The Foreign Corrupt Practices Act required public executives to certify that they had effective internal controls….and management issued those certifications from 1977 forward. No one…not the SEC or the auditors….verified whether those certifications were truthful or based on anything….we just trusted that business leaders wouldn’t certify something that wasn’t really true….of course having real controls costs some money, so there was little incentive.
Then came the meltdowns in felonious financial reporting at Enron, Worldcom and Adelphia….and Congress decided to put some verification to the certifications (404(b)) by having auditors test those certifications…..(something the SEC, despite their lack of oversight, had been pushing for for 25 years)…..
…and the cost to ACTUALLY implement controls was HUGE (an average of $4 million for the accelerated filers)….consequently, we got the pushback that has existed ever since
..now it looks like we will let small public companies behave as companies did under the old FCP Act rules….certify to having controls without having to prove it….because it costs too much….and, obviously, (one must conclude) business profits are more important than investor confidence.
So I guess we’ve come full circle. Given the billions in market value that investors lost due the shenanigans of Enron and their ilk…..I can only think that Caveat Emptor….let the buyer beware….is now the catchphrase if you want to invest in small public companies….I just get confused…why do we care less about the investors in small companies….and wouldn’t robust investment in small companies help them? Of course, you have to believe that having good controls over the reliability of the financial information you provide to the public is important. If you don’t, then all of this is moot. Just seems to me we spent the last 8 years whining about cost so we can get back to the environment that fostered the problems in the first place……ahhh Capitalism
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