Sarbanes-Oxley:

Sarbannes-Oxley does to double entry accounting, what the Occupy Movement did to poop control.

Sarbannes-Oxley was correctly predicted to be a gigantic job killer and an obstacle to innovation.  It has also turned out to be a license to steal, as has been demonstrated dramatically in the collapse of MF Global.

You know how the Occupy crowd is calling for personal bailouts and high status government funded virtue jobs.  In Europe, by and large, their equivalents have government funded virtue jobs.  President Obama and company tell each other that this is an investment in our future, and after they say it enough times, they start to believe it.  And so, when MF Global’s clients thought they were investing in gold futures or such,  Jon Corzine (former Democratic party Governor of New Jersey) being wiser than his social inferiors who do not know that investing in gold is politically incorrect and investing in Greek bonds is politically correct, and thus bound to be highly profitable, took their money and invested in loan guarantees to governments without telling them, which were ultimately investments in virtue jobs for the kind of people who at Occupy encampments are apt to poop in grossly inappropriate places, thus ultimately “investments” in people inadequately toilet trained and disinclined to do any real work.

And Jon Corzine’s accountants and auditors, PricewaterhouseCoopers, in accordance with Sarbanes-Oxley, somehow neglected to tell anyone the money had gone.

Civilization is the art of living together in large numbers without killing each other too often, and economics the art of coordinating human activity in large numbers without slave labor and killing fields.

Civilization began with burying your poop.  God told the Children of Israel he did not like to see stools lying around, and that if you hung out with diseased or dirty people, or ate animals that had died rather than being killed, you would get unholy cooties from them.  God commanded them to bury their poop.  God was pleased with their obedience, and performed miracles for them – the most common important miracle reported in the bible being that during war and conflict, their enemies would be shattered by plague, and the Children of Israel would not.   Until the modern era, armies were struck down by plague a lot more than they were struck down by fire and steel, so the winner was often the last army to get sick – which, the bible tells us, was apt to miraculously be the Children of Israel.

Modern technological civilization, the widespread application of science and technology to improve people’s living standards, is based on the joint stock company.  In North Korea, we see what happens when you attempt to do it by the old fashioned means, by slave labor and killing fields.  Slave labor and killing fields are not totally incapable of effectively coordinating the labor and capital of large numbers of people, but they are clearly less effective than the joint stock corporation.  The joint stock corporation is built on double entry accounting, which treats the corporation as a being that owns property and does business separate from the particular people that actually carry out the actions of defending that property and using it to do business.  The left, starting with Rousseau, have always been fundamentally hostile to civilization, all of it, lock stock and barrel.  Thus with  Sarbannes-Oxley the modern left did to double entry accounting, what the Occupy movement did to poop control.  Sarbannes-Oxley, no less than modern university courses, is part of the left’s war on western civilization and modern technology.

PricewaterhouseCoopers accounts and audit for MF Global showed MF Globals “investments” in guarantees of for government bonds as off balance sheet liabilities, as if MF Global still had the money.  But the big “liability” was that the money was already gone.  It had been spent – and ultimately spent on Greek rioters and suchlike. It was not a liability, still less a liability that could be appropriately listed off the balance sheet.  The money was gone, and the “liability” was that it was not very likely to return.  A liability is money that you are at risk of having to pay out in the future.  This was money that had already been paid out in the past.   By treating this as a potential liability, PricewaterhouseCoopers misled MF Global’s clients that MF Global still had their money, when in fact MF Global no longer had their money.

If it had merely been a liability, then if that liability had come due,  MF Global would then have gone bust and its creditors would have been out of luck, but the clients would have been able to withdraw their money, while the creditors would not have been paid their liability.  But it was not a future liability, but a past actual loss.  The money to pay the clients was no longer there.  The money had already been spent, in part on Greek rent-a-rioters.  Or, as President Obama would say, “invested in the struggle for justice”.

PricewaterhouseCoopers was the same accounting firm that also somehow failed to notice that Freddy and Fanny had pissed away most of their money and lots of other people’s money on no money down million dollar mortgages to unemployed no-hablo-english wetbacks – another triumph of Sarbannes-Oxley accounting.  Back in 2002, Democratic Party Senator Jon Corzine was shocked, shocked to find that Fannie’s accounts were a teensy weensy bit vague as to where the money was and who had it.

Sarbannes-Oxley killed IPOs.  It used to be that venture capitalists would fund an entrepreneur and, if the venture succeeded, sell it to shareholders.   Today, however, the compliance costs are too great, which makes it a lot harder to cash out.

Supposedly, Sarbannes-Oxley prevents fraud:

Most senior company officers and auditors can attest that Sarbanes-Oxley is difficult and expensive to comply with. While the legislation prevents accounting fraud and material misstatements, designing, implementing and following lots of internal controls procedures at all levels of the organization prevents employees and managers from focusing on running the company.

Yet let us compare the bad stuff that happened before Sarbannes-Oxley, with the bad stuff that happened after Sarbannes-Oxley.  It does not look as if the legislation prevents fraud and material misstatements.

Before Sarbannes-Oxley Enron did funny stuff with its books.  A bunch of accountancy students went over its books, smelled something funny, word got out, investors and creditors panicked, suddenly Enron found itself unable to buy stuff except for cash on the barrelhead, and unable to sell stuff except for stuff it could actually deliver on the spot, unable to sell stuff except for what was in the barrel – which meant that Enron could no longer buy nor sell.  Suddenly Enron’s paychecks started bouncing, and shortly thereafter, no one was showing up for work, the landlords were chucking their stuff in the street, and so on and so forth.

So, the federal government announced that something must be done, and created Sarbannes-Oxley, which theoretically forbade doing funny stuff with the books.

In the present crisis, a lot of strange accounting has come to light, strange accounting often curiously similar to that conducted by Enron – but due in part to Sarbannes-Oxley, only came to light after numerous financial institutions bit the dust, whereas before Sarbannes Oxley, it came to light before Enron bit the dust, and caused Enron to bite the dust.

The way real accounting works is that accountants ask people who actually operate the company where money and valuables are, and what was done with past money and valuables, what happened to the previous years money and valuables, and do some spot checks to make sure that the money and valuables reported to be there actually are there.

Theoretically this also happens in Sarbannes-Oxley but in practice it is is apt to be the other way around.  Instead of listening, the godlike accountants tell people, and rather than the accounts reflecting reality, reality is supposed to be adjusted to reflect the accounts, much as peer review results in the scientific community telling the experimenter what he observed, instead of the experimenter telling the scientific community what he observed.

By examining Enron’s accounts carefully and cynically, people could, and did, discover that Enron was deeply in debt and losing money hand over fist, and was therefore unlikely to be able to pay for goods it had purchased, nor supply goods it had been paid for.  There was no way that someone examining MF Global’s accounts could tell that MF Global had already pissed away its client’s money on European welfare bums.  That is the difference that Sarbannes-Oxley made.

12 Responses to “Sarbanes-Oxley:”

  1. Red says:

    Preventive law in general has been a total failure. Seems the old tried and true system of restitution and forcing responsibility works best.

    Did preventive law get started around the same time progressive came to power?

    • jim says:

      Hard to say. Who are progressives and when did they come to power? I see that people got in trouble for arguing that blacks were a separate species back in the lead up to the French Revolution.

      Preventative law is the idea that government can prevent bad things from happening, and compel good things to happen, which view Thomas Sowell has brilliantly analyzed in “vision of the anointed”. The formation of the Federal Reserve seems like a clear expression of that worldview.

      Enron was a good example of the free market working to punish bad conduct. As soon as people came to doubt it could pay, suddenly it was out of business, suddenly had no employees, and shortly after that, no premises. The response of the political elite was that Enron being shut down and people losing money because they had given Enron credit on the basis of misinformation was a bad thing, and the political elite would prevent it from ever happening again – an entirely impossible promise, and one which was inevitably carried out by enforcing fiction, rather than revealing truth.

      • Make Believe Media says:

        Those who would argue that government can prevent bad things from happening are those who can benefit from the government infrastructure they argue for.

    • Ryne says:

      Yup, that solhud defo do the trick!

  2. Bill says:

    There is little to disagree with here except the omissions. Finance is not some passive receptacle of government depredations. Rather, it is an enthusiastic participant. Opaque, impossible to comply with financial standards are the friend of the politically connected con man. If there is no way to figure out which things are legal and which are not, which things are fraud and which are not, then the government regulators get to decide. And they can be bought or intimidated by the crowd with the most money and power.

    Corzine very reasonably believed that as long as he was in with the right people, he could expect to be bailed out. He believed this because the evidence told him it was true. The right firms and people in finance have it sweet. They can commit serial fraud with no legal consequences. They can make absurdly bad bets in the sure knowledge that Joe the Plumber will be taxed to make the bets good when they go bad.

    Their power is mind-boggling. When it looked as if Greece was going to get uppity about repaying its debt, Goldman Sachs promptly orchestrated a coup resulting in a Goldman Sachs man becoming prime minister. Although Berlusconi had not really signaled any independence, he looked kind of unreliable, so Goldman orchestrated a coup in Italy as well, putting in another Goldman Sachs man as PM. For good measure, a Goldman Sachs man was put in at the European Central Bank.

    As the Europeans have been discussing “haircuts” on Greek debt, these haircuts are always described as voluntary (though they will not, in fact, be voluntary). This is more than passing strange. Well, it is more than passing strange until you understand that Goldman Sachs has written a bazillion dollars in credit default swaps on Greek debt. CDFs which must be made good in the event of even partial default but not in the event of voluntary refinancing. And that’s just the last couple of months’ news.

    The Great and the Good are curiously all on the same page regarding what responsible policy absolutely demands. And their ideas about responsible policy curiously always align with Goldman’s interests. Goldman’s competitors must be allowed to fail to show good capitalistic discipline. Goldman’s counterparties must be saved to save capitalism.

    Modern finance is a machine to transfer wealth from the middle class to the best connected members of the financial/political elite. It ain’t about financial intermediation no more.

    And Enron failed because they bought the wrong people and because they were not big enough. What kind of a moron buys Paul Krugman? Silly hayseed morons. Of the big three Enron execs, two were hayseeds (Skilling and Lay). Right now, it looks like Skilling will die in prison. Lay’s convictions meant that he would have died in prison, had he not dropped dead of a heart attack before sentencing. One of them, Fastow, was born in DC and was in with the right crowd. Despite the fact that the fraud was Fastow’s idea and that he was directly supervising the fraud, he spent about five minutes in jail.

    AIG and Goldman also would have been a good example of the free market working, except Goldman men in the US government stopped that from happening, in order to save capitalism.

    • jim says:

      Opaque, impossible to comply with financial standards are the friend of the politically connected con man. If there is no way to figure out which things are legal and which are not, which things are fraud and which are not, then the government regulators get to decide. And they can be bought or intimidated by the crowd with the most money and power.

      Underlying Sarbanes-Oxley are three factors:

      1. The great and the good want opaque legislation that is impossible to comply with, since they want power, so they want legislation that makes all honest men criminals, no matter what they do, and the well connected to be never be criminals, no matter what they do. (Ayn Rand’s analysis)
      2. Progressivism attempts to legislate that which cannot cannot be legislated, what you have called preventative legislation, legislation to prevent rather than punish bad behavior, which results in opaque legislation that is impossible to comply with. (Thomas Sowell’s analysis, “vision of the anointed”)
      3. Leftism just hates all of modern civilization, and in particular the corporation, and thus hates double entry accounting. They want a form of accounting that enhances their self esteem, instead of cruelly, greedily, and materialistically reporting how much value is created. (My analysis) The great and the good should attribute to any enterprise those accounts that are socially desirable, and declaring these accounts true should make them true.

      Being impossible to comply with, no honest man ever complies with Sarbanes-Oxley. Being opaque, no criminal who is sufficiently well connected can ever be found to have failed to comply with Sarbannes-Oxley.

    • jim says:

      What kind of a moron buys Paul Krugman? Silly hayseed morons.

      They mistook the loudspeaker for the microphone.

    • Jeanette says:

      Haellljuah! I needed this-you’re my savior.

  3. […] In its death throes, government is taking over and destroying every part of the economy, and will probably reach computing soon enough. I have often mentioned Sarbannes Oxley as the height of far left madness, for it makes the foundation of the modern corporation, accounting, pretty much illegal, leaving investors in the dark. Sarbanes-Oxley accounts don’t mean much. […]

  4. […] Additionally, Sarbanes-Oxley, held as the usual culprit, really does a lot of damage to the ability of companies to access the big capital markets without a lot of private investment to get there. Jim has written frequently about how much damage that Sarbanes-Oxley has has done to accounting standards in the US. […]

  5. mysterian says:

    You shouldn’t overlook the aborted Dynegy(?) deal that led to the closer look at Enron.

    • jim says:

      Word of Enron’s accounting creativity and cash crisis was getting around before the Dynegy deal. The Dynegy deal was an attempt to get cash, when suddenly people were becoming increasingly reluctant to supply Enron without cash in advance, or pay Enron cash in advance. Dynegy was an effect, not a cause, one of many increasingly desperate efforts to get some cash.

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