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Source link: http://archive.mises.org/4229/sarbanes-oxley-fails-to-prevent-refco-accounting-scandal/

Sarbanes-Oxley Fails to Prevent Refco Accounting Scandal

October 18, 2005 by

Another accounting scandal has occurred, despite the existence of the Sarbanes-Oxley Act which was signed into law by Bush to “prevent the next Enron.” Commodities trading firm Refco is now bankrupt, and in the process of being de-listed from the New York Stock Exchange. Refco had just launched its Initial Public Offering of shares in August. Statists are claiming that Refco occurred due to insufficient regulation. However, the SOX accounting law and a myriad of other rules and restrictions are designed to prevent just this kind of fraud.

Under the Securities and Exchange Act of 1933, all prospective issuers must register with the SEC by filing a Form S-1 and a prospectus. Registration with the SEC is supposed to ensure full and fair disclosure to potential investors of all material facts. The agency is supposed to issue a stop order prohibiting the sale of any securities in which the registration has omissions or misrepresentations. Clearly, the SEC failed to scrutinize Refco for related-party transactions and other signs of possible fraud. Former SEC chief accountant Lynn Turner admitted in a WSJ report that the agency’s corporation-finance division will almost never detect fraud in company filings. A typical SEC review consists of staff perusing the prospectus and asking the company for clarifications.

Refco disclosed in its filings that its auditor had found “two significant deficiencies in our internal controls over financial reporting” including a “lack of formalized procedures for closing our books.” Under SOX, this disclosure is supposed to warn investors to be wary that this company might be another Enron. But investors know by now that unreasonable SOX rules can trip up almost any new company, so naturally they ignored these warnings. If anything, the over-disclosure mandated by government lulled investors into thinking Refco must be legitimate.

Refco was also subject to listing requirements on the New York Stock Exchange, which enforces government rules as a Self Regulatory Organization. Refco’s broker-dealer arm was regulated by the NASD. Refco’s futures brokerage firm was regulated by the Commodity Futures Trading Commission. All to no avail.

Statists are spinning a desperate theory that Refco, a derivatives trader, fell through “an intentional regulatory gap” regarding derivatives. This is absurd. Refco’s accounting was fraudulent, not its derivatives trading. Seemingly no amount of regulatory failure will get these people to think about alternatives.

{ 2 comments }

not_william October 19, 2005 at 10:24 am

If the death penalty doesn’t prevent people from murdering each other, why does anyone expect the intricacies of Sarbanes/Oxley to stop accounting fraud?

Timm Engel October 19, 2005 at 11:01 am

Some day paper terriers will catch real rats, and abstractions will pursue real satisfactions! I’m not holding my breath for either while I’m waiting!

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