Page 2 of
3 The decline of US
equity markets By Julian
Delasantellis
the corporate
chutzpah hall of fame by seeking to profit from
his lies by illegally selling his own stock short
prior to the news of his lies becoming public.
But all these scandals were mere pikers
compared with what was going on at Enron. In 2002,
the public learned that billions of dollars of
Enron's previously reported revenues were the
result of private deals with what it called
"special-purpose entities", limited
partnerships that, in
actuality, didn't exist. On the cost side, Enron
hid corporate liabilities in, once again, its
various and sundry specially created phony
arm's-length "offshore entities".
As the
news of these malfeasances spread through 2002, it
caused sharp falls in the share prices of the
afflicted companies - WorldCom, Enron and others
declared bankruptcy. Going back to the P/E
concept, if investors were comfortable paying a
P/E of 20 for a company, and then it is revealed
that half the company's earnings are phony, then,
to maintain the 20 P/E, investors would sell the
stock by 50% as well.
The stock market
began to fear that all these accounting scandals
were not, as former presidential press secretary
Ari Fleischer termed it, just the work of a few
corporate "bad apples"; perhaps the whole barrel
was rotten, and the general market sold off as a
result. In between March and October of 2002, the
Dow Jones Industrial Index, which had clawed back
to recoup most of its losses post-September 11,
2001, lost another third of its value.
Therefore, with nervousness growing about
how sour stock markets might affect the upcoming
mid-term congressional elections, on July 30,
2002, President George W Bush reversed his
previous stated position that government should
not intervene in markets that were best
self-regulated, and signed into law the
Sarbanes-Oxley Corporate and Auditing
Accountability, Responsibility and Transparency
Act.
The bill, named after its
co-sponsors, Republican congressman Michael Oxley
and Democratic senator Paul Sarbanes, had passed
both houses of Congress, by 423-3 in the House,
99-0 in the Senate. At the time, it was said to be
the biggest reform in US corporate-governance
regulations since the creation of the Securities
and Exchange Commission in 1934.
Prior to
the adoption of Sarbanes-Oxley (commonly referred
to as "Sarbox" or "SOX" in the financial press),
corporate executives could get off the hook from
charges of malfeasance anywhere within the
corporation with the famed "I know nothing - I see
nothing!" defense of Sergeant Schultz (the late
John Banner) of the 1965-71 US sitcom Hogan's
Heroes.
Thus, in the same manner as
Schultz looked the other way as Colonel Hogan
brought everything up to B-24s into Stalag 13,
corporate executives routinely claimed ignorance
for everything up to human sacrifice followed by
cannibalism in the cafeteria. (This defense failed
in the corporate-securities-fraud trial of Enron
principals Ken Lay and Jeffrey Skilling.
Apparently, so much financial pain had been
suffered, so many people realized that they must
now work to their dying day because of the
disappearance of their retirement savings, by so
many in southern Texas as a result of the Enron
collapse that a Houston jury was no longer willing
to accept a defense that had worked so well in
other corporate trials.)
Sarbox turned
these blowsy standards on their head. No longer
could corporate executives simply plead ignorance
and walk away; they were now mandated to attest
and sign off personally on all corporate earnings
statements; the companies were also mandated to
have available for regulators' perusal a
documented paper trail of the efforts undertaken
to ensure the integrity of their earnings
releases.
Section 302 of Sarbox required
corporate officers to:
Certify in each annual or quarterly
report filed or submitted under either such
section of this title that (1) the signing
officer has reviewed the report; (2) based on
the officer's knowledge, the report does not
contain any untrue statement of a material fact
or omit to state a material fact necessary in
order to make the statements made, in light of
the circumstances under which such statements
were made, not misleading; (3) based on such
officer's knowledge, the financial statements,
and other financial information included in the
report, fairly present in all material respects
the financial condition and results of
operations of the issuer as of, and for, the
periods presented in the
report.
Section 404 of Sarbox required
corporations to make even more efforts to maintain
the integrity of their earnings releases. It
affirmed "the responsibility of management for
establishing and maintaining an adequate internal
control structure and procedures for financial
reporting".
Corporate officers must create
and maintain internal auditing procedures that
assured "reporting.effectiveness of the internal
control structure and procedures of the issuer for
financial reporting".
And to provide an
extra incentive to the new corporate morality,
Sarbox mandated enhanced penalties under criminal
and civil law, including longer prison terms, for
those who might be still tempted to revert to the
old, morally profligate earnings-reporting ways.
The powers that be in corporate America
never really liked Sarbox, especially the Section
404 requirements for establishment of new,
expensive ongoing internal auditing controls, but,
at first, with so much egg on their faces from the
scandals of 2002, they bit the bullet and did
their best boy-scout imitations. A healthy cottage
industry of software, consultancies and books
arose to help corporate executives with Sarbox
compliance. (One of these, Sarbanes-Oxley for
Dummies, by Jill Gilbert Welytok, certainly
presents an interesting challenge to those who
claim that American CEOs are the brilliant,
all-knowing business avatars of our age.)
Lately, with the stock market rising, and
the scandals and selloffs of 2002 more than a
thousand 24-hour news cycles ago, the CEOs are
clearly pining for what was, for them at least
(certainly not for the investors they duped), the
more relaxed expectations and strictures of the
good old days.
The anti-Sarbox cheering
crowd - prominent among them Glenn Hubbard,
professor at the Columbia Business School, and,
from 2001 to 2003, appointed by President Bush to
the chair of the Council of Economic Advisers;
former adviser to president Ronald Reagan and
current CNBC talk-show host Larry Kudlow; and the
entire editorial board of the Wall Street Journal
- share one common ideological trait.
They
are all what are called "market supremacists"
(more pointed observers call them "market
fetishists") in that they believe in the complete
and unfettered operation of the markets for goods,
services, and capital markets products, completely
free from any control or regulation by government.
In weighing private interests against the
interests of government, representing the
interests of society as a holistic entity, for
market supremacists, society's interests always
finish a very distant second.
Even though
the corporate class hate and resent Sarbox,
they're way too clever to come out and announce to
the public that they'd like it repealed so that it
would once again be relatively sanction-free to
lie. They had to come up with a reason, whatever
its
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
