Ebbers Without Tears

Wednesday’s sentencing of former WorldCom chief Bernard Ebbers to 25 years in prison marks yet another step in corporate America’s reckoning with a wave of scandals. But this case, both in its principles and in its particulars, offers little help to anyone trying to argue with a straight face that the 2002 Sarbanes-Oxley Act has helped clean up corporate governance.Ebbers was convicted in March by a federal jury for fraud after prosecutors charged him with cooking the books to the tune of $11 billion at WorldCom, the telecommunications giant he had built practically from the ground up. The company’s disintegration in 2002 marked the largest bankruptcy in American history. Ebbers maintains that he is innocent and has vowed to appeal.Prosecutors convicted Ebbers and won for him a 25-year sentence under laws that existed before Sarbanes-Oxley. It leaves one questioning the need for those new rules. It’s a salient question, considering the huge compliance costs with which the new rules have saddled law-abiding companies.The particulars of the Ebbers case also raise questions about the utility of Sarbanes-Oxley. Prosecutors argued, and jurors agreed, that Ebbers had been complicit in the creative bookkeeping that brought down his company. By its very nature, this fraud required ongoing deception on an enormous scale, and it’s hard to imagine how signing any of the additional certifications required by Sarbanes-Oxley would have deterred him when the laws that will now imprison him for a quarter century didn’t. As Peter Wallison of the American Enterprise Institute noted in a June 2005 research report, “a determined management can hide deceptive accounting from the most determined auditors and directors.”Without ever having been prosecuted under Sarbanes-Oxley, the former World-Com chief has been handed a 25-year sentence that’s twice the jail term routinely meted out to those convicted of manslaughter for taking another human life. On top of which he will lose most of the $40 million that remained of his personal fortune under an earlier deal to pay back various aggrieved parties who lost money in WorldCom stock; he was once worth $1 billion, at least on paper.Corporate scandals in America tend to come in cycles, with a wave of misbehavior followed by a wave of headline-chasing prosecutors and legislators overreacting in ways that make it harder for law-abiding Americans to earn a profit. Ebbers will pay for his crimes under the pre-Sarbanes-Oxley laws. Unfortunately, American businesses are left paying for Sarbanes-Oxley.

Ebbers Without Tears

Ebbers Without Tears

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