Washington, D.C., May 26, 2006—Members of the Enron jury should be commended for their deliberative process. They carefully weighed the evidence involving complex accounting issues and concluded that Ken Lay and Jeff Skilling were indeed guilty of fraud. It is testament to the jurors’ careful scrutiny of the facts that they did not find Skilling guilty on the “insider trading” charges. The definition of “insider trading” has been stretched in many cases and the jury was right view this charge skeptically.
Unfortunately, in 2002, Congress did not engage in such careful deliberation when it rammed through the Sarbanes-Oxley “corporate reform” act. That law punishes all companies as a class – through billions of dollars and thousand of hours in compliance – for Enron’s sins. And it’s not at all clear the law would have prevented Enron’s sins – or the sins of the next company that engages in corporate fraud.
Because the Enron bankruptcy and Enron shenanigans occurred before Sarbanes-Oxley was passed, the government had to convict Lay and Skilling with preexisting law. It was successful. But it was unsuccessful in getting a conviction for Richard Scrushy of HealthSouth, even with the new crimes and penalties in Sarbanes-Oxley. The Enron and WorldCom convictions show that the law before Sarbanes-Oxley was more than adequate go after corporate fraud.
It is worth noting that Enron received top scores from the “corporate governance” groups before it imploded. Its board of directors was 86 percent independent, and its audit committee consisted entirely of independent directors. The requirements of Sarbanes-Oxley would have barred only one of six members of its audit committee, a member who was a paid consultant to the company, from serving on it.
And no one alleged any problems with Enron’s “internal controls,” the heart of the costs of Sarbanes-Oxley. Due to the broad interpretation of the phrase “internal controls” in the law, companies are forced to have accountants sign off on things like office keys and employee passwords that have little to do with financial statements. But Enron was not about internal controls; it was about accounting judgments. The best internal controls would not guard against bad judgments or misleading statements. That’s what anti-fraud laws are for.
As the Enron jurors rendered their verdict on Lay and Skilling, thousands of honest entrepreneurs have rendered theirs on Sarbanes-Oxley. The law is guilty of mandating massive costs in dollars and time that do not serve shareholders. And by requiring voluminous audits of trivial internal controls, it has enriched the same Big 4 accounting firms proponents claimed it would rein in. It is time to sentence this law to repeal or a major scale-back.