Introduction In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency. Critics argue that SOX was passed too quickly without sufficient data to support its effectiveness in curbing the moral hazard behaviors that led to the downfall of these big corporations, causing investors to lose their savings and confidence in the market.
Ethical corporate behavior has been a recurring issue of public policy. Recent events have brought this issue into sharp focus beginning with the Enron scandal in 2001 and more recently the financial crisis of 2008. Subsequent regulation such as the Sarbanes-Oxley act seem to be in reaction to the public clamoring for government action in the wake of painful economic outcomes. A deeper examination of the events leading up to Enron and the financial crisis both seem to indicate that government agencies were asleep at the switch. Policy such as Sarbanes-Oxley in the wake of Enron have not prevented the more recent financial crisis of 2008.
The Enron Scandal escalated distrust amongst the shareholders, employees and government agencies. Thus, as a result the Sarbanes-Oxley Act was passed to protect the interest of all affecting parties. The Act is nearly "a mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the Act." The Enron Scandal also revealed the unlawful practices followed by Arthur Andersen’s accounting firm. They helped Enron in altering, covering up, and destroying classified documents.
In this paper I will discuss this statement and demonstrate that wrong financial engineering practice and corporate governance effectively caused, or at least in part, the financial crisis. 2. The role of Financial Engineering in the Crisis The origins of the crisis have been discussed and a number of different causes have been pointed out. According to (Sun, et al., 2011), the roots of the crisis have been identified to be in the preference for deregulating financial institutions and markets, which resulted in the prompt growth of securitization. Financial engineering allowed a great burst of global derivatives setting the context in which major financial institutions thoughtlessly disregarded risk management and corporate governance.
McGraw-Hill Companies You can’t manage what you can’t measure’: Maximizing Supply Chain wharton.universia.net/index.cfm?fa=viewArticle&id=124language=English&specialld= Quinn, Q. (2000, January). Quantifying the benefits of SCM. Logistics Management & Distribution Report, 39(1), 30. Retrieved December 6, 2008, from Business Source Complete database.
Understanding... ... middle of paper ... ...usiness & Economics Research, 10(3), 149-156. DHALIWAL, D. S., GLEASON, C. A., & MILLS, L. F. (2004). Last-Chance Earnings Management: Using the Tax Expense to Meet Analysts' Forecasts. Contemporary Accounting Research, 21(2), 431-459. Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry.
The authors argue that Bank CEOs have taken actions that... ... middle of paper ... ...Meegan, R. 2009. The Credit Crunch, Recession and Regeneration in the North: What’s Happening, What’s Working, What’s Next? Liverpool: European Institute for Urban Affairs, Liverpool John Moores University. Scalet, S., Kelly, T. F. 2012. The Ethics of Credit Rating Agencies: What Happened and the Way Forward.
The Economist (2008) ‘Confession of a risk manager’, [Online], Available: http://www.economist.com/node/11897037.htm. [30 Oct 2013]. Wilfield, W. E. (2013) Ethical reflections on the financial crisis 2007/2008: making use of Smith, Musgrave and Rajan, New York and Heidelberg: Springer, pp. 1-4.
The roots of the financial crisis can be traced back to the property asset bubble in the US between 1997 and 2006. This asset bubble was enabled by a poorly regulated subprime mortgage industry and the assumption that property prices would continue to rise. The collapse of the property bubble and subsequent foreclosures led to many financial institutions suffering huge losses due to their exposure to the subprime market through a series of innovative and complex investment vehicles. While these investments carried extra risk, they also gave the opportunity for massive short term returns, and the move to these riskier and more complicated financial investments may have been facilitated by a ‘too big to fail’ mentality by many US financial institutions. The collapse of the property bubble and uncertainty in the markets led to a run by depositors and a sudden loss of funding for banks day to day activities.
The policy makers was also lack of accountability that fail to encourage optimism about the reforming the policy process itself (Adrian & Atkinson 2009). The decision by the U.S. Treasury and the Fed to let a major bank (Lehman Brothers) fail led to a system-wide loss of confidence that exacerbated the crisis. The failure of policy makers to deal with the crisis should be seen as a factor in aggravating the crisis. (1) Housing market failure - An Economics professor Taylor conducted a research in 2009 and suggested that the financial crisis was due to government policy and intervention that leaded to excessive money and contributed to housing boom and bust (Taylor 2009). By using the information given in The Economist (October 18, 2007), Taylor indicated that the federal funds interest rate was deviated from the suggested rate based on Taylor Rule – Fed interest rate should be adjusted according to economic situations such as the inflation & employment level.