The Sarbanes Oxley Act
The Sarbanes-Oxley Act of 2002 was primarily designed to address the extensive fraudulent accounting practices undertaken by the accountants for Enron and WorldCom. One of the biggest problems with regard to the accounting used in preparation of financial statements by corporations has been the issue of non-salary executive compensation. Corporations, as part of a lucrative and complex combined incentive and retention program, often offers to the executives, stock options and enhanced performance pay at extreme levels. The key debate in this situation, with regard to accounting practices, has been how these incentives should be represented on annual and quarterly corporate financial reports. The position of the Internal Revenue Service has generally been that corporations, in order for the government to fairly obtain the tax benefits should list these compensation plans (options, in particular) as expenses on the corporate financial reports. (See Simon Kennedy and Brendan Murray, IRS Proposes Stock Options be Expensed for Some U.S. Affiliates, Bloomberg News Wire Service, Jul. 26, 2002). If corporations were to expense executive compensation plans, this would reduce their overall profits. However, there are those, including the
Modifications to the Federal Sentencing Guidelines may have given the SEC more teeth, but not nearly in proportion to the profit derived from corporate fraud. When Michael Milken was punished for insider trading, he served five years in minimum-security prison and was fined about $30 Million. At the same time, even after the fines, he earned $300 Million from his misconduct. From a cost-benefit perspective, if this story is true, crime pays quite well when your collar is white. White-collar crime has notoriously been under enforced and inadequately punished. Sarbanes-Oxley attempts to rectify this as to corporate fraud by increasing, in Section 1106, the penalties for violations of the Securities Exchange Act of 1936. Fines have been increased (the maximum possible fine is now $25 Million per violation, instead of $2.5 Million), as have prison terms (20 years maximum). Still, the problem remains: who cares if they are fined $25 Million if they make $250 Million? There needs to be stronger enforcement policies. A theory that might be useful is to borrow from the Racketeering Influenced Corrupt Organizations Act (RICO). Fines should not be set as a constant. They should reflect the social cost of the crime. Thus, as with RICO, fines should be set at a level three times that of the social cost of the criminal act (a.k.a., treble damages). Imagine how reluctant Milken would have been to engage in insider trading had he known that he would make -$600 Million as a result of $300 Million in social costs? The Sarbanes-Oxley Act is a very well intentioned act. However, it lacks teeth in areas where it needs them, and goes too far in areas where actual enforcement of pre-existing laws would solve the present regulatory problem. The Act may be the source of more problems in the future. Further, it is unlikely to work as the curative salve for which it is intended with respect to the stock market/economy. celebrated and successful CEO of Berkshire Hathaway, Warren Buffett
Some common words found in the essay are:
Attorney Ethics, Initially Black-Scholes, SEC DOJ, Sarbanes-Oxley Act, Enron WorldCom, Michael Milken, Oversight Board, RICO Fines, Securities Act, Exchange Act, accounting practices, executive compensation, board power, options exercisable, corporate fraud, black-scholes model, corporate financial, financial reports, sarbanes-oxley act, financial statements, corporate financial reports, punish bad accountants, options exercisable date, rico fines set, exercisable date specific,
Approximate Word count = 1333
Approximate Pages = 5 (250 words per page double spaced)
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