The Sarbanes Oxley Act regulated some activities that were shown during the Enron era to be widely abused (such as corporate loans of over half a billion dollars to an officer, very aggressive (outlandish even) revenue recognition and expense recognition (calling marketing costs an asset because they created an asset called mindshare). In short, the statements managements and the statements being issued could not be trusted. So the law said the CEO and DFO must sign the statements with an oath that they were true.
The intent was good. By comparison, we demand that the piples that our plumbers put together do a reliable job. Why shouldn't we demand that our financial statements be reliable? If we don't neither one will hold water.
Personally, I don't agree with everything in the restrictions. A simple advance to an officer for travel related expenses, the kind routinely given to non-officers, is a loan. This if forbidden by the law, and should be revised. Of course, half a billion dollar travel advances might change my mind.
I probably don't need to go into the stock option treatment. There've been many stories about underreporting of expenses due to misuse of, mis-dating, and accounting for stock options as management wished the rules to be instead of as they are.
I don't always agree with having the CFO sign the statements or with oath mandated. The CFO might disagree with the contents of the oath, but is still required by law to give those exact words. Sometimes, by law, he is forced to give a false oath.
Anytime the CFO has someone else (e.g., a boss) who controls his compensation, then the CFO should not, in my opinion, sign the statements. Those who ultimately control his compensation and the resources he has (e.g., the number of people in the accounting department) should, instead.
The rules are complex. They are overly complex. Sometimes they don't make much sense and are hard to understand or nearly impossible to apply (what's the fair market value of an asset that has no market?). The rules should be changed, and changed so that they are made simple, conservative, and easy to apply.
Conservativeness used to be a principal taught in introductiory accounting classes, as in when there are multiple reasonable interpreations, choose the one which reports the lowest income. That concept seems to have been lost, replaced by just the opposite. When someone says it is aggressive accounting, the word aggressive says right away that it is wrong. Yet, aggressive accounting somehow became the norm.
Matt Bandyk, a reporter for U.S. News, explores capitalism from where it all begins, with the entrepreneur, whose risk taking and experimentation provide the roots from which the rest of the economy grows. As much courage as it takes to create one's own business, even the entrepreneur needs some help, and this blog will look at news, trends, and practical advice for starting and running a small business.
Roland of VA @ Jul 18, 2008 10:21:11 AM
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