When the Sarbanes-Oxley Act was signed July 29, 2002, and processes to implement it began immediately, the public was led to expect dynamic changes in investor confidence with improved integrity in how corporate financial disclosures are reported by publicly owned companies. Within 13 months, 545 enforcement actions were taken by the SEC including 147 cases for fraud and 144 barred corporate executives from management roles in public companies. But polls continue to show that the public holds corporate America in low esteem. This is a harmful attitude and as well, the "hassle factor" for officers and directors of investor owned firms has been significant regarding compliance with the law. Possibly the public is disenchanted with the excessive pay of the average corporate executive; in 1980 their earnings were 40 times the hourly paid worker, rose to 85 times in 1990, in 2000 was 500 times but today has declined 20% to 400-fold more than the wage-earner class. Among the 2,600 New York Stock Exchange listed firms, the average earned income of CEOs last year was $818,000. But with stock options, total compensation was well in excess of $10 million annually. Sarbanes-Oxley has not changed the public's perception nor should it, and further, the cost for the bureaucracy's administration of this law exceeds $750 million a year of taxpayer's money.
A closer look at Sarbanes-Oxley in practice reveals, excluding the obvious fraud and corruption instances, that the biggest problem prosecutors face is distinction between the "event" and the "intent" of the executive involved. A manager accused of improper accounting can argue that he had no criminal intent but relied on advice of lawyers or accountants, and this "advice-of-counsel defense" has proven quite effective. So now it is evident that lawyer and accountant actions can manipulate events without direct linkage to those accountable under the law for intent to commit wrongdoing. It is predictable that the legal and accountant support in recent cases such as Enron, Tyco or WorldCom will be investigated further, but with the arms-length appearance and goal to avoid any hint of complicity, prosecutors have a difficult pursuit. In fact, in a recent case involving KPMG where 16 employees were indicted for establishing bogus tax shelters, a federal judge ruled that, essentially, existing contracts "trump" the illegalities of the fraud. According to a legal analyst, the case complexity is enhanced by problems of determining how to allocate responsibility within a large organization.
This all raises need to examine how a business entity, having a separate legal persona, is different from the natural person that manages the business activity. The 14th Amendment of the U.S. Constitution stipulates that "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens ...nor shall any State deprive any person of life, liberty, or property without due process of law, nor deny to any person within its jurisdiction the equal protection of the laws." It is also widely cited that in 1886 the U.S. Supreme Court declared (Santa Clara County v. Southern Pacific Railroad; 118 U.S. 394) that a corporation is a "person" as interpreted by the 14th Amendment. English law matched this decision in 1897. Public policy is now shaped to maintain, protect, enhance and create corporate benefits.
In the recent book "Unequal Protection" by Thom Hartmann, the notion of corporate "due process" and "equal protection" is directly challenged. He seems to have done something that nobody else did. That is, read the 1886 casebook and learn that the interpretation of a corporation existing as and equivalent to a person is not to be found anywhere in the court decision. What appears is a "headnote," or abstract by a court reporter, that carries no legal weight whatsoever and establishes no precedent in law! The court reporter who wrote the headnote, John Chandler Bancroft Davis, a Harvard law graduate, wrote the summary and, it is claimed by Hartmann, deliberately inserted his opinion to establish "corporate personhood" due to his bias toward the railroad's case and to achieve what no corporation had accomplished through litigation processes.
If all the foregoing is true, the entire Sarbanes-Oxley issue, in fact all corporate litigations, are in a shambles. What do you think of that?!!
FEDERAL TRIANGLE: Sarbanes-Oxley - Groundless Law
September 13, 2006