Bush/Clinton Budgets (split from gay marriage)

Joe · Post by **Joe** » 2004-02-26 09:02pm

Explain.

The Kernel · Post by **The Kernel** » 2004-02-26 09:08pm

Joe wrote:Explain.

Sarbanes-Oxley is an act that provides process and accountability for corporate fraud, but it doesn't do a bit of good unless the companies commiting the fraud are caught. The SEC is the only government enforcement agency that is tasked with enforcing these laws and they are so underfunded that they have to get extremely lucky in order to actually uncover corruption.

Joe · Post by **Joe** » 2004-02-26 09:18pm

No it isn't, the Sarbanes-Oxley act creates the Public Company Accounting Oversight Board (PCAOB), which has the power to investigate and discipline accountants and set auditing standards. Although FASB still gets to set accounting standards, the PCAOB has enforcement power, something FASB never got (and still doesn't have).

The Kernel · Post by **The Kernel** » 2004-02-26 09:56pm

Joe wrote:No it isn't, the Sarbanes-Oxley act creates the Public Company Accounting Oversight Board (PCAOB), which has the power to investigate and discipline accountants and set auditing standards. Although FASB still gets to set accounting standards, the PCAOB has enforcement power, something FASB never got (and still doesn't have).

They have enforcement authority, but they still task all investigations to the SEC. The problem isn't that no one can enforce these laws, but that no one has the resources to police these companies, especially since most companies that choose to cook their books do a good job of hiding it.

Most of the time the SEC doesn't give anyone a second glance unless they have reason to, they usually trust the auditing firms with making sure the books are in order. After Arthur-Anderson though, I don't have a lot of faith in this system.

Joe · Post by **Joe** » 2004-02-26 10:22pm

They have enforcement authority, but they still task all investigations to the SEC.

No they don't; I just said that the PCAOB does in fact have investigative power. Sarbanes-Oxley, Section 105:

(1) AUTHORITY. - In accordance with the rules of the Board,
the Board may conduct an investigation of any act or practice,
or omission to act, by a registered public accounting firm,
any associated person of such firm, or both, that may violate
any provision of this Act, the rules of the Board, the provisions
of the securities laws relating to the preparation and issuance
of audit reports and the obligations and liabilities of account-ants
with respect thereto, including the rules of the Commission
issued under this Act, or professional standards, regardless
of how the act, practice, or omission is brought to the attention
of the Board.

The problem isn't that no one can enforce these laws, but that no one has the resources to police these companies, especially since most companies that choose to cook their books do a good job of hiding it.

Hence the reforms. Also the PCAOB is not funded primarily by tax revenue, it's funded by accounting support fees to be levied on public companies and investment companies as well as penalty fees. So the SEC's lack of funding won't be as big of an issue.

It's true that most companies that cook their books do a good job of hiding it; however, the penalties for being caught are now steeper, so there's less incentive to do it, and there's also the fact that the market doesn't respond well to companies caught in the act. Managers now have to approve financial statements, which will put them actually in a similar situation to the auditor; more conservative, and inclined to do whatever is possible to avoid potential liability.

Most of the time the SEC doesn't give anyone a second glance unless they have reason to, they usually trust the auditing firms with making sure the books are in order.

That is the best they can do, unfortunately, there's simply too many companies out there. The SEC can only focus on the ones caught in the act. That's why we need to do whatever we can to make sure auditing standards are sound and enforceable.

After Arthur-Anderson though, I don't have a lot of faith in this system.

Of course, the system has brought that mistrust down upon itself (although in the case of Enron, it should have been there in the first place, giving the insanely high PE ratios Enron was reporting a few years ago). That's why reforms have been made.

The Kernel · Post by **The Kernel** » 2004-02-26 10:37pm

Joe wrote: No they don't; I just said that the PCAOB does in fact have investigative power. Sarbanes-Oxley, Section 105:

Do they have actual investigators? I can't seem to find any evidence of a dedicated investigation department of PCAOB.

It's true that most companies that cook their books do a good job of hiding it; however, the penalties for being caught are now steeper, so there's less incentive to do it, and there's also the fact that the market doesn't respond well to companies caught in the act. Managers now have to approve financial statements, which will put them actually in a similar situation to the auditor; more conservative, and inclined to do whatever is possible to avoid potential liability.

You're right that the incentive has gone down, but unfortunately its a little too early to say whether there has been any decrease in corruption because of it. I certainly hope it does, because corruption is the biggest threat to our economy in years.

That is the best they can do, unfortunately, there's simply too many companies out there. The SEC can only focus on the ones caught in the act. That's why we need to do whatever we can to make sure auditing standards are sound and enforceable.

I agree, if we can regulate the auditing firms better we'd at least have a shot of stamping out most corruption.

Joe · Post by **Joe** » 2004-02-26 10:49pm

Do they have actual investigators? I can't seem to find any evidence of a dedicated investigation department of PCAOB.

Yes, they do have an Office of Investigations and Enforcement and they're hiring accountants right now in DC. I don't have the patience to pick through the act, but it's there.

You're right that the incentive has gone down, but unfortunately its a little too early to say whether there has been any decrease in corruption because of it. I certainly hope it does, because corruption is the biggest threat to our economy in years.

Oh, I guarantee you that it's gone down at least in the short run, simply because at the moment working to eliminate corruption makes economic sense - it builds goodwill, prevents possible costly government action, and most importantly will keep John Q. Stockholder happy and financially solvent enough to where he won't have to dial up his mischief-making friend, the Lawyer. The question is whether this trend will last when the economy is up in full swing again. That doesn't mean the corporate world has gone and completely cleaned up its act within the last two years, but things are generally speaking either getting better or they're getting worse, and for the time being they're getting better.