Time for Sarbox to be rethought post-Valukas
March 18th, 2010
The time bombs detonated by the court-appointed examiner’s report into the collapse of Lehman Brothers have by no means all gone off. Indeed, further explosions are expected to continue to reverberate and echo around the financial and regulatory landscape for some years to come.
The report—a 2,200-page, nine-volume page-turner written by lawyer Anton Valukas—revealed that the failed investment bank continuously manipulated its accounts from 2001 until its September 2008 demise in order to deceive investors as to its own financial health.
Above all else, the report has highlighted that the draconian Sarbanes–Oxley (Sarbox) approach to regulating financial institutions introduced by the government of George W. Bush following the collapse of Enron has failed.
The Valukas report suggests that Sarbox was what a lot of people have long suspected it was—too rules-based to stop the clever creative accountant or the would-be manipulator of financial reporting. It will probably come to be seen as a classic case of a US administration shooting itself in the foot with a kneejerk “something must be done” regulatory response to a crisis. Sarbox will almost certainly now have to be rethought.
The Valukas report has also prompted calls for a fundamental review of the corporate governance of so-called systematically dangerous institutions (aka “too-big-to-fail” banks) such as Lehman Brothers unfortunately was; of the audit industry (including of self-regulatory standard setters such as the IASB and FASB); and of course of financial services regulation.
One of the report’s most stunning revelations is the apparent complicity of Lehman’s primary regulator, the Federal Reserve Bank of New York, in maintaining the fiction that Lehman Brothers was a well-capitalized bank, whose assets were worth what was said on the tin, and which was awash with liquidity, even as it careered towards self-destruction.
Eliot Spitzer, the former New York attorney general, has shed light on the relationship between Lehmans and the NY Fed in an article in the Huffington Post, co-authored with Professor William K. Black.
Spitzer was a notorious crusader against fraudsters and white-collar criminals on Wall Street in the mid-Noughties but had to step down as governor of New York after a prostitution scandal. Well, Spitzer is now back and in this no-holds-barred piece has called for “an immediate Congressional investigation.”
- To read the full blog post on QFINANCE click here
Short URL: https://www.ianfraser.org/?p=1044
Posted by Ian Fraser
on Mar 18 2010. Filed under Blog.
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Sarbox 404 on adequacy of internal controls was the catch-all they could (should) have utilised as a deterrent. As Federal Law it should, in theory, have trumped regulatory arbitrage.
Of course the will to do so had to be there – and that’s a whole other story.