Corporate Transparency or Congressional Window-Dressing? the Case against Sarbanes-Oxley as a Means to Avoid Another Corporate Debacle: The Failed Attempt to Revive Meaningful Regulatory Oversight

The Sarbanes-Oxley Act of 2002 [the Act] is not designed to be self-executing. By congressional mandate, the Act's operative provisions depend upon the implementing regulations promulgated by the Securities and Exchange Commission [SEC]. This Article argues that the SEC's implementation of regulations for the Act undermines the lofty legislative goal of increasing corporate "transparency" as a deterrent to corporate fraud because the regulations do not provide meaningful regulatory oversight of the internal affairs of publicly traded corporations. Instead, the regulations empower publicly traded corporations to design, implement and self-police "improved disclosure" without SEC scrutiny to ensure that disclosure accurately reflects risk. Moreover, events in the history of securities regulation prove that self-regulation is a failed legislative reform paradigm. The initial series of articles about the Act necessarily offer a limited analysis of the new efforts aimed at corporate reform because they were written before the SEC issued the final implementing regulations.2 Since the issuance of the regulations in 2003, the question remains: Will the Act, as implemented, prevent another string of corporate debacles? This analysis demonstrates that the Act and regulations add little substantively to pre-existing regulatory guidelines and statutory framework because the SEC will not abandon its ingrained regulatory philosophy of corporate self-governance as the measure of compliance. The regulations reflect the continuing tension between reformist demands for corporate accountability and the baseline demand for corporate autonomy. That fundamental contradiction in legislative philosophy circumscribes the rest of the pre-Sarbanes securities legislation and provides, in part, the legislative context of the Act and the regulations. I. Introduction John Olson, a leading Wall Street stock analyst, observed "it took 16 years to build Enron into a $63 billion dollar asset powerhouse, but only 24 days for it to disintegrate. "3 By December 2, 2001, only two months after the Wall Street Journal first broke the story about improprieties in financial reporting at Enron,4 the company was in bankruptcy.5 A month before, on November 8, 2001, Enron had made the shocking disclosure in an 8K filing with the SEC that its financial statements for the preceding years, 1997-2000, were not reliable and had to be restated.6 Enron's descent into bankruptcy was fueled by a massive loss of market confidence following news media accounts of the dramatic SEC disclosures. Plummeting share prices contributed to greater demands by trading and financial institutions for cash collateral to back its trading positions. Enron's questionable liquidity pushed down its credit rating, thus leading to the filing of a chapter 11 petition in bankruptcy. But there were still crucial questions to answer about the original causes of the company's failure. The same questions were repeated in connection with the failures of WorldCom,7 Cendant, Waste Management, Sunbeam, Microstrategies, Rite Aid, Lucent, Xerox, and Global Crossing, all prestigious publicly traded American companies.8 There is no shortage of finger pointing and blame assessment both inside and outside of government. The Senate Committee on Government Affairs quickly published a 127-page report in October, 2002, chastising the SEC for its failure to review Enron's financial statements filed after 1997 and, in some instances, for its approval of Enron's questionable accounting procedures.9 That lack of regulatory oversight, combined with corporate greed, most certainly bred the result.10 Enron exemplifies the ever-consuming ambition to produce stellar financial results in order to benefit the opportunists running the company. Enron hired legions of attorneys and accountants to help the company meet the letter of law, giving technically correct answers in lieu of simply honest ones.11 Of course in several instances, there were pure fraudulent misrepresentations in connection with SEC reporting requirements, although some critics wonder if the SEC would have noticed the irregularities in any event. …