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Monday, June 14, 2004
Sarbanes-Oxley Update

There is no link available, but the dead tree edition of the Wall Street Journal had a guest editorial by Paul Volker and Arthur Levitt (if you don't recognize these names, consider yourself excused from reading any further). I'm not posting this to Chicago Boyz because we covered it last month. Don't skip the comments.

The central argument they raise is that SarBox requires companies to institute and maintain a system of internal controls. This is fine, but it still seems to me that it is solving the wrong problem. Internal controls only work if management lets them work. Remember the Putnam fiasco? It turns out that their compliance department (which is very good) found the market timing issue two years ago, and management failed to act on the information.

If Enron and WorldComm had not known what the right numbers were, SarBox would have made them put a system in place so they would know. Unfortunately, they knew only too well what the numbers should have been. That's why they changed them.

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