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CASE STUDY 6.1: SEC TO RETHINK POST-ENRON RULES

• Outline what you see as the arguments for and against foreign firms operating in the United States having more relaxed governance rules than those applying to US firms.

Answer

The argument for non-US firms having less stringent rules for registration are basically as outlined in the case. That is to say that if foreign companies wishing to do business in the US have to carry such high compliance costs for secondary listings then they may go elsewhere. This argument has some interesting back up. Firstly a recent report (Independent on Sunday 2006) suggests that not only may foreign firms object to SOX compliance costs in the US, but further that a number of US companies are currently considering quitting the New York Stock Exchange in favour of the London Stock Exchange’s Alternative Investment Market or AIM. Secondly, and perhaps more significantly, the new US Treasury Secretary Hank Paulson, previously Goldman Sachs CEO until his move to government in July 2006, is reported (The Observer 2006) to be considering major changes to the SOX rules. He is reported to have said that “the regulatory pendulum has swung too far.” Foreign firms have been granted extra time to meet the SOX rules. The latest deadline for compliance was extended to July 2006 (BBC 2006).

• How do you think Lynn Brewer might have come by ‘evidence’ that corporate corruption is ‘still rife’ in the United States? Would you be inclined to believe her, or should she be treated as a ‘hostile witness’, and likely to exaggerate the facts?

Answer

It is impossible to know exactly Lynn Brewer’s sources. However since she blew the whistle on Enron, and published her Confessions of an Enron executive (2004) Brewer has become something of a celebrity and would have access to a great deal of relevant information. As a ‘witness’ she would clearly be hostile towards Enron and the malpractices with which it has now become synonymous. Whether her views are extreme is another matter. Even Ernst and Young the huge accountancy and consultancy organisation are concerned about business standards at the moment. They say corporate governance has become the shareholders’ mainstay, but the legacy of corporate wrongdoings has created a situation which previous generations of directors could scarcely have imagined. (Ernst and Young 2006).

• Former WorldCom chief executive Bernie Ebbers was found guilty of conspiracy and fraud (in March 2005) and faces up to 85 years in prison. (He is now 63 years old.) Do you think that ‘white collar’ crime like this should carry such long prison sentences? Are fraudulent executives really a danger to society?

Answer

Whether white collar criminals should be given long prison sentences is clearly a normative issue. However there is no doubt that the US authorities certainly do believe that business executives should get long prison terms for serious offences. Bernie Ebbers was in fact given 25 years in jail when sentenced in July2005. Jeffrey Skelling, one time CEO of Enron was found guilty, in May 2006, on 19 counts including conspiracy, insider trading and securities fraud. He is to be sentenced in October 2006; observers expect him to get 25-30 years. Ken Lay, Enron Chairman and CEO from 1986-2001, was similarly convicted in May 2006 on 10 counts and was expected to be given 25-30 years. Lay died of a heart attack in July 2006. Are fraudulent executives really a danger to society? Clearly the US authorities believe them to be, and Ernst and Young are worried about the ‘legacy of corporate wrongdoings’.

Independent on Sunday (2006) ‘Sarbanes (SOX) refugees heading for AIM‘, Miranda McLachlan, 20 August 2006.

The Observer (2006) ‘The “hammer” from Goldman’s’, Edward Helmore, 13 August 2006, Business and Media section p 7.

Brewer, L. (2004) Confessions of an Enron executive: a whistleblower’s story, Authorhouse, Bloomington Indiana.

Ernst and Young (2006) ‘Corporate Governance’, www.ey.com/global/content.nsf/UK/Corporate_Governance, accessed August 2006.

Other chapter answers >>

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