A W$J editorial points out an important lesson from the Refco collapse (also discussed by the usually alert Tom Kirkendall):
All those new laws, rules and regulators that Congress created after the WorldCom and Enron failures weren't able to detect, much less prevent, what is alleged to have been fraudulent behavior. Sarbanes-Oxley, which was supposed to protect investors from nefarious CEOs, didn't deter former Refco chief Phillip Bennett from allegedly disguising that an entity he controlled owed Refco hundreds of millions of dollars. * * * [N]one of this "oversight" stopped the accountants at Grant Thornton LLP from signing off on Refco's books before the broker's August IPO.. . . . It's always possible there is a simple explanation for the Refco mess: One or more of its senior managers lied to all kinds of people, perhaps at some level even to themselves. Human beings sometimes behave that way -- in government as well as business -- and no amount of "oversight" can prevent it.
It's always interesting (for me anyway) to go back to what I wrote when Sarbox was passed, three years ago, Market v. Regulatory Responses to Corporate Fraud, 28 J. Corp. L. 1, 26-32 (2002) (from the final print version, footnotes omitted):
The board itself, as a part-time supervisory body, is inherently unsuited to reviewing the minutiae of corporate transactions closely enough to spot fraud by committed and astute insiders. * * *
[T]he more serious issue is whether even strong regulation will change auditors' practical ability to find corporate fraud when determined corporate insiders want to hide it. * * *
If investors cannot rely on auditors to find fraud, it is even less realistic for them to rely on government regulators. * * *
Sarbanes-Oxley hopes to enlist others to help in the fight against fraud. Lawyers will now be required to report "evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent" to executives and possibly to the board. The Act also includes strong protection for whistleblowers. . . [T]hese rules are also ineffective for purposes of uncovering fraud. Those involved in a fraudulent scheme are unlikely to discuss it with nonparticipants. * * *
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