Sarbanes-Oxley Will Make Little Difference

When first Enron, and then WorldCom, collapsed in spectacular fashion to be followed by many others (including Parmalat which removed any residual European belief that these were American problems), the headlines were screaming ‘accounting scandal’ as if this was the sole cause of these failures.

To be sure, so-called ‘aggressive’ accounting policies and earnings management , often embarked upon to meet analysts’ expectations, were part of the stories, but these primarily served to conceal, for far longer than should have been possible, much more significant problems. That companies were assisted in this by greedy and craven auditors encouraged that simplistic explanation.

Reacting to the media outcry and the anguished moans of the many that had lost jobs, pensions and savings, the US Congress rushed to pass an ill-considered and hasty piece of legislation, the Sarbanes-Oxley Act (S-Ox) in early 2002. It sought to prevent future ‘Enrons’, an objective it is doomed to fail as