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Saturday, April 14, 2007

Still Think SOX Is a Bad Idea?

I've commented previously about the value of Sarbanes-Oxley reporting rules as relatively cheap "macro-economic malpractice insurance" for the economy (#1, #2). The Wall Street Journal reported April 14, 2007 on a report from the board of Computer Associates (now CA) that is recommending a lawsuit against its founder to recover $500,000,000 in costs related to his role in the larger $2.2 billion accounting fraud alleged by the government.

Per the WSJ report, the committee report not only confirms the nature and extent of the charges against eight CA employees who have already been indicted but identifies three others not yet facing charges. For those who might conclude that SOX rules were unnecessary and that the board did its job, you might want to rethink that:

* Charles Wang resigned in 2002 amid clear signs of financial fraud.
* The board waited for THREE YEARS to commission the investigation in 2005.
* The board's investigation received no cooperation from Wang whatsoever during the investigation.
* The report identifies an additional three employees who have not yet been indicted but played key roles in the fraud.
* The report was issued more than five years after the fraud, preventing the information from being used in criminal proceedings due to the 5-year statute of limitations.

How convenient.

Wang is probably still worth south of $1 billion so the CA board might be able to recover its $500 million from him but that still leaves him with about $400 million and leaves investors who saw share prices drop from $20 to $7 during the worst of the crisis in mid-2002 holding the bag. That's not an efficient free market. That's a free market for criminals.

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#1) http://watchingtheherd.blogspot.com/2006/05/is-sarbanes-oxley-really-problem.html

#2) http://watchingtheherd.blogspot.com/2006/11/what-enron-and-worldcom-werent-enough.html