Executive Briefings

Is Sarbanes-Oxley Up to the Task of Keeping Tabs on Accounting Legerdemain?

One wonders if Sarbanes-Oxley has had its day in the sun. Look at the Lehman Brothers fiasco-- a bit of accounting magic called Repo 105. The transaction was based on the repurchase agreement, or repo deal, a common practice where a bank uses a security it owns as collateral for a short-term cash loan. But Lehman reportedly used repo deals to actually pretend to sell securities at a profit, making the firm's finances look rosy at the end of each quarter. The company would then borrow to repurchase the securities and repeat as necessary.

The last time accounting sleight of hand was so widely discussed was during the Enron and Worldcom era, when special purpose entities and shady limited partnerships were used to hide liabilities and exaggerate asset values. To stamp the practices out -- and stop future Enrons -- congressmen Paul Sarbanes of Maryland and Michael Oxley of Ohio crafted Sarbanes-Oxley, which was enacted in 2002.

The fact that Sarbanes-Oxley didn't keep Lehman out of trouble makes you wonder: Is it possible to ever close these loopholes, or are bills like Sarbanes-Oxley just the legal equivalent of fighting the last war?

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One wonders if Sarbanes-Oxley has had its day in the sun. Look at the Lehman Brothers fiasco-- a bit of accounting magic called Repo 105. The transaction was based on the repurchase agreement, or repo deal, a common practice where a bank uses a security it owns as collateral for a short-term cash loan. But Lehman reportedly used repo deals to actually pretend to sell securities at a profit, making the firm's finances look rosy at the end of each quarter. The company would then borrow to repurchase the securities and repeat as necessary.

The last time accounting sleight of hand was so widely discussed was during the Enron and Worldcom era, when special purpose entities and shady limited partnerships were used to hide liabilities and exaggerate asset values. To stamp the practices out -- and stop future Enrons -- congressmen Paul Sarbanes of Maryland and Michael Oxley of Ohio crafted Sarbanes-Oxley, which was enacted in 2002.

The fact that Sarbanes-Oxley didn't keep Lehman out of trouble makes you wonder: Is it possible to ever close these loopholes, or are bills like Sarbanes-Oxley just the legal equivalent of fighting the last war?

Read Full Article