What Does Subprime Lending Scandal Say About Sarbox?

Lora Bentley

Sarbanes-Oxley Act co-author and current NASDAQ vice chair Michael Oxley gave the keynote address earlier this week at the Gartner Financial Services Technology Summit. He spoke about the "the crisis in confidence and loss of trust" that resulted from the Enron scandal and others like it, an impact that was magnified because "average citizens" were affected by the scandals.

 

That, he said, was what gave rise to the law that bears his name, according to Bank Systems & Technology. And according to Oxley, Sarbox has been successful in that it has motivated a return of the average investor's confidence in the capital markets.

 

But as blogger Kathy Burger points out, reference to the current subprime mortgage scandal was conspicuously missing from Oxley's remarks. Why? She speculates as follows:

Maybe that's because this is occurring only a few years after the events that spurred the passage of Sarbanes-Oxley, or maybe the former Congressman thinks the legislation is only applicable to accounting practices and the capital markets and believes (wrongly, I think) that it has no relevance to the cap markets. But I'm sure that, just as Enron, WorldCom et al begat Sarbanes-Oxley, so will the fallout (failed companies, workforce cuts, people losing their homes, etc.) from the subprime mess spur the creation of new or updated regulation.

I certainly agree. And if some have their way, Sarbanes-Oxley may even be extended to apply to subprime mortgages.



Add Comment      Leave a comment on this blog post
Sep 6, 2007 1:41 AM Tony Tony  says:
Continued expansion of Sarbox is a fools game. Let the system adjust to Sarbox in its current form rather than continuing to adjust it in a reactionay manner creating the possibility it becomes as complicated as the tax code (maybe it already is). Reply
Sep 6, 2007 1:43 AM DD DD  says:
You are mixing apples and oranges. Subprime lending has nothing to do with SOX. Mortgage companies who offered subprime loans may still have secure processes in place to provide the SEC with correct reportings. Subprime lending was an internal lending practice, not an accounting practice.Just my 2cents worth. DD Reply
Sep 6, 2007 8:16 AM Rhonda Rhonda  says:
When will we restore the business education curriculum in high school to include the year of general business that covered such items as rental agreements, how to buy a car, contracts and such. Such courses have been watered down and are taught by "consumer science" instructors who will also teach you how to bake cookies while we have an obesity epidemic in the US. When will we ever have a common sense curriculum--we include citizenship in a capitalist society, when will we teach survival skills in a capitalist society? Reply
Sep 7, 2007 3:08 AM Frits Bos Frits Bos  says:
The problem is aggravated because US legislators think their laws should have world-wide application. If so, it should follow that lending practices should already be made to adhere to international Basel-II accords that are being implemented world-wide just like Sarbox is taken seriously world-wide. Does it take a Pearl Harbor for an American institution to realize that the US is not merely subjected to internal governance but instead is subject to every international influence that all other countries pay attention to? Learn from your mistakes to improve, learn from others' mistakes to improve more cheaply! Reply
Sep 17, 2008 4:53 AM Nick D Nick D  says:
Sarbanes-Oxley already applies to all public companies, and the mortgage meltdown shows how ineffective the act is. Companies that acquired sub-prime mortgages should have taken reserves against the potential of default. Also, interest receivable should not have been fully accrued due to the potential of default. Furthermore, additional reserves should have been taken as housing values declined. These are basic accounting principals: proper valuation of assets and recognizing revenue only when it is reasonably likely that it will be received.If financial institutions had followed proper accounting procedures, let alone Sarbanes-Oxley, they would have recorded losses every time they acquired a sub-prime mortgage.Ironically, Enron's accounts were inflated by incorrect valuation of derivatives, which is exactly what happened with the mortgage meltdown. Reply
Nov 8, 2008 9:06 AM Nick D Nick D  says:
DD wrote that subprime lending was not "an accounting practice". But then no business activities are accounting practices. The role of accounting is to fairly report income, assets and liabilities. The banks failed to properly account for subprime loans. Otherwise the losses that they are now reporting would have been reported when they occurred, i.e., when loans were acquired or when they became uncollectable.If you go to the "conspicuously missing" link above, you will see that Sarbanes Oxley and SEC regulations were broken, but the argument is for additional regulation to ensure that lenders follow existing laws. Reply

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