Sarbanes-Oxley/Enron/2008 Crisis


Sarbanes-Oxley probably saves a lot more companies from going under and countless people in America from losing their jobs. It’s funny that we talked about this and Enron in class because shortly after I had a discussion with my guidance counselor who worked for Enron and quick 6 months before the chaos ensued. When I asked him whether he had any idea what was happening he was brief and mentioned that it was something that even surprised him and there was no doubt that he was relieved to have “jumped ship” when he did. Although still possible, SOX has proven to be a shield again erroneous accounting because now, for the most part, CFOs are looking over their shoulder as there is more visibility into their finances. Its only comedic that its taken us X number of years since the birth of the business to realize that transparency is needed.

But it’s astonishing how a CFO, although brilliant, would be able to kept such erroneous record to themselves for so long. It was touted that Enron’s fall should have warned us for what was coming in 2008 but as we have shown too many times before, we simply do not learn from our mistakes. I was reading an article a year or so back that mentioned that, like in the case of Enron, people who looked over Bernie Madoff’s finances knew that something did not add up. All it would have ten was for someone to say, “Hey, I don’t understand this can you please explain it to me.” and both schemes would have been halted long before they would have built enough clout to affect so many when they came crashing down. The article mentioned that it was too sad that it took so long for some to step up and ask the question “How?”

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9 Responses to Sarbanes-Oxley/Enron/2008 Crisis

  1. mcardinute says:

    What did take so long? I don’t even know how to answer that question. My Corporate Finance professor told me that “it takes a lot of guts to ask someone to explain something to you and if they can’t explain it to you then they either: don’t want you to know, or they simply don’t know themselves.” In the case of Bernie Madoff and Enron it is evident that they did not want the public to know.

    • tesoman says:

      That’s a great question to ask. I was reading an article that was posted in the Telegraph not long after Madoff was taken into custody. The author’s argument was that Madoff had created a system that worked so well that people at first were very suspicious as they should have. But apparently he had a great resume of 4,000 high profile clients who, in the minds of the SEC and other government organizations could not have been duped by one man and a scheme. The author talks about how Madoff socialized in the right places, knew the right people, and had the right aurora to make him seem like an innovator and genius rather than one of the best actors of our time. The article mentions that you would be seen as a “fool” if you did not invest in his hedge fund. The SEC boss stated that he “shocked” that his commission could not find out anything wrong with the hedge fund after “investigating” for over two years. In fact, one of the SEC workers charged to investigate the hedge fund later married Madoff’s niece with no real questions asked about it. I believe personally, that when you get to certain level of power there is such a huge web of politics that blind eyes are turned for a favor or monetary exchange. It seems like when you are on the top, the system works to keep you there until those who are benefiting realize that your are no longer an asset as is the case when Madoff started getting a lot of negative press those who supported him suddenly turned their backs on him.

      Source: http://www.telegraph.co.uk/finance/financetopics/bernard-madoff/3869934/Bernard-Madoff-how-did-he-get-away-with-it-for-so-long.html

  2. awhigbee says:

    I think there had to have been some thought behind how Madoff and Fastow could avoid getting caught. It wasn’t really a matter of time but more a matter of finding someone as smart as them to figure out what was really going on. These people were knowingly creating discrepancies in their financial statements in order to benefit their own stock price at the risk of the rest of the company finding out and having to make huge billion dollar corrections. So although asking might have helped, I doubt they would have fully explained their illegal dealings straight up.

  3. Alex, I think that’s a great point. But, I think that it may not always take someone “as smart as them to figure out what is really going on”. A professor told my class last semester that a company, I forget which, was brought down in the same way that Enron and AIG crashed, because of an ignorant journalist that asked too many questions in hope of understanding how the company was operating. Maybe it doesn’t take a genius, but instead someone who is confused and ADMITS to their confusion. Some geniuses may think too highly of themselves to ask questions that may seem dumb. I think this could be a fundamental problem of why people get away with so much sometimes.

    • tesoman says:

      I think you hit the issue right on the head Eli. In addition to having people working for him, nobody wanted to come out and say, “Hey Bernie….this is an incredible hedge fund you have here. Exactly how does do you manage to keep such high returns even when the market says it’s not feasible?” The only problem with this is that these people (aka. the Madoffs and Enrons of our world) are so smart that their reply to that questioning might only make half sense to most people. I think it’s taking it another level and saying, “Ok, I understand A, B, and C of your theory, but D and E are still blurry. Can you explain them again?” I feel from what I’ve read people just accepted the answers they were given and assumed that the theories Madoff and the rest were proposing were just too “far over their heads” when they were just smoke-screens to what was really happening. We now know exactly what was going on with both Madoff and Enron and I feel like if someone (or a few people) didn’t just accept the answers they were given and probed to actually understand what was going on, the smoke would have cleared and these con-artists would have been brought to justice well before they were.

  4. nrz002 says:

    I agree that it’s unbelievable that people have not learned from prior mistakes. Huge mistakes at that! I also agree with Mike that it’s pretty obvious that Bernie Madoff and Enron did not want the public to know. There is without a doubt no chance that either of them would explain their “questionable financial statements” if asked. In other situations it does seem somewhat easy to just ask. It’s funny though how it seems like the complexities act as a tool for hiding information since people have been accepting to what they do not understand. Without a doubt, attacking the problem right away and demanding an understanding seems to be most reasonable.

  5. mmilne23 says:

    SOX definitely came during a time when the business world needed it most. Imagine if action was not taken against what happened with Enron before the financial meltdown occurred. It probably would have been ten times worse. I often think half the reason why accounting issues and ponzi schemes go “unnoticed” is because people who work for these large companies are too afraid to say something. The accounting firm Enron hired probably looked at Enron as one of its best customers. It also said in the case that business relationship between the two was very close, which could mean there was a conflict of interest. To me it’s crazy how people knew what was going on and just didn’t have the courage to say anything. With billions of dollars on the line a business relationship should be the last thing on their mind. Guaranteed Enron’s accounting firm had major fiscal repercussions due to Enrons bankruptcy. Some of this could have been avoided if someone had just said something!

  6. meghancrawford says:

    I could not agree more with the initial post, asking a simple question “How?” Asking the question how does not seem like a difficult thing, especially when dealing with such large companies. When looking at the collapse of Enron some may think positively about the situation; that it led to better regulation and that this type of error will be preventable in the future but as said in the earlier post, “we simply do not learn from our mistakes.” As much as CEO’s and CFO’s try to run their business as ethically as possible, profit overtakes ethics, leading to actions that may never seemed possible from an outside view.

  7. meghancrawford says:

    I could not agree more with the initial post, asking a simple question “How?” Asking the question how does not seem like a difficult thing, especially when dealing with such large companies. When looking at the collapse of Enron some may think positively about the situation; that it led to better regulation and that this type of error will be preventable in the future but as said in the earlier post, “we simply do not learn from our mistakes.” As much as CEO’s and CFO’s try to run their business as ethically as possible, profit overtakes ethics, leading to actions that may never have seemed possible from an outside view.

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