Paul and Michael are common enough names in the West, but two gentlemen with these first names, Messrs Sarbanes and Oxley, respectively, have, as Sarbanes-Oxley or SOX, become the name by which one of the most used and most feared financial disclosure norms in the world is known.
The Sarbanes-Oxley Act of 2002, created months after Enron Corp., WorldCom and several other companies were hauled up for accounting fraud in the US, created some of the most stringent financial disclosure norms for public listed companies in that country, including holding a company’s senior executives legally responsible for the veracity of their financial statements. The co-authors of the Act, former senator Paul Sarbanes (a Democrat) and former representative Michael Oxley (a Republican), say US markets are attractive for Indian companies looking to raise money through share sales, although they will have to bear the extra costs of complying with SOX.
In an interview with Mint, the duo talk on contemporary issues such as the legislation being considered by the US Congress to avoid a repeat of the subprime crisis; Michael Oxley’s “unbelievable” visit to the stock exchange; and why Republican John McCain would win if the US presidential elections were held in India.
Edited excerpts:
Sarbanes-Oxley addressed the corporate scandals of Enron, WorldCom and others. Do you think there is a need for a similar legislative response to the subprime and credit derivative crisis?
Former US Congressman Michael Oxley (left) and former US Senator Paul Sarbanes say it is critical for companies to provide accurate financial statements (Photograph by: Abhijit Bhatlekar /Mint)
Neither of us is in the Congress anymore. But that is a critical issue, although it is a different issue in terms of how it will be addressed. I don’t think there is any obvious statutory way to resolve this, although Congress is considering some measures.
Oxley: Barney Frank (representative from Massachusetts) has a Bill. Chris Dodd (senator from Connecticut) either has a Bill, or is about to put in a Bill.
One of the tenets of our Act was transparency. Clearly, one of the problems with the subprime mortgage crisis is the lack of transparency in the secondary market. These are somewhat parallel problems to the lack of transparency going back to Enron and WorldCom. There is consensus on some of the areas and others are pretty controversial.
Do you anticipate more red flags to come up in firms involved that were Sarbanes-Oxley compliant?
Sarbanes: A lot of those mortgages (were) originated by agents that are not within a regulated environment and that is clearly part of the problem. It does show the need to be more vigilant about the practices that work in our market because the markets can be very sensitive and very fragile as we are witnessing right now. And the extended repercussions can go well beyond the particular problem. It just feeds on itself and some of that is happening right now.