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Bigger fish

29 October 2014 By Reynolds Holding

A scandal at one of America’s biggest real-estate investment trusts could be the perfect test for the Sarbanes-Oxley Act. American Realty Capital Properties’ stock tanked nearly 20 percent on Wednesday after the company said mistakes in its financial statements were intentionally left uncorrected. That sounds tailor-made for a case under the often-ignored law inspired by Enron, WorldCom and other accounting debacles.

An appeal now before the U.S. Supreme Court suggests how low SarbOx has fallen. The case involves a fisherman convicted of violating the law’s ban on destroying potential evidence by tossing overboard several under-sized grouper. His defense sounds persuasive: The 2002 statute was aimed at financial records, not sea creatures.

SarbOx has never received much respect. Companies persistently gripe that it deters them from going public and drives business overseas. But several recent studies credit the law with improving disclosure, cutting down on financial restatements and lowering companies’ cost of capital.

Government lawyers still give the statute short shrift, though. Its most prominent provision can require executives who certify inaccurate financial records to cough up bonuses and other incentive pay. And while the Securities and Exchange Commission has filed dozens of cases under that section, most have resulted in only tiny amounts being collected. The biggest criminal prosecutions have accused HealthSouth boss Richard Scrushy of signing a false financial statement – and the fisherman of dumping his grouper.

One reason SarbOx isn’t used more often may be that it overlaps with older statutes that prosecutors are more familiar with and that have been tested in court. The reform has also pushed companies to create procedures that require low-level employees to tell chief executives or chief financial officers that financials are up to snuff. That makes it tough to prove higher-ups knew of inaccuracies.

At first glance, no such difficulties should arise in the ARCP situation. The REIT admitted that it believes “financial statement errors were intentionally made.” Those errors have already cost the CFO and the chief accounting officer their jobs.

Details are scant and it’s too early to know whether regulators are investigating or legal action is in the offing. After more than a decade as an afterthought, though, SarbOx may finally get its chance to shine.


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