Journalism in the Public Interest

The SOX Win: How Financial Regulation Can Work

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As fears mount that Dodd-Frank, the financial overhaul law, is about to be emasculated, it's worth reflecting on the 10-year anniversary of a major regulatory success.

I'm speaking of the mocked, patronized and vilified Sarbanes-Oxley, the law that cleaned up American corporate accounting.

SOX, as it's known, was a response to an epidemic in corporate accounting fraud that swept American business in the late 1990s and early 2000s. Because the 2008 financial crisis dwarfs that earlier round of scandal, it's easy to forget how rotten things were, said Broc Romanek, editor of, a site devoted to securities law and corporate governance. "Everyone had lost faith in the numbers put out by big public companies," he said.

Cast your mind back. The scandals erupted in some of the purportedly best, most recognizable companies in America. Enron and WorldCom were the two biggest names and the two biggest failures. Tyco and Adelphia were in the second tier. But there were appalling accounting disgraces at HealthSouth, Rite Aid and Sunbeam. Waste Management and Xerox barely survived theirs.

Today, there are certainly debates about stocks and their valuations — and some questionable accounting — but no company that finds itself under scrutiny now is anywhere near as large, respected or publicized as those were then.

Something else characterized those dark days: the frauds often lasted and lasted. Investors known as short-sellers, who make money when stocks collapse, waged battles for years over certain companies. Today, accounting disputes are finished before they start. An accounting scandal at Groupon, the online coupon company, came and went in a matter of weeks back in the fall — resolved by the regulators before the company went public.

When SOX was passed, it was attacked — almost exactly like Dodd-Frank is today. Sarbanes-Oxley got "horrible press," said Jack T. Ciesielski, who edits the Analyst's Accounting Observer. People mocked it for requiring companies "to flow chart the keys to the executive washroom," he said. But the result is that accounting at American companies is much cleaner today.

The main criticisms of the law haven't panned out. Corporate earnings have soared, and no company has ever missed a quarterly estimate because it was spending too much on its accounting and internal controls.

Critics railed that it would cost small companies too much, which it may have, though the evidence is debated. They also argued that it would hurt initial public offerings, which it didn't. Yet, there remains vestigial criticism from the right; Newt Gingrich called for its repeal the other day on the campaign trail.

Is Sarbanes-Oxley perfect? Of course not. The financial crisis included accounting problems. The books of the American International Group, Lehman Brothers and Merrill Lynch misrepresented the true state of the companies. The auditors have managed to skirt blame — even more so than other gatekeepers, like the ratings agencies, have. But at its heart, the financial crisis wasn't an accounting scandal. It was a bubble, albeit one exacerbated by some book-cooking.

But the evidence in SOX's favor is that one big dog didn't bark. Even as the financial panic turned into the Great Recession, corporate America weathered the worst of the downturn without a series of major accounting frauds.

SOX required that chief executives and chief financial officers personally sign off on their companies' financial statements. That seems minor. No doubt a Madoff wouldn't be deterred by a little dissembling signature. But blackhearts aren't the typical accounting fraudsters.

At huge corporations, corruption usually develops slowly, incrementally, starting with a minor crossing of the line. At the end of a quarter, a sale is booked before it was actually ordered — to make the numbers for Wall Street. Over time, the fraud builds on itself and it's easier to keep the game going than to clean it up.

Requiring a step where the top dogs actually have to mark the books as their own territory halts that process. It steels their concentration and improves the culture, preventing those initial halting steps toward fraud.

The accounting industry has been improved as well. The new SOX-created industry overseer, the Public Company Accounting Oversight Board, has made inroads. Accountants have done a better job, remembering the devastating collapse of the accounting firm Arthur Andersen in the wake of the Enron debacle.

SOX wasn't the only factor in this cleanup, of course. The accounting trials of the early 2000s made a cultural mark. Kenneth L. Lay and Jeffrey K. Skilling of Enron, the Tyco fraudsters L. Dennis Kozlowski and Mark H. Swartz and Bernard J. Ebbers of WorldCom all had their day in court. All the world, including their executive peers, watched them go from their mansions to the big house.

Is there a lesson to draw here for the prospects of Dodd-Frank? The new law is more sweeping, more pilloried and more complicated. It is concentrated on one industry, which allows for a more unified opposition. Importantly, a round of perp walks and prison terms didn't accompany the law. Quite the contrary, the people responsible for the greatest economic collapse since 1929 have all danced away untouched.

But for all of the criticisms of Dodd-Frank, there has been a societal change in our views. Few can sustain an argument in favor of a gigantic, self-serving and rapacious financial sector. Some kind of financial reform law was — and still is — needed.

If lawmakers don't gut Dodd-Frank, then 10 years from now we just might be reflecting on how safe our financial system is.

Three points come to mind.

First, “we just might be reflecting on how safe our financial system is”?  Cute, but remember that financial companies hire lawyers, mathematicians, (pure) scientists, and the occasional mobster.  That ain’t to play by the rules more carefully, but rather to find the loopholes.

Second, the 2008 incident was not a problem of shady accounting or mere fraud.  It was terrorism, plain and simple.  The banks said that, if they didn’t get lots of money from the Treasury (in small, unmarked bills, perhaps), they would collapse the economy.  The fraud and shady accounting beneath it to ensure Washington blinked in the staring contest is a marvel to behold, but at the end of the day, let’s not lose sight of the fact that the banks threatened to destroy our country (Marci Kaptur can be seen on a C-Span clip on YouTube, I believe, where she mentions that she was threatened with martial law).

Third, regardless of what kind of law Dodd-Frank actually is (I haven’t had the time or motivation to hack through it), the people whose name it bears aren’t exactly pro-safety.  Frank’s usually got a good head on his shoulders, but did his damnedest to inflate the bubble with subsidized housing.  Dodd is now a Hollywood lobbyist who says Iran- or China-style censorship would be a good approach as long as his failing industry makes a buck.

In the end, the only thing that will make the economy safe is enforcing the rule of law ABOVE regulation.  Investors need to actually own the things they insure (beyond a simple purchase contract).  Executives need to be held responsible for the practices under them.  Threats of attack need to be punished.

Transparent accounting will help (the more transparent and the fewer the ambiguous points, the better), but the key is to stop this weird division where what’s a felony fraud for any of us “might need a rule” if you run a bank.

And it wouldn’t hurt to stop Congressmen from investing in companies they’re about to award contracts to.  For the rest of us, that might be considered in somewhat bad taste, y’know…?

@John-Very well stated. I would only ask where were these measures in regards to Fanni and Freddie? IMO Glass-Steagal should have not been repealed. It’s been game on for the banks ever since.

Sarbanes Oxley will never work.  I am a CPA who has watched this circus of corporate shannanigans for 30 years now.

Today, Diamond Foods’ CEO and CFO are resigning because of an accounting scandal with regard for payments to walnut growers being played around with….. I have watched the massaging of numbers over the years knowing the lines blur between massaging and manipulation.

Tech companies still stuff the channel and play around with contractual terms in order to over recognize revenue when times are appropriate or under recognize in a quarter that is already gangbusters in order to save something for the next quarter.  Banks over deducted losses on assets and are now reversing those deductions into income.  Within a quarter or two new realities about how much banks can really earn will finally hit wall street hard.

No amount of regulation will contain the greed of corporate managers dependent on earnings for bonuses.  The real solution and I mean real solution is to pay a significant amount of compensation in stock, not cash.  NO, I do not mean fat stock options.  I am talking about 50% or of their actual salary; no options; no deferred compensation.  Make their future fully dependent on long term performance of the company. 

Then, and only then can you finally rid these companies of most of the BS that presently goes on today.

Outstanding Bruce F. I worked for UPS for 30 years. Before they went public on their stock, management was paid in the exact way you suggest. Management’s stake was in the long-term value of the stock. It automatically made them think long-term. Before UPS sold out to Wall Street, the stock never decreased in value. It has never split since going public. Prior, it would split, on average, every couple of years.

The Grim Reaper

Feb. 8, 2012, 6:38 p.m.

“Today, accounting disputes are finished before they start.”


I have been a big supporter of ProPublica since its inception and given you a lot of “air time”.  But lately you guys are putting out some dubious investigative reports.  You can’t expect to write intelligently about a topic you really don’t understand and that is starting to show. 

When you compare the attacks on SO to Dodd-Frank, what are you inferring?  You are inferring something to the reader.  That 2500 pages of Dodd Frank is similar to 60 pages of SO or 30 pages of Glass Steagall.  Dodd Frank is 1800 pages and growing.  It is still growing because what was passed was not codified.  They are still making it up.  Politicians in concert with financial lobbyists that is.  2500 pages of anything is red tape meant to rig the game in favor of the firms supposedly being regulated.  Who can ever enforce 2500 pages of regulation?  Since you seem to be inferring Dodd Frank is getting a bad rap, why don’t you put together a business plan for the SEC on how to actually enforce 2500 pages of bulloney and share it with the rest of us? The regulator would need to be an idiot savant to even remember a small fraction of it. 

Wall Street’s scams were COMPLETELY abetted by MASSIVE accounting fraud.  Massive.  MASSIVE.  And, nothing has changed. 

My intent is not to personally attack its author but if this were peer reviewed by experts in the field of finance before it was published, it wouldn’t have even made the back pages of MAD magazine.  This is a horrendous piece of journalism.

Might I make a constructive suggestion that you have complex stories on esoteric topics reviewed by subject matter experts before you put out more drivel like this.  Or, you will eventually lose readership and donations.  Me included.

On the one hand, the author makes a good point with how in 2002—in wake of Worldcom scandal and the destruction of Arthur Andersen, there was a loss of confidence in the numbers.  This time around, that was contained to banks—particularly Bank Of America and Citigroup.

On the other hand, many financial company managements completely failed us on ethics in the 2000s.  It just wasn’t by cooking the books—- it was pursuing their near-term bonus in exchange for a wild gamble on the housing market.  ‘Hey, my company may or may not make it—but I get my $10 million this year and that is cash in the bank.’ 

Hard to think of ways to prevent lapses in ethics.  The same sort of thing is rampant today in hedge funds.  Expert networks and inside info is the ‘edge’ they need to make those bonuses.

One more time an “alternate” media channel with a decent reputation descends into the “rant” mode. Please. Please. Provide a scrap of factual information asserting SOX is effective.

Facts. Information. Truth. That kind of stuff.

Everyone needs to relax a bit. Before retirement I worked for one of the preeminent ultra-high tech companies whose books were, to say the best, messy and very likely fraudulent. Sarbox arrived and we mid managers under the whip of the CEO and BOD went about correcting the travesty. The end result: a vastly better company whose books correlated exceptionally well with reality. When we included an annual review via our Total Quality program, we just became better and better. This company was later acquired with not a single challenge to its statements. The President and CFO slept well and we were all proud of our accomplishment. Every company (EVERY), needs come clean and adhere to SARBOX. The nice federal prisons are really not very nice at all. Ditto for Dodd-Frank. Actually, I really hope to see a “no-vacancy” sign on the fed facility at Sheridan, Oregon before this mess is done.

ProPropagandica shilling for Wall Street again.

From your reporting, I asume you think congress, the Exe & Jud are in complete control,no? I think not. Wake up, smell the gun powder, the PE’s won’t give in easy, War is the wrong answer but you have people in high places who lose their way of life , fast, will they pull the trigger to save their butts life style as Thousands may die , this is real, history repeats & rymes, but this shall been seen as way differernt I hope?!
Peace to all!

“They also argued that [Sarbanes-Oxley] would hurt initial public offerings, which it didn’t.”

From the paper linked to:

“Although the 2002 Sarbanes-Oxley Act and the 2003 Global Settlement have reduced the
attractiveness of being public for small companies, we argue that the more fundamental problem
is the increased inability of small companies to become and remain profitable.”

In whole the paper posits that structural changes in the attractiveness of venture exits by acquisition versus IPO have caused a secular decrease in IPO activity. This is just a hypothesis being explored. Additionally, the paper concedes that SOX negatively impacted IPO activity, contrasting starkly with how it is used in this article.

Linking to a working paper without pointing out (a) that it is a working paper, and, (b) paraphrasing what it concludes is sloppy. Mis-representing it is dishonest.


I understand that you want to defend Dodd-Frank from all the nasty criticisms that it has been receiving since its inception.  And I agree with you that most of them are trigger-happy and agenda-driven, and many lack merit.  But your argument is founded upon a justification of the status quo.  Reduced to the absurd, which doesn’t take all that much reduction, it’s like this:  Look, no major accounting cases, ergo no major accounting fraud.

I realize your motivation here is pure—to shush the noisy critics of regulation—but you can’t take such a stand and leave it at that.  We expect more from you.  Such an approach reflects a burdensome optimism, or perhaps just laziness.  Either option is not the kind of attitude that a self-declared muckraking journalist can afford to have for very long.

Yes, SOX was helpful.  But also, Yes, there is still major accounting fraud.

SOX was a good thing—it helped motivate management to get their accounting more correct, at least to the point where their lawyers told them they’d be ok because the government wouldn’t fight them on it.

But no, it is not the case that 2008-2011 has not been the cause of major accounting fraud.  That is absolutely NOT the case, and it’s extremely frustrating to read such a claim on the pages of this wonderful publication.  See, e.g., Frank Partnoy and Lynn Turner, Roosevelt Institute paper, “Abusive off-balance sheet accounting was a major cause of the financial crisis,” available at Sheet Transactions.pdf.

The reason we haven’t seen the kind of Enron and Worldcom explosions in the last several years is, well, confusing and mysterious, and many folks have taken a stab at trying to bring some clarity to the issue.  And the sad thing is that the SOX-related cases would be the simplest to bring.  But guess how many SOX-related cases, civil or criminal, have been brought?  It’s not like you’re not hearing about them because they’re just so commonplace.  You should take a look at articles like Marian Wang’s 12/6/11 in ProPublica, as well a 60-Minute feature that ask the same questions—why no SOX prosecutions—instead of turning this fact into a self-fulfilling stamp of approval for the effectiveness of the law.

On a constructive note, you might consider doing a follow-up story that looks into the dirty details of SOX-related cases from 2002 to the present.  How many have been brought by the government?  What have been the results?

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)