Thursday, 5 May 2011

Sox and smelly feet

Remember the Sarbanes Oxley Act ? The one that was promulgated in the aftermath of Enron. This was supposed to ensure that accounting scandals are greatly minimised. The Act that had every business chief howling that it was draconian , that compliance was putting a huge cost on business, etc etc. Well, it turns out that investors, whom the Act was supposed to protect, actually don't care all that much about accounting scandals.

Take the case of the "success" of many of the Chinese IPOs in the US market. In the fine print , most of them have disclosed accounting deficiencies. But does the market care ?? Not one bit. Take Renren which IPOed yesterday. The stock rose some 50% above the issue price. Never mind that the Chair of the Audit Committee resigned on Tuesday, they changed a key growth figure, they disclosed a "material weakness" that they did not have enough people in their accounts department and a "significant deficiency" that they had no policy on the treasury function and investment of cash.

Material weakness and accounting deficiency are Ramamritham speak. The former means the accounts are definitely wrong. The latter means that it is most probably wrong.

And yet investors seem to care two hoots. These days anything with a China name will sell like crazy. Even if they presented their accounts in Chinese and qualified it by saying that they just made it up to satisfy a legal formality.

Even the famed General Motors IPO showed a material weakness in the accounts. Didn't come in the way of its much touted success.

I am sure that the Public Companies Accounting Oversight Board ( what other name can you expect Ramamritham to dream of), that was supposed to regulate auditors under the Sarbanes Oxley Act has done enough research to prove that disclosures of accounting weaknesses have had a positive correlation to the share price and therefore they should be considered as having done great benevolence to the human race. It is probably true - the research finding that is. But as long as cases like Renren exist, its hard to take Sarbanes Oxley seriously.

Sure Sox, does reveal smelly feet. But if gorgeous blondes find smelly feet sexy, there's not much that can be done about it.

Disclosure : This blogger has made merry with the aforesaid Act; making a fair bit of money for his company from it. His opinions are therefore completely biased.

Material Weakness : This post is utterly without research, written on a whim and totally opinionated.

13 comments:

kiwibloke said...

Et tu? SOX fed us for a while! Like all good intentions it ultimately meant just that, good intentions, nothing more!

hemarao said...

First, I came to know Prada listed in China, then about Chinese Internet Cos listing in the US, then the BBs and now SOX...items I would have been blissfully unaware of otherwise! Your blog has sort of become a learning centre too. Now, dont charge me a fee for that! I guess SOX disallows it...:)
All I can say is thank God I'm not a gorgeous blond! and appreciate the Material weakness content!

Ramesh said...

@kiwi - It more than fed us - It enabled us to exist. The Act per se I believe is still the right thing to do. The problem is, the market doesn't seem to care one way or the other. The punter is looking for the quick buck - if accounting fiddling can enable him to make the quick buck, thn he is all for fiddling ! He only screams when he loses.

@Hema - Well, of the two adjectives, one is certainly true :)

zeno said...

Double like for the title and the concluding Para :P :D

1)How is that uncles can get away with cheeky remarks like this but kids like me end up in cross hairs and sometimes get shot ;)

2)Blondes, do they find feet sexy at all, let alone smelly feet? I thought it was some guys who usually find feet sexy!

All relevant disclosures and material weekness do apply

sandhya sriram said...

To the Best of my lack of knowledge and no belief I certify that the said accounts disclose a true and fair view. True to my bank balance and fair to my fraternity's future. However we cannot comment on whether the material misstatements articulated in the report is meant for whom. Sad...a war elephant turned into a white elephant

Ramesh said...

@zeno - You cheeky boy. You are going to get clobbered :) Btw - how do you know what blondes like and don't like ??

@sandhya - Classy comment. Its the investor , whom the elephant was meant to protect who has turned it into a white one.

zeno said...

Oh come on after reading all your blogs for these many number of days, i know a certain thing or two. No i am not telling that i came to know wat blondes like or dont like from your blog but am talking about the material disclosures line ;)

Ramesh said...

@zeno - Ha ha. You can't wriggle out so easily. Methinks you are guilty re blondes :):):)

Vishal said...

Thanks to your four words definitions of material weakness and accounting definiency, makes life so easy. I imagine how hard it could be for a layman to understand them.

You are very right when you say investors do not seem to care. Infact most of the people do not seem to care unless forced by law (howsoever necessary Ramamritham may think it fit).

In the world of business, materiality does matter and fraud is also sometimes linked to materiality. There is always a talk of high level control environment which is at expense of process level controls. I think it all depends on people charged with governance.

Ramesh said...

@Vishal - It just goes to show that investors are simply betting on straws. If they were really educated investors, they must be worried about accounting deficiencies.

RamMmm said...

Does a layman investor read all the disclosures? Maybe none, save a miniscule fraction. I thought you had an opinion that the US market valued fundamentals more than what the Indian market does and yet sems to happen regularly. :-) But then, if everyone reads all the rider clauses to a T, they may be in a permanent stage of seizure in decision. Hence take a risk. :-)

Ramesh said...

@RamMmm - True - you can become completely schizophrenic if you read all the disclosures. There's just too much of information with even more legalese thrown at you.

J said...

It's sad but I think most investors build strong priors on a company without learning all the facts and then look for information that fits with their story. But I have read a few (very few) of these disclosures on deficiencies and it is hard to really separate out which ones are really serious and which ones are just checking stuff off a laundry list.

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