Corporate Fraud, Regulation and Ethics
With new laws and regulations, short-term financial goals continue to drive corporate decision-making creating pressure and motive for accounting fraud, according to the Washington Post. The simple fact is that regulators cannot pass laws that force corporate executives to act with integrity or prompt investors to do their research before buying stock and other investments. For the first time in some 70 years, accountants, serving as gatekeepers, face independent oversight.
“The profession has taken a bit of a bloody nose in the last few years,” Chester J. Wood, chairman and CEO of Deloitte Tax. “Against popular belief, it’s a big business and it’s here to stay,” he told the the Journal Inquirer.
The Enron debacle spawned the enactment of the Sarbanes-Oxley Act (SOX) and most current business regulation since that time. This legislation was initially aimed at corporate executives, auditors, and directors, according to the Washington Post. Organizations like the Public Company Accounting Oversight Board (PCAOB) oversee the auditing firms now and expensive Section 404 regulations have been enacted seeking more transparency in financial reporting.
The question remains, “Could Enron happen again?” The answer is a swift and simple yes. Henry T.C.Hu, a law professor at the University of Texas at Austin, told the Washington Post, “Sure it could. Just look at Refco.” The trials of the former Enron executives, Lay and Skilling starts on January 30.
Former SEC chairman Harvey L. Pitt, told the Washington Post, “I just don’t think we are as far along as we need to be. Many shareholders may have been lead to believe that [reforms] have cured all the problems, and we’re home free. Unfortunately, that’s a prescription for disaster.”
In the face of all this regulation, companies pay a price from Wall Street when they miss their earnings expectations by even pennies. Earnings guidance is “like heroin” for Wall Street analysts, according to Colleen Sayther Cunningham, leader of a corporate finance officials. “Once you put it into your arm, you can’t kick it,” she explains in the Washington Post.
There is growing opposition to these regulatory laws from groups like the U.S. Chamber of Commerce as well as professionals and academics such as securities law professors, according to the Washington Post. They say that the time spent conforming to regulations is off-target and missing the root of more insidious problems. Executives, such as Bob Merritt, the former chief financial officer of Outback Steakhouse, Inc, have resigned their posts telling us about “overzealous” regulations that kept him from making business decisions. Merritt resigned his post in April 2005.
The Journal Inquirer reports there are U.S. business sectors that contend that SOX makes fair competition in the private sector too difficult. Reason.com reports that critics in the academic, business journalism, and even corporate realms, are reluctant to speak on the record and show “bad faith” regarding SOX.
Executive pay also continues to grow. Expensing stock options has become a more regular practice but it doesn’t help that companies are replacing executive stock options with restricted shares. Investor advocate Nell Minow told the Washington Post, “As long as CEO pay is so fundamentally out of whack, we cannot say that boards are doing their job or that corporate governance reform has been accomplished.”
Chester Wood said in the Journal Inquirer, “The biggest impact [on the accounting profession] has been in terms of the scope of services we can offer clients. It’s been difficult since it’s the first time we’ve been regulated by an outside party. But overall, the impact has been positive.”