Interesting bit of a quote

[James A. Donald]

     --
Leichter, Jerry wrote:
 > Business ultimately depends on trust.  There's some
 > study out there - I don't recall a reference - that
 > basically finds that the level of trust is directly
 > related to the level of economic success of an
 > economy.  There are costs associated with
 > verification, some of them easily quantifiable, some
 > of them much harder to pin down.  The difficulty is in
 > making the tradeoffs.  We're now pushing way over on
 > the verification side, in a natural reaction to a
 > series of major frauds and scandals.

Sarbanes-Oxley substitutes formal procedures for real
relationships, but formal procedures are unlikely to
successfully substitute for real relationships.
Sarbanes-Oxley also forces those companies to which it
applies to have a large minimum size, since compliance
costs are so great, so one has a single company
embracing an excessively wide variety of activities,
which of course increases the need for trust, at the
same time as the oppressive bureaucracy of SO compliance
diminishes the supply of trust.

I think we will see in future big scams that comply with
the letter of Sarbanes-Oxley, without complying with the
substance.

What happened with Enron is that they simply made up
some figures, and then when suspicious investors started
to harass them, they proceeded to make up some accounts
that superficially justified those figures.  Had they
started with the accounts, instead of starting with the
fraud, they would have been pretty much in compliance
with what is now Sarbanes-Oxley.   So Sarbanes-Oxley
will not prevent another Enron, rather it will legalize
it.

Sarbanes-Oxley makes it mandatory to do what suspicious
investors demanded of Enron - but it also makes it legal
to comply in form without necessarily complying in
substance.  It makes suspicion mandatory, rather than
making honesty mandatory - forbids trusting behavior,
rather than forbidding untrustworthy behavior.

     --digsig
          James A. Donald
      6YeGpsZR+nOTh/cGwvITnSR3TdzclVpR0+pr3YYQdkG
      BtuKBOPO2RPPKVNZMPpxlQMVrOaMFO/q/qzhXTex
      4xGjYNrDxf0b1LuglGzrFFpJNIlrzvvB1U5BPjv/H

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