Two former finance chiefs say loosening the Sarbanes-Oxley corporate governance law is a bad idea. They should know–it’s the legislation that helped send them to jail.
Aaron Beam and Weston Smith both went to prison in 2005 as part of the $2.7 billion accounting scandal at medical facility operator HealthSouth Corp.
Now the pair, along with a former Federal Bureau of Investigation agent, are warning finance executives about ethics and compliance risks related to fraudulent accounting activities.
“Shining the light on it, raising public awareness of these types of things, I think it makes it better,” said Mr. Beam.
The trio is speaking on Thursday to the New York chapter of Financial Executives International, a professional group.
Mr. Smith was one of the first executives to go to prison under the Sarbanes-Oxley rules, which were enacted in 2002, because he signed off on false financial statements.
Mr. Smith was the fifth CFO at HealthSouth within seven years. He blew the whistle in March 2003 on the company’s practice of overstating financial performance, perpetuated by previous finance chiefs, starting with Mr. Beam, who was a co-founder of the company.
“Sarbanes was my wake-up call,” he said. Mr. Smith was also barred by the Securities and Exchange Commission from appearing or practicing before the commission as an accountant due to his role in the fraud.
Congressional Republicans are now aiming to loosen a provision of Sarbanes-Oxley that requires an independent auditor to evaluate a public company’s internal controls of financial reporting and attest to their effectiveness.
Those rules are under threat from the Financial Choice Act introduced last year by Jeb Hensarling (R., Texas), the chairman of the House Financial Services Committee. The bill would raise the cap on the market value of companies required to have an independent auditor sign off on their financial controls to $250 million. The current threshold is $75 million.
A February memo from Mr. Hensarling’s office proposes increasing that threshold to $500 million when a new version of the bill is reintroduced.
“Securities fraud was illegal before the Sarbanes-Oxley Act and it will be still illegal after the Financial CHOICE Act,” said Sarah Rozier, communications director for the Financial Services Committee, in an email. “The Financial CHOICE Act strengthens penalties for violations of the securities laws, including penalties included in the Sarbanes-Oxley Act.”
But Messrs. Beam and Smith say the rules deter corporate fraud. They also follow in the footsteps of corporate criminals, including famed check forger Frank Abagnale, as they reinvent themselves as motivational speakers.
“I think I’d be foolish to say that if you take the fence down, the dog won’t run away,” Mr. Beam said. “You can train him and everything, but you still need fences to show him the boundaries are.”
HealthSouth’s fraud took root in 1996, as Mr. Beam and his team scrambled to close the books for the second quarter, he said. Mr. Beam directed his controller, a former auditor of HealthSouth, to create hundreds of fake entries in the company ledgers to falsely boost performance.
By March 2003, Mr. Smith was CFO at HealthSouth and grappling with the more stringent external oversight of company financials called for by Sarbanes-Oxley. Faced with the likelihood that the company wouldn’t pass the newly required independent audit of its internal controls over financial reporting, Mr. Smith confessed the accounting fraud to the FBI.
“It would’ve have been very difficult to survive that type of scrutiny on internal controls,” Mr. Smith said. “The balance sheet was complete fiction.”
A HealthSouth spokeswoman said in an email that the company prefers “not to discuss past leadership.”
Some enforcers say the prosecution of corporate fraud during the era acted as its own deterrent. The sight of top executives in handcuffs frog-marched across the evening news likely prompted many directors and managers to dig into their own company’s books.
But as memories fade and executives who lived through that period retire, it is likely that the strict provisions of SOX, as the statute is known, are finally yielding fruit, said Vic Hartman, a former FBI agent who worked on the Enron and WorldCom cases.
“SOX is preventing fraud now, for the first time,” Mr. Hartman said. “I think it could be stopping fraud from here forward.”
As seen in the Wall Street Journal.