MF Global could finally help SarbOx prove itself

November 15, 2011

By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

MF Global could finally help the Sarbanes-Oxley Act prove itself. The reform inspired by Enron, WorldCom and other accounting scandals helped clean up U.S. company books, albeit at a cost. But approaching 10 years on, enforcers have filed few cases under the law. They could finally get their big chance if questions surrounding MF Global’s failure prove to have substance.

SarbOx has always drawn gripes. A 2009 survey by the U.S. Securities and Exchange Commission pegged the average company’s cost of complying with the 2002 law at $2.3 million a year. Some firms complained that it deterred them from going public and drove business overseas. More recent research, in contrast, credits it for better disclosure, fewer financial restatements and a lower cost of capital for companies.

Either way, SarbOx has lacked muscle. Executives who certify books that turn out to be dodgy can be forced to cough up bonuses and other incentive pay. The SEC has filed cases against 31 honchos at 20 firms. But only piddling amounts have been collected since the financial meltdown, despite glaring failures, and about the only biggish names involved were Navistar, Diebold and Beazer Homes.

HealthSouth boss Richard Scrushy was prosecuted for signing a false financial statement, and a California man under investigation for child pornography was convicted of destroying his computer hard drive – a violation of SarbOx. Criminal cases, though, have been scarce.

One reason is that the law overlaps with some prohibitions in older statutes and those, already tested in the courts, may be preferred by enforcers. Regulators may also be wary of action that involves going after auditors, since the prosecution and collapse of Arthur Andersen left companies with few big accounting firms to choose from.

But MF Global is shaping up as a potential high-profile candidate. Bart Chilton, a commissioner at the Commodity Futures Trading Commission, on Tuesday suggested activities at the firm – where a whopping $600 million in customer funds still seem to be missing – could have been illegal. Critics have pummeled law enforcement for timidity toward financial crime and SarbOx for being all bark and no bite. Using the law to go after Jon Corzine’s former firm could show both have teeth after all.

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