Descripción de los procesos del negocio propuesto

The Sarbanes–Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act (Pub.L.No. 107-204, 116 Stat. 745), became effective as United States federal law on 30 July 2002. This law was meant primarily to protect investors by improving the accuracy and reliabil-ity of corporate disclosures. At the law’s signing, President George W. Bush affirmed that it contained ‘the most far-reaching reforms of American busi-ness practices since the time of Franklin Delano Roosevelt’ (Bush, 2002), in clear allusion to the New Deal of the 1930s. ‘This law says to every dishon-est corporate leader: you will be exposed and punished, the era of low stand-ards and false profits is over; no boardroom in America is above or beyond the law’ (Bush, 2002), continued the President with rhetorical flourish.

Sarbanes–Oxley consists of 11 sections or titles: one establishes the Public Company Accounting Oversight Board (PCAOB), two specifically create tough criminal penalties for executives committing fraud or issuing mis-leading information and several more cover areas such as auditor independ-ence, corporate responsibility, financial disclosures, analyst conflicts of interest, and corporate and criminal fraud accountability. Sarbanes–Oxley also updates and amends provisions from the Securities Exchange Act of 1934, the Employee Retirement Income Security Act of 1974 and the Federal Corporate Sentencing Guidelines. Among Sarbanes–Oxley’s major provisions we find the certification of financial reports by chief executive officers and chief financial officers as well as the disclosure of their com-pensation and benefits, a ban on personal loans to executive officers and directors, an accelerated reporting of insider trades and their prohibition during pension fund blackout periods, a demand for strict auditor indepen-dence through the exclusion of all other non-audit work (actuarial and legal services and management consultancies, for instance) and the requirement of independent annual audit reports regarding internal controls on financial reporting (Fried, Frank, Harris et al., 2003; Hogan, 2003, 2004; Rockness and Rockness, 2005: 43–4).

The background story to Sarbanes–Oxley is, of course, the series of cor-porate scandals triggered off by Enron that rocked the financial market in

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the United States beginning in the third quarter of 2001. In fact, most of the new rules and regulations that Sarbanes–Oxley mandated seemed to have been designed specifically to prevent a new Enron-like scandal from occurring. How did the Enron nightmare come to be?

With a market capitalization of $63 billion in 2001, Enron ranked seventh in the Fortune Top 500 list. It had also been voted America’s Most Innovative Company for several consecutive years. Since the mid-1990s, the firm had reported an eight-fold increase in sales, to more than $100 billion, with income reaching a record-breaking $1.3 billion in 2000. No doubt these merits had contributed to Enron’s board of directors being chosen as the third best in the US by Chief Executive magazine in 2001 (Sison, 2002: 24). Unfortunately, however, most of these purported achievements turned out in the end to be based on half-truths, if not on blatant lies.

On appearance, Enron’s board scrupulously complied with most best practice recommendations for corporate governance, such as those issued by The Business Roundtable (2005), for example. Beginning with the board’s composition and structure, we find that the post of Chairman, held by Kenneth Lay, was separate from that of President and CEO, occupied by Jeffrey Skilling. From a total of 15 directors – by most accounts, the ideal number – only Lay and Skilling came from management, the over-whelming majority being external and independent directors. This roster was composed of successful businesspersons, experts in finance and accounting, several of whom had served for more than 20 years in Enron and other companies. Four had polished academic backgrounds. Coming from countries such as the US, Hong Kong, Brazil and Great Britain, Enron directors arguably provided a truly global business outlook. The board itself was divided into five committees (Executive, Audit, Finance, Compensation, Nominations) each headed by an external director. Among them was Dr Robert Jaedicke, professor of accounting emeritus and former dean of the Graduate School of Business, Stanford University, in audit, and Sir John Wakeham, former UK secretary for energy and member of the House of Lords, in nominations (The Guardian, 2002).

From the viewpoint of operations, we discover that the board held five meetings yearly, with additional ones convoked whenever needed (The Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, 2002: 8–9). These meetings usually lasted for two days: one, dedicated to committee meetings and another, to the full board.

During committee meetings, directors received presentations on company performance, internal controls, new business ventures and other special transactions. The compensation committee regularly received inputs from the firm’s external consultant, Towers Perrin, and the audit committee, from the external auditor, Arthur Andersen. At full board meetings the

company’s outside legal counsel, Vinson & Elkins, normally intervened as well. The working relationship between top management and the board and among the directors themselves was generally characterized as efficient and harmonious.

Yet on 3 December 2001, Enron filed what was until then the biggest bankruptcy case in American courts, seeking protection for assets worth

$49.8 billion and debts of $31.2 billion. About half a year later, on 8 July 2002, a US Senate Investigations Committee released its findings accusing the Enron board of the company’s collapse (The Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, 2002: 3, 52–3, 55–6, 57–8). The board had egregiously failed to exercise its fiduciary duty, ignoring numerous questionable practices by Enron management.

Among these practices were the continued use of high-risk accounting and extensive off-the-books activity which did not comply with generally accepted accounting principles. The board left conflicts of interest in senior officials to go unchecked, allowing its Chief Financial Officer, Andrew Fastow, to establish the LJM private equity fund and to profit at Enron’s expense, for example. Directors too were overly generous with executive compensation, failing to monitor the Chairman, Kenneth Lay’s pay. At over $140M in 2000, it was more than ten times the average for CEOs of US publicly-traded companies. Neither did the board stop Lay’s abuse of a personal credit line, permitting him to avail himself of more than $77M in cash.

The board had not properly overseen the independence of its members, many of whom were compromised by business relations with Enron. Herbert Winokur, for instance, also served on the board of the National Tank Company, which sold oilfield equipment and services surpassing $2.5M to Enron subsidiaries between 1997 and 2000. Robert Belfer, former Chairman and CEO of Belco Oil and Gas, had been engaged with Enron in hedging arrangements worth tens of millions of dollars since 1996. Directors from not-for-profit institutions were equally mired in unseemly conflicts of inter-est. Two Enron directors, Dr LeMaistre and Dr Mendelsohn, were former presidents of M.D. Andersen. In 1991, Enron pledged $1.5M to the M.D.

Andersen Cancer Center in Texas, and, since 1997, the Center had received nearly $600 000 in donations from Enron and Chairman Lay. Similarly, Enron and Lay had donated more than $50 000 since 1996 to the George Mason University, which employed Enron director, Dr Wendy Gramm.

Most outrageous of all, perhaps, was the case of Lord John Wakeham.

Besides his board compensation of $350 000 in 2000 (more than twice the average for directors of US publicly-traded companies), he had been receiving a monthly retainer of $6000 since 1996. And on the institutional level, both Enron and Andersen had made a mockery of the standards of

professional independence. Andersen was earning more by providing con-sultancy services to Enron, the company it was, in principle, ‘impartially’

auditing. In 2000 alone, the combined audit and consultancy fees Andersen charged Enron ran up to $52M.

A well governed company, with a properly functioning board, requires far more things than just producing stellar financial results (since these could be faked) or an apparent strict compliance with codes of good cor-porate governance, since these focus on the letter rather than the spirit. For this reason one may welcome increased government regulation such as the Sarbanes–Oxley stipulations which seem to be tailor-made remedies for Enron’s ills. Or are they, really? How effective could Sarbanes–Oxley have been in preventing the Enron meltdown? Is it sufficient to ensure good cor-porate governance? What else, if anything, is necessary?

It is disheartening indeed to hear an authority such as Harvey Pitt, former US Securities and Exchange Commission (SEC) chairman, remark,

‘Everything that went wrong at Enron was already illegal before SOX [Sarbanes–Oxley] passage’ (Boerner, 2004: 41). In other words, the Enron board could have perfectly ticked all the boxes of Sarbanes–Oxley compli-ance and still the scam would have gone on undeterred. Perhaps there is no such thing as a law that could singlehandedly eradicate corporate fraud once and for all, but the least one could expect is that a new law represents an improvement over the previous situation. Yet even on this very basic premise there seems to be serious doubts.

A huge number of Sarbanes–Oxley critics are simply of the belief that legislation is not the answer to the problem of corporate malfeasance.

Honesty and integrity in business cannot be mandated, much less by government, so they say. A lot of attention has been focused on Sarbanes–Oxley section 406, promoting the adoption of a code of ethics for senior financial officers. Companies now have the obligation to disclose whether they have such a code and, if not, explain why. However, there are no indications as to the language or procedures the code must include.

Instead, each company is free to decide for itself what the compliance pro-cedures and disciplinary measures for ethical breaches will be.

Enron had a code explicitly prohibiting conduct which ‘directly or indi-rectly would be detrimental to the best interests of the Company or [. . .]

which would bring to the employee financial gain separately derived as a direct consequence of his or her employment with the Company’

(The Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, 2002: 25). The code also forbade employees from owning an interest or participating, directly or indirectly, ‘in the profits of any other entity which does business with or is a competitor of the Company, unless such ownership or participation has been previously disclosed in

writing to the Chairman of the Board and Chief Executive Officer of Enron Corporation and such officer has determined that such interest or participa-tion does not adversely affect the best interests of the Company’ (Powers et al., 2002: 44). Obviously, these provisos were repeatedly ignored or waived and, in the end, they proved useless. Codes could only be as good as the people who enforce them.

Furthermore, as a Harvard Law Review note suggests, ‘Sarbanes–Oxley’s attempt to improve the transparency of corporate codes by requiring enhanced disclosure is a good example of a legislative effort whose spirit may evaporate through compliance. Those executives who abused codes [. . .] before Sarbanes–Oxley are unlikely to be deterred now because codes can be craftily written and those honest executives who were using codes effectively prior to the Act will have perverse incentives to rewrite them for fear of the litigation and negative market signals that may stem from the heightened disclosure that Sarbanes–Oxley requires’ (Harvard Law Review, 2003: 2141). That is, codes are not only oftentimes ineffective, but, depending on the intention with which they are used, they could even turn out to be pernicious.

Definitely, there has been no lack of laws in the US attempting to impose ethical behaviour on securities markets, the auditing profession or the cor-porate world in general, even before Sarbanes–Oxley entered the scene (Rockness and Rockness, 2005: 33–4). After the stockmarket crash of 1929, the Glass–Stegall Act was passed, prohibiting banks from selling securities to pay off loans to failing entities and creating an institutional barrier between commercial banks and investment banks. Succeedingly, the Securities and Exchange Acts of 1933 and 1934 were approved, regulating securities trading through the newly-created Securities and Exchange Commission (SEC), mandating common accounting standards and requir-ing the audit of publicly traded companies by certified public accountants (CPAs). By then, misrepresentation in the sale of securities, insider trading, manipulation of financial markets and fraudulent financial reporting already became included among the punishable behaviours. Way back in 1940, the Investment Company Act was legislated, recognizing the fiduciary responsibilities of company directors and calling for periodic dis-closures of a company’s structure, operations, financial conditions and investment policies. And after a spate of irregularities affecting the Savings and Loan industry in the late 1980s, the Federal Deposit Insurance Corporation Improvement Act came into being in 1991, requiring inde-pendent auditor attestation on management reports on internal control.

Finally, in 1995, the Private Securities Litigation Reform Act went even a step further by obliging auditors to report fraud directly to the SEC.

To say, therefore, that corporate finance is one of the most heavily regulated

areas in modern American society could very well pass as a mild under-statement.

More regulation such as Sarbanes–Oxley cannot be the remedy, espe-cially since markets themselves do a better job at self-correcting abuses and restoring investor confidence, some would hasten to add almost counterin-tuitively (Ribstein, 2002). Sarbanes–Oxley measures rely heavily on inde-pendent directors as watchdogs, auditors as detectives, increased disclosure and the dissuasive effect of heightened criminal liabilities, yet these are only marginally effective (Ribstein, 2002: 29–40). Outside directors face insur-mountable limitations in terms of time, information and inclination to immerse themselves in management. They only have time to review, rather than make business decisions; they depend on insiders for crucial informa-tion; and understandably they would be very hesitant to second-guess the decisions of the same executives who nominated them to the board in the first place. Auditors, for their part, do not usually engage in forensic audits to uncover wrongdoing, but only in sampling audits. How more regulation would improve their ability to spot the instances of corporate fraud that managers are determined to hide is difficult to imagine. Furthermore, Enron’s failings could be attributed more to the ambiguity of what it already disclosed than on its silence. Obliging firms to reveal off-balance sheet transactions, pro forma earnings and material changes in financial conditions could just be today’s solutions to yesterday’s problems. As for more stringent penalties, these could very well underestimate the over-whelming impulses of greed: ‘The substantial existing regulatory frame-work was breached by aggressive outsiders who seemed determined to ignore the risks of their actions, including their personal exposure to pun-ishment’ (Ribstein, 2002: 68).

What is worse, Sarbanes–Oxley seems to have inadvertently ignored its attendant costs: ‘increasing agency costs by skewing executives’ incentives to engage in value-maximizing transactions; encouraging executives to move to less monitored firms and activities; increasing firms’ costs of obtaining information about executives’ fraudulent activities; and increas-ing friction in the organization by reducincreas-ing trust’ (Ribstein, 2002: 40). In fact, according to a 2003 survey conducted by LexisNexis and the International Bar Association (IBA), one in four US lawyers think that the most significant effect of Sarbanes–Oxley would be higher legal costs (LexisNexis and IBA, 2003: 3). Corporate legal expenses would balloon because, among other things, executives would hire their own attorneys to advise them on corporate decision making and communications.

For the above-mentioned reasons, market-based responses such as intensified scrutiny and alertness, signalling by honest firms to differentiate themselves from other competitors for capital, expanded shareholder

monitoring including the possibility of takeovers and competition among multiple regulators would all make a better alternative to regulation (Ribstein, 2002: 52–68). In this connection, Gordon criticizes specific Sarbanes–Oxley provisions of being over-eager to mandate the immediate disclosure of material business developments (the so-called ‘price-perfecting diclosure’) even when this premature disclosure sacrifices shareholder value for very little gain in capital market efficiency (Gordon, 2003).

Another group of critics is not against legislation in itself, but only against Sarbanes–Oxley in particular. These individuals base their argu-ment on Sarbanes–Oxley too quickly separating facts, processes and actions, on the one hand, from values, intentions and culture, on the other, hardly paying any attention to the latter. As a result, it enervates ethics, which should be instead the main driving force towards reform (Rothchild, 2005). To be sure, law occupies an important place, together with a study of the economic incentives of agents, but neither of them makes ethics superfluous. Without ethics, rules on transparency and disclosure would be like a net with holes too large to catch corporate miscreants. Similarly, an excessive emphasis on legal responsibilities could distract actors from their wider social and moral commitments. Less procedural and formalistic leg-islation and more ethics seems to encapsulate their message.

A third group welcomes Sarbanes–Oxley on the whole, although individ-ually they find it out of focus, for different reasons. Cullinan believes that Sarbanes–Oxley merely addresses symptoms, proposing a superficial under-standing of auditor independence, rather than attacking ‘the underlying disease of a lack of sense of public duty, and inadequate emphasis on audit competence in the audit profession’s culture’ (Cullinan, 2004: 862). At the root of the issue was the auditor’s lack of resolve in standing up to a client on misstatements. Deakin and Konzelmann object that the Enron affair was not so much the result of the board’s failure in monitoring, as Sarbanes–Oxley implies, but its miscalculation of the risks inherent in the firm’s otherwise legitimate business plan of ‘intelligent gambling’ (Deakin and Konzelmann, 2004). Only as a consequence of this error in managing corporate risk did the board flounder in implementing an effective system of internal control. Commenting on the whistleblower protections advo-cated by Sarbanes–Oxley from a criminal law perspective, Brickey states that they would not have been sufficient to induce Sherron Watkins, an Enron vice-president, to bypass the corporate chain of command and report the anomalies directly to the SEC (Brickey, 2003: 368). Therefore, despite the introduction of explicit prohibitions on retaliation against witnesses, it is far from clear that Watkins could have taken such a course of action.

Along the same lines of acknowledging the need for Sarbanes–Oxley while at the same time pointing out its deficiencies, Columbia professor

John C. Coffee, Jr offers us what is, perhaps, the most comprehensive view.

Coffee identifies three different accounts, each featuring a separate actor, as plausible explanations of the Enron fiasco (Coffee, 2003). The first, the

‘Gatekeeper Story’, focuses on ‘reputational intermediaries’ such as audi-tors, analysts, debt rating agencies and attorneys on whom investors rely for verification and certification of information. Legislation and court deci-sions in the 1990s resulted in reduced legal exposure for gatekeepers. This

‘Gatekeeper Story’, focuses on ‘reputational intermediaries’ such as audi-tors, analysts, debt rating agencies and attorneys on whom investors rely for verification and certification of information. Legislation and court deci-sions in the 1990s resulted in reduced legal exposure for gatekeepers. This