Daily Archives: March 18, 2006

GM’s Enronesque Experience

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This Floyd Norris/NY Times article reports that General Motors’ descent toward what is increasingly looking like an inevitable reorganization is looking absolutely Enronesque:

There was a time when General Motors was seen as the paragon of financial quality. Its bonds were rated triple A, and it was known for the most conservative accounting. Let other companies use liberal accounting rules to make results look better; G.M. did not need such things.

The announcement late Thursday that General Motors would revise profit figures for every year of this decade, and would have to restate the 2005 earnings it had already reported, shows how far the icon has fallen. Less than a year after it lost its investment-grade bond rating, its bonds are viewed as middling even among junk bonds.

“You have to question what controls are in place,” said Charles W. Mulford, an accounting professor at Georgia Tech. “When companies like G.M. are profitable, there is not a need to engage in aggressive accounting. What we are seeing now is a pattern of very aggressive accounting that took them well beyond the limits of generally accepted accounting principles.”

The restatements indicate that G.M. used some highly questionable accounting techniques in 2000, when it seemed to be flying high, and a year later when profits fell sharply.

Funny how those “questionable accounting techniques” occurred both before and after Sarbanes-Oxley, isn’t it?

Thinking about SOX

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Sarbanes_Oxley_Harm4.jpgThe Free Enterprise Fund’s Mallory Factor observes in this WSJ ($) op-ed today that even notorious anti-business politicians such as House Democrat Nancy Pelosi and the Lord of Regulation are starting to question the over-reaction that is the Sarbanes-Oxley legislation.
Factor’s piece is a good summary of the core defects of SOX, but Larry Ribstein has provided the more thorough and thought-provoking commentary as he has been traveling the country this week talking about SOX. In preparing for a talk at Berkeley, Professor Ribstein sums up the superficial nature of the only line of defense that he has heard defending SOX:

I’ll be particularly interested to hear whether anybody has a cogent defense of SOX. All I’ve heard so far along these lines is this: “There was fraud; fraud is bad; SOX is against fraud; therefore SOX is good.” This seems to assume that we should favor legislation that purports to restrict fraud regardless of cost, and regardless of effectiveness. And even this has been mainly from journalists, accountants, regulators and legislators — i.e., those with a stake in the regulation. I’d really like to hear something more from disinterested parties.

Then, in regard to Peter Lattman’s post regarding revelations of more alleged fraud at Refco, Professor Ribstein notes that SOX did not prevent the Refco frauds from occurring:

Significantly, all this is after SOX, and occurred after Refco had gone through the intensive scrutiny involved in an IPO.
Some might say that the lesson from all this is the need for still more regulation. I’d be interested in hearing about the regulation that could have prevented the problems indicated above. Requiring certification of internal controls isn’t very effective when the fraud is by the certifying CEO, as may be the case here.
I would say, and have said, here and here, that the more realistic lesson is that no amount of regulation can prevent fraud by the most determined fraudsters. It can, though, catch law-abiding firms in a spiral of regulatory costs.