The Enron scandal became public in 2001 and was followed by a long list of corporations that conducted unethical and illegal activities that negatively impacted the lives of millions of shareholders. Kenneth Lay, founder of Enron, developed a management team that used accounting loopholes, special purpose entities, and poor financial practices, in order to hide billions of dollars in debt. Lay and his team, then misled Enron’s board of directors and audit committee on those at-risk accounting practices. As a result, many executives at Enron were indicted and later sentenced to prison. As a consequence of the scandal, in 2002, the Sarbanes-Oxley Act was passed by legislators, which increased consequences for attempting to defraud shareholders. The act also changed the relationship between auditing companies and their clients, requiring the auditing companies to remain unbiased.
Six years after Sarbanes-Oxley was passed, Lehman Brothers filed for bankruptcy. In 2008, the Lehman’s bankruptcy filing was the largest in history even larger than WorldCom and Enron. At the time of its collapse, Lehman was the fourth-largest U.S. investment bank. The fact that Sarbanes-Oxley didn’t keep Lehman out of trouble creates questions about the value of these types of legislation. So if Sarbanes-Oxley is ineffective, what type of plan will bring about corporate responsibility and accountability to all shareholders?
I believe that the intent of Sarbanes-Oxley was to increase transparency, which would lead to accountability. While I support the philosophy, the first step in accountability is not transparency. The first step in becoming accountable….is wanting to be accountable. This is a statement about corporate culture and starts at the top of the agency. The development of a corporate compliance officer that does not report to the administration, but independently reports to the board of directors, is my second step recommendation. The corporate compliance officer should not be a third party accounting firm, but, instead, should be a part of the corporate executive team with the responsibility of guiding and advising the executive staff. They should be completely integrated, yet report to the board and not the CEO. Today, many of the executive staff managing publicly traded companies are incentivized to focus on the short term gains that temporarily improve stock price but are not necessarily good for the company in the long run. It is for this reason I would argue for my third step and recommend delayed bonus and incentive payments that are tied to long-term trends and not point-in-time performance. Finally, for my fourth step, I would recommend the adoption of International Accounting Standards, instead of the current US accounting practices. The international practice incorporates a “principle-based” approach that helps address some of the limitations that we experience with the US system.
In conclusion, I would like to suggest that expanding legislation like Sarbanes-Oxley only increases the expense and complexity of corporate operations while producing questionable benefit. True improvement in Corporate Accountability and Responsibility will only happen when the corporate culture changes. But, by creating an integrated corporate compliance office, changing executive pay incentives, and adopting better accounting practices, we will help create a level of transparency and accountability that should foster the right environment for corporate culture to change.
About the Author
Jerry Landers is the Vice President of Business Development for Aspire Indiana. While the beliefs and opinions expressed in this blog are solely those of Mr. Landers you can learn more about community mental health and how it intersects with business and media at http://www.facebook.com/AspireIndiana
Cone, E. (2006), Compliance: Is Sarbanes-Oxley Working?, Retrieved from http://www.cioinsight.com/c/a/Trends/Compliance-Is-SarbanesOxley-Working/
Benner, K. (2010), Is Sarbanes-Oxley a Failure, Retrieved from http://money.cnn.com/2010/03/23/news/economy/sarbanes_oxley.fortune/index.htm