't MF Global's auditors, PWC, be in even more jeopardy? If not, has the auditing industry become "too concentrated to fail," and does this negate any effect of SarbOx on the big auditing firms?

3. If SarbOx did not deter MF Global, did it deter anyone? Or is this a case of a law which obtained compliance (at great cost in terms of scarce executives' time) from honest firms, while doing nothing to deter dishonest ones?

Comments and Sharing

CATEGORIES: Business Economics

COMMENTS (8 to date)
Jeff writes:

My understanding was that the Arthur Andersen folks were actually complicit in the fraud at, that they were aware of it and signed off on financial statements that they knew to be fraudulent and/or misleading, then attempted to cover it up later.

PWC's culpability in the case of MF Global may rise to the same level, or it might simply be a run of the mill negligence case, where they were derelict in performing the audit. It's impossible to say at this point.

In general, my opinion of Sarbanes Oxley is not high, though. I worked as an auditor for four years with a mid-sized CPA firm. Compliance with the law is expensive, and it seemed to me that the only value added by Sarbanes Oxley was to help identify and remediate financial vulnerability issues at companies where management was too inept or careless to do so on their own. There are companies both big and small where this is the case, but they tend to be a minority.

Jack writes:

What we call financial scandals are usually accounting scandals. (Which isn't to say there are no financial scandals.)

Mrs. Davis writes:

[Comment removed for supplying false email address. Email the to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Lord writes:

1. Most likely as much. There is a real possibility of prison this time which there was not before as it would have been blamed on underlings before. It still isn't a high probability though.

2. Auditing statements are only quarterly and even those have large unaudited portions and are only fully audited annually so it would depend on when it occurred and whether they had previously uncovered the problem. I wouldn't be surprised if this occurred in the last days as they scrambled for cash and would not be audited at all. It would be a failure if it occurred unconsciously.

3. SarbOx holds executives accountable. The expense is simply to allow those executives to escape accountability for their underlings. Nothing can relieve them of their own accountability. Whether it deters anyone probably depends on the result but while it may deter a lack of oversight, it is unlikely to deter conscious fraud or actions taken in haste without contemplation of consequences or systems in place to catch them.

Mike Rulle writes:

I have a hunch SarBox was irrelevant. We don't know all the facts, but the speed at which cash is able to be transferred is impossible to catch before it happens. It was caught within 4 days by a potential buyer. Posting customer cash in one entity, the FCM, as collateral for these positions in another entity, the broker dealer, was known by everyone to be disallowed. In fact, Corzine tried to persuade Gensler to loosen the rules this summer, implying he was aware of the rules in advance of his actions.

When Corzine says he does not know where the money is, I believe him. What he does know is where the money came from; i.e., customer accounts.

The only thing which gives me pause, is how can someone risk going to jail for a trade (i.e., owning Sovereign Bonds, which may have been stupid but neither illegal nor hidden). That is pretty amazing and stupid, even by greedy self interested standards. But, we have seen it before and will see it again.

Who would authorize posting customer cash in such a situation? People who must go to jail.

Bob writes:

Ironically, Corzine was one of the co-authors of the Sarbanes-Oxley act.

Now Corzine is using a "know nothing" defense for MF'ing Global.

If Corzine wins, that effectively kills Sarbox, which sought to force top executives to sign off and accept blame for all financial numbers.

One would expect the fed gov to eagerly jump on such a CEO but Corzine is a well-known Democrat, so who knows how this will play in an election year.

Douglass Holmes writes:

SOX was passed by a Republican Congress and signed into law by a Republican president at a time when the popular mythology says the government was busy deregulating everything financial. Why on earth would the Obama administration prosecute another Democrat under these circumstances?

Andy writes:

The "harsh penalty for executives" provision of SOX didn't survive first contact with the enemy.

Has anyone even been charged with violating it since the government failed to win a conviction of Richard Scrushy in its test case?

IMO the cost of SOX far outweighs any conceivable benefit and the law (or at least Section 404) should be repealed.

Comments for this entry have been closed
Return to top