Could Too Much Focus On Compliance Leave Companies Open To Fraud?

Culture

from the another-problem dept

Thu, Mar 1st 2007 4:28pm — Joseph Weisenthal

In his first public speech since resigning from HP's board, Tom Perkins outlined what he sees as wrong with corporate boards. As Perkins sees it, in the post-Enron era, boards are filled with what he calls "compliance directors", individuals that are mainly concerned with things like Sarbanes-Oxley requirements and other governance issues. The problem is that these directors don't really know much about the actual business (via Valleywag), and so, ironically, aren't in a position to prevent another Enron from playing out. This makes a lot of sense. In order to know if management is engaging in fraud, you really need to have a solid understanding of what the company does. If your expertise is simply in governance, it may be easy to miss what's going on right in front of you. Ideally, a company should probably have a mix of directors, some of whom really know the business and the industry, with others more knowledgeable on compliance issues. But, if Perkins' assessment is correct, Sarbanes-Oxley has caused companies to put an overemphasis on the latter group, potentially causing problems down the road. Of course, this would hardly be the first perverse consequence of this legislation.

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misanthropic humanist, 1 Mar 2007 @ 5:32pm

keep your SOX on
Oh please , stop attacking SOX. We all know it has its downsides and teething troubles, but most of us recognise it as a good thing with good intentions. We just have to accept that it's a cost of doing business these days and factor that into any model.

Besides, cynically speaking, it is a big earner for IT practicioners and developers, probaly more of a cash cow than Y2K was. :)
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Bumbling old fool, 1 Mar 2007 @ 7:36pm

Too bad they weren't in compliance
As Perkins sees it, in the post-Enron era, boards are filled with what he calls "compliance directors", individuals that are mainly concerned with things like Sarbanes-Oxley requirements and other governance issues.

Too bad those "compliance directors" didn't tell HP not to go around spying on reporters... But I guess criminal law is not as important in business as securities regulations... ah, priorities, priorities...
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Bumbling old fool, 1 Mar 2007 @ 7:42pm

Re: keep your SOX on
...most of us recognise it as a ... thing with good intentions.

The road to hell is paved with good intentions.

We just have to accept that it's a cost of doing business these days and factor that into any model.

Right, no point trying to enact changes for the betterment of our society now. That was so 60's...

Bad legislation is bad legislation. We don't just have to accept it. We just have to get it fixed. (And yes, blogging about their deficiencies is one way to obtain the influence of those that can actually fix it, so Mike, Blog on!)
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a, 1 Mar 2007 @ 7:56pm

Are you really that stupid?
SOX is not in place to keep fraud from happening. It is in place to punish the ones who perpetrate it once they are caught.

Don't you understand how things work? Compliance departments are created to insulate senior management. Its not there to ensure compliance, its there to keep senior leadership from going to jail.

Regulators know this, so they had to come up with something to hold those responsible for the fraud responsible. Fine, we know we can't prove that you commited fraud, so we will just toast you for failure to provide proper oversight.

Oh, and I really loved your quote "In order to know if management is engaging in fraud, you really need to have a solid understanding of what the company does." Maybe I am misunderstanding your intention, but should a director of the company understand what the company does? Do you understand that the director of a company is there to protect shareholder interests?
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misnathropic humanist, 2 Mar 2007 @ 6:31am

Re: Re: keep your SOX on
I might well agree with you on many points if I knew exactly
what they are BOF.

Thing is, from where I stand, and what I read more generally, SOX is a much needed and long overdue attempt to limit the corruption of big corps by introducing a little accountability. I take that as positive change for the betterment of society, something I'm all about.

Mike/Joe - Maybe what's needed is an idiots point by point simple breakdown of why SOX is dangerous and/or may be misused. I've no doubt it has some faults, but let's have them spelled out. Cheers.
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MyNameIsMatt, 2 Mar 2007 @ 10:40am

SOX isn't the problem
I don't agree with Techdirt's view of SOX, although, I do agree that bad legislation is corrosive. The real problem with SOX is not that it makes senior executives' jobs that much harder, or adds some extra costs to running public businesses, but the real problem is that SOX is only a patch for a system that is in place and already full of holes. GAAP accounting is the problem. SOX won't be able to stop or make illegal various off-shore debt hiding vehicles because GAAP is just that flawed. It won't fix all of the problems with how revenue and debt and such are reported because that's ultimately a problem of the original reporting system, but it can patch holes like not reporting loans the senior executives or fully disclosing senior executive compensation packages (no wonder these executives are bitching).

In the environment of GAAP and various tax laws, SOX is a great benefit to investors who actually own the company. Managers and senior executive can bitch all they want, but INVESTORS OWN THE COMPANY, and unless you focus the talk about SOX from the point of view of the real owners, then you'll always be slightly off base. Post after post we get executives complaining, but I have yet to see real owners complain as they are the beneficiaries of SOX regulation. And still, the only way to get rid of SOX is to fix the underlying problems with the overall system, so maybe it's time you start complaining about the things that should be illegal, but aren't, under systems like GAAP.
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|333173|3|_||3, 3 Mar 2007 @ 3:33am

Directors
How can the directors protect the interests of the shareholders if they don't know what the company is doing?
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Jeff, 3 Mar 2007 @ 3:08pm

ignorace is profitable
"How can the directors protect the interests of the shareholders if they don't know what the company is doing?"

Does anyone seriously think that Warren Buffett really knows what's going on in the 44 unrelated subsidiaries of Berkshire Hathaway? (see http://www.berkshirehathaway.com/subs/sublinks.html) What he does do is trust the assurances that he gets from people that they're doing the right thing.

SOX, as written, simply raises the penalties for lying to owners. The fact that the Public Company Accounting Oversight Board and auditing companies have taken this as a blank check to impose unrealistic controls is an entirely different problem. The fix doesn't lie in eliminating accountability, it lies in changing the definition of acceptable risk that the PCAOB imposes on auditors.
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a, 4 Mar 2007 @ 8:26pm

ignorace is profitable by Jeff
SOX is not in place to punish those who lie to owners. Who the hell do you think is commiting fraud? Its the fucking senior executives. The stockholders are the owners, SOX is in place to protect the shareholders from the senior leadership.

Do you think the crap that Enron pulled was done by middle management? Do you think all the backdating was done by middle management? Do you think that (take a pick at the latest fraud) was commited by middle management?

Its the senior management that commits the fraud. That is why SOX was started. Hell, when middle management goes to jail or gets canned, its because usually senior management worked it that way.

Think middle management at accounting companies decided to defraud its clients with the travel scandal? Think again.
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