Sarbox: Fiddling with “internal controls” while mortgages were burning


Thanks for noting the cite on why the SEC “reforms” of Sarbox would still mandate that companies be suggested to broad reviews for “internal controls.”

With questions about accounting for collateralized debt obligations and mortgage-backed securities, the case for overhauling Sarbox is just that much stronger. The fact that the law and its interpretation by the SEC and Public Companuy Accounting Oversight Board mandated that companies spend so much time looking at trivial “internal controls” such as the number of letters in an employee password meant there was less time and probably less importance on decisions involving business judgements such as assessing the risk of these novel financial instruments.

Sarbox critics such as Larry Ribstein, Peter Wallison, and me have said for years that Sarbox would fail to catch the next scandal or accounting difficulty. We’ve been proven right. I’ll buy someone 100 shares of New Century Financial (the bankrupt mortgage lender. It’s selling as a penny stock, and I do have a dollar to spare) if they can show me how office keys, employee passwords, or type of computer operating system (as opposed to the mathematical valuation models based on hunan judgement), contributed to the credit crunch.

Also by making it so much more difficult for companies to go public, smaller firms had to borrow to expand instead of issuing shares. This may have directly contributed to the crunch. More on this in forthcoming CEI analysis.

Another way SOX may have contributed to the crisis is by its defenders loudly proclaiming that the law made the markets virtually risk-free. This may have given some investors a false sense of security. Scandal or not (and it’s not clear there was a major scandal here involving credit problems. Bad or mistaken judgment is not always a crime), the market always involves risk, and investors should be under no illusion otherwise.

Thus, it should not be the job of the government to boost investor confidence, contrary to what SOX defenders say. And we certainly should not again rush to blanket bans of CDOs or adjustable-rate mortgages, based on the phony distinction between the financial and “real” economies.The only alternative to risk in financial markets is the risk of stagnation, which would deprive Americans of a lot of “real” products from pharmaceuticals to technologies.

By the way our anti-Sarbox YouTube video starring Richard Morrison and Kate McLauglin has gotten more than 1,200 views. If this keeps up, we’re going to beat the pro-Sarbox singing accountants video. So OpenMarket readers should forward this video to as many people as they can.