Relevance of the Sarbanes-Oxley Act of 2002 to the Madoff Scandal Essay Example

Madoff scandal could have been thwarted at an initial stage if the firm had complied with the regulations mandated by the Sarbanes-Oxley Act. For example,

“Section 404 of the Sarbanes-Oxley Act requires each issuer’s annual report to include an internal control report which shall … contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. In addition, section 404 requires each issuer’s auditor to attest to and report on management’s internal control assessment”. (Coustan, 2004)

When the Sarbanes-Oxley bill was initially proposed, it set out to address the loopholes then present in the corporate governance laws. While the whole of Sarbanes-Oxley Act includes many clauses and subclauses, its essence is to make accounting practices in the USA more ethical. The only drawback of such an elaborate reworking of corporate governance laws is the additional cost involved. It is a matter of speculation if the Madoff scandal could have been prevented had Sarbanes-Oxley been implemented earlier than 2002. But there is no doubting the fact that the accounting misrepresentations carried out by Bernard Madoff and his cohorts were in breach of Sarbanes-Oxley regulations, both in letter and in spirit. (Kohn, 2004)

For example, Madoff’s ponzi investment scheme showed investors double digit annual returns on their investments, when in truth the money went straight to Madoff’s business bank account with Chase Manhattan Bank. Whenever an investor would request a redemption, Madoff’s firm would pay using funds from new investors, the excess being sent straight to the Chase Manhattan account. The trouble started when this vicious

spiral of new infusions and redemptions went out of control. The savings and retirement pensions of many investors were lost in this artificial investment scam, reiterating the fact that regulatory overhauls such as Sarbanes-Oxley are highly relevant to the prevention of such scandals in the future. (Parles et. al., 2007)

It should also be mentioned that the provisions under Sarbanes-Oxley are not universally welcome by accountants and managers. While some of the measures were inevitable, they also impose additional encumbrances on the business corporations. For example, a systematic study of managers’ opinions elicited mixed reactions.

“The interviewees unanimously agreed the legislation has many good aspects. Specifically mentioned as a good idea was the part of section 302 requiring top management to certify it had reviewed each quarterly and annual report. Furthermore, requiring management to certify that the financial statements–and other financial information included in the reports fairly present the issuer’s financial condition, as well as the results of operations, will force management to become more engaged in the financial reporting process.” (Moberly, 2007)

While there are more plusses than minuses, it would be premature to conclude that Sarbanes-Oxley has achieved its stated purpose. One should not expect the Act to be a panacea for improving financial reporting. It would be unreasonable to expect that fraud would be eliminated from Corporate America. Only in another five years’ time would researchers have enough time and data to perform longitudinal studies of the legislation’s effectiveness. The act can been deemed a success even if it reduces the magnitude of corporate crime (Green, 2005). In other words, making Corporate America crime free would be a Utopian dream; but frauds such

as Enron and Lehman Brothers could be identified and thwarted at an earlier stage with greator vigilance from the regulators.

References:

Anatomy of a Credit Crisis. (2009). Australian Journal of Management, 34(1), i+.

Coustan, H., Leinicke, L. M., Rexroad, W. M., & Ostrosky, J. A. (2004). Sarbanes-Oxley: What It Means to the Marketplace; from Support to Apprehension, Accounting Professionals Express Their Thoughts. Journal of Accountancy, 197(2), 43+.

Culp, C. L. & Niskanen, W. A. (Eds.). (2003). Corporate Aftershock: The Public Policy Lessons from the Collapse of Enron and Other Major Corporations. Hoboken, NJ: Wiley.

Ex-Madoff Executive Pleads Guilty to Fraud. (2009, August 12). Daily Herald (Arlington Heights, IL), p. 2.

Green, S. (2005, March). The Limitations of the Sarbanes-Oxley Act. USA Today (Society for the Advancement of Education), 133, 66+.

HE STOLE FROM THE RICH, THEPOOR& THEINBETWEEN; Madoff’s Victims Hit out as the Conman Is Given 150-Year Prison Sentence. (2009, June 30). Daily Record (Glasgow, Scotland), p. 9.

Kohn, S. M., Kohn, M. D., & Colapinto, D. K. (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. Westport, CT: Praeger.

Lander, G. P. (2004). What Is Sarbanes-Oxley?. New York: McGraw-Hill.

Long, R. (2009, July 20). From the Desk of Bernard Madoff. National Review, 61, 41.

Longnecker, B. M. (2004, May). The Sarbanes-Oxley Act: Altering the Fabric of American Business. USA Today (Society for the Advancement of Education), 132, 28+.

Moberly, R. E. (2007). Unfulfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win. William and Mary Law Review, 49(1), 65+.

More Arrests on Way over Madoff Scandal. (2009, June 30). The Evening Standard (London, England), p. 33.

Parles, L. M., O’Sullivan, S.

A., & Shannon, J. H. (2007). Sarbanes-Oxley: An Overview of Current Issues and Concerns. Review of Business, 27(3), 38+.

Romano, R. (2005). The Sarbanes-Oxley Act and the Making of Quack Corporate Governance. Yale Law Journal, 114(7), 1521+.

SEC Chief Outlines Plan to Build Investor Confidence. (2009, July 15). The Washington Times (Washington, DC), p. A12.

Smith, R. C., & Walter, I. (2006). Governing the Modern Corporation: Capital Markets, Corporate Control and Economic Performance. New York: Oxford University Press.