The Con and the Professor
"In a new series of blog posts over the next few months, [Sam Antar] will document why Sarbanes-Oxley should be strengthened with added reforms to protect the integrity of our capital markets. For starters, please read the letter below that [Sam Antar] submitted to the SEC and PCAOB Roundtable on Internal Control Reporting Requirements in 2006."
"SOX was a misbegotten, inadequately debated, debacle from the beginning. I saw this as evident from the beginning, and after three years of theory and evidence. Still later, Henry Butler and I wrote a monograph detailing the SOX debacle. I've continued covering the Act on this blog, including this 2008 critique of a previous Floyd Norris foray into SOX-land."
Sam Antar, a convicted con felon, disagrees with Professor Larry Ribstein about the value of Sarbanes-Oxley Act of 2002.
Specifically, they disagree about the wisdom of reducing the scope of SOX: Antar wants it strengthened, and Ribstein believes that it has failed its purpose.
One issue is whether the SOX requirements should apply to small market capitalization companies.
As stated previously, Crazy Eddie went public with a market capitalization of $40 million (already built on a skimming fraud) and its market capitalization eventually rose to over $600 million in less than two years.
Therefore, Crazy Eddie would have been subject to the SOX exemption when it went public." Sam Antar
But, Ribstein argues that SOX should not apply to small market firms.
"SOX presents significant problems for small firms, since their compliance cost per dollar of capitalization is much higher than for larger firms.
Moreover, SOX's disproportionate impact on these firms is entirely unwarranted, since the corporate meltdowns that led to it were a phenomenon of large corporations.
To the extent that SOX addresses the problems in the latter, its provisions are not necessarily appropriate for small firms.
In particular, small firms may have far less need for extensive internal controls provisions throughout the organization."
Remember that Antar presided over the largest stock market fraud at the time with the Crazy Eddie IPO.
The difference between Ripstein and Antar may be over not whether internal controls are required but whether SOX compliance is really a defence against the Antars of the world.
Sam says:
"Even today there are many complaints by companies and critics of Sarbanes Oxley relating to the auditors review of internal controls in that they are merely filling in boxes in their work papers.
Like the auditors of Crazy Eddie, today's auditors have not been adequately prepared for conducting these reviews.
The solution is very fundamental. It is about education.
Competence cannot be legislated, though it can be learned.
Sarbanes Oxley, the PCAOB and new accounting regulations instituted by the American Institute of Certified Public Accountants (AICPA) (SAS Number 99, for example) have placed much emphasis on internal controls and detecting fraud.
A significant majority of accounting students still do not take a single dedicated college level course to gain a complete understanding of these new requirements.
They are often simply learned as part of a general auditing course and are covered within a day or two of the semester."
Most accountants will end up providing consulting services for their client: they will not be in an adversarial role that is needed for the public audit. For them, the fraud courses will be a waste of time.
In my view, Barry Minkow's video's which alerted individuals to the types of tricks that con criminals use was very valuable - much more valuable than a simple checklist of due diligence.
The problem that Professor Ribstein, and most academics, face is that they have no familiarity with intra species predators - the con criminals. In essence, those conducting public audits are the equivalent of warriors. Protecting the integrity of information which flows to the market. We don't skimp on military defense and we cannot skimp on defending marketplaces either.