Sarbanes-Oxley for Entrepreneurs

The Sarbanes-Oxley Act: Title VII— Past Violators and Investment Banks

Written by Bennet Grill for Gaebler Ventures

This article focuses on the second half of Title VII of the Sarbanes-Oxley Act. This section of the Act looks at how investment banks contributed to the financial crisis.

The seventh title of the Sarbanes-Oxley Act mandates the research and publication of a number of studies and reports regarding the accounting firms, credit rating agencies, investment banks, and past corporate malfeasance.

This article highlights and explains the required reports on past violators of securities laws and of investment banks.

The second half of title seven requires an investigation of possible violators of securities laws in the period of 1998 through 2001.

This investigation is to covers all securities professionals, including, but not limited to "public accountants, public accounting firms, investment bankers, investment advisers, brokers, dealers, and attorneys." This study aims to review not only the violation of securities law but the enforcement action that followed each violation. This study was designed to help identify the "areas of reporting that are most susceptible to fraud, inappropriate manipulation, or inappropriate earnings management."

Title seven also designates a special study of investment banks and their role assisting companies with the manipulation of earnings and "obfuscating their true financial condition."

This section specifically identifies the collapse of two firms--Enron Corporation and Global Crossing to study and identify exactly how earnings and the financial condition of the companies were manipulated before the resulting collapses.

In the case of Enron, the Chief Financial Officer Andrew Fastow created a number of Special Purpose Entities (SPEs) whose sole function was to hide the debt of Enron and essentially served as holding vessels for the unfavorable assets of Enron. Major investment banks, including Credit Suisse, J.P. Morgan, and Merrill Lynch participated in the financing of these Special Purpose entities knowing that they were designed to hide Enron's debt and thus project an inaccurate image of the company's financial condition.

Title seven seeks to examine and evaluate the manner in which investment banks behaved in their transactions with Enron and the related Special Purpose Entities.

Global Crossing is a large telecommunications firm which filed bankruptcy in 2002. Like many other telecom companies in the early 2000s, it was hit with hard financial losses but unlike others it continued to report record earnings. Global Crossing engaged in many capacity swaps with other communications companies--exchanges of bandwidth or communication capacities. While capacity swaps can increase a communication's company's core technology's capacity, there is no cash exchanged in this transaction. Global Crossing, with the help of a number of investment banks and Arthur Anderson, booked its capacity swaps in a manner which portrayed a large influx of money resulting from the transactions.

Title seven of the Sarbanes-Oxley Act seeks to identify the manner in which investment banks contribute to the manipulation of companies balance sheets and earnings statements.

The Sarbanes-Oxley Series -- Learn More About Sarbox

The Sarbanes-Oxley Act: An Introduction
The Sarbanes-Oxley Act: Title I
The Sarbanes-Oxley Act: Title II
The Sarbanes-Oxley Act: Title III—Audit Committees
The Sarbanes-Oxley Act: Title III—Blackout Periods
The Sarbanes-Oxley Act: Title IV
The Sarbanes-Oxley Act: Title V
The Sarbanes-Oxley Act: Title VI
The Sarbanes-Oxley Act: Title VII—Accounting Firms
The Sarbanes-Oxley Act: Title VII— Past Violators
The Sarbanes-Oxley Act: Title VIII
The Sarbanes-Oxley Act: Title IX-XI

Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.

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