Hello prison, goodbye SOX (Editorial)

U.S. court decisions negate need for unproductive bureaucratic web that is the Sarbanes-Oxley Act

They ruined the retirement plans of their employees and bankrupted America’s seventh largest public company with a fraudulent scheme that made a mockery of financial statements. But in the end justice prevailed and former Enron leaders Kenneth Lay and Jeffrey Skilling are on their way to prison.

The May verdict in the Enron case ends a sorry chapter in business where Lay and Skilling hid the firm’s financial woes in order to keep share prices high. Shares they sold before the collapse. Shares that were held by employees who were told all was rosy right up until the end. Thousands of staff lost both their jobs and their retirement savings. And Enron investors suffered as did the integrity of the stock market.

Along with destroyed lives and fortunes, the Enron scandal left another painful legacy — the Sarbanes-Oxley Act (SOX). Passed by the United States government in 2002, SOX is meant to rein in executive fraud through tighter regulations around accounting procedures and board of director responsibilities in publicly traded companies. And while it’s a U.S. law, it is also one of the biggest legislated headaches Canadian HR professionals and corporate managers have had to deal with in recent years, even competing with the need to comply with Canada’s own privacy legislation. With the amount of Canadian firms doing business in the U.S., or listed on American stock exchanges or that are subsidiaries of U.S. companies, its tentacles have wrapped themselves around the throats of Canadian businesspeople.

In an attempt to safeguard against fraud, SOX has mandated elaborate approvals and documentation of what were once routine transactions. Whether it’s authorizing employee access to corporate systems or okaying the expenditure of $100, an unproductive bureaucratic web has been grafted onto publicly traded companies.

And — surprise, surprise — there’s suddenly a spike in the demand for accounting professionals in Canada and the United States, so put away some more of the budget for salary increases in the finance department.

Earlier this year BusinessWeek reported that many top executives and performers are looking for positions with privately held firms in a bid to avoid the onerous requirements of SOX. And more than one-half of corporate directors polled by recruitment firm Korn/Ferry International said SOX should be repealed.

So what started out as a well-intentioned bill to prevent Enron-style fraud and bankruptcy has become an administrative drain.

Making low-level managers do a lot of paperwork isn’t going to prevent the big boys from ripping off the company. One of the best tools for stopping that is making an example of wrongdoers by putting them behind bars. With Lay and Skilling on their way to prison, the U.S. justice system has shown that the means to punish corporate fraud exists without SOX. And Enron’s executives aren’t the only ones who’ve been toppled for excessive greed in the last few years. Bernard Ebbers of WorldCom, John Rigas and two other executives at Adelphia Communications, Dennis Kozlowski of Tyco and David Radler of Hollinger International have all received jail time for accounting shenanigans and assorted corporate plundering. The convictions of Lay and Skilling complete the picture.

The deterrence to Enron-style fraud has been delivered. So who needs SOX?

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