Corporate Governance

The Continuing Consequences of SOX

By J. Robert Brown

In thinking about the impact of SOX, the data is growing that the Act has reduced the amount of fraud in public companies.  This can at least tentatively be seen from a reduction in the number of fraud suits over the last two years.  It also arises from a dose of common sense.  The frauds at Enron and Worldcom (not to mention Adelphia and others) were not one person shows, but involved fraud that at some level had many participants.  SOX sought to reduce this type of fraud by requiring boards to put in place mechanisms for employees to anonymously report improprieties, whistle blower protection, and by interjecting the audit committee more deeply into the disclosure process, making it harder to cover up the fraud.

The scandal at Société Générale SA, albeit a French company, shows the type of fraud that can still occur and was not addressed by SOX.  The case involved a single trader who apparently was responsible for a $7.27 billion trading loss, trading scandal, according to a person close to the bank.  Where the fraud can be engineered by a single person, the mechanisms created by SOX will make no difference.  That will always be a potential cost to investors.  But what Enron showed was that frauds could take place over long periods, involve many within the company, and be largely directed by top management, all without detection.  SOX was designed to make that type of fraud far more difficult and the evidence indicates that it has.

Full post as published by The Race to the Bottom on February 09, 2008 (boomark / email).