Charles Hooper

Thoughts and projects from a site reliability engineer

Financial Crises: And the Cycle Continues

This entry is part 7 of 8 in the series Intro to Financial Reporting

After Enron, Global Crossing, and Xerox, we witnessed the creation of new regulation (the Sarbanes-Oxley Act of 2002), the establishment of a new oversight/regulatory organization, and increased pressure from the government on big players in the market. As we find ourselves in the midst of the Financial Crisis of 2007 (and onward,) we are seeing this same pattern – new legislation, a new regulatory organization, and increased pressure from the government on big players in the market.

In news today, we see the Restoring American Financial Stability Act of 2010 and the Wall Street Reform and Consumer Protection Act of 2009 on the desk of the President. This 2,300-page bill will “ban high-risk trading inside the banks and put in end to conflicts of interest” and “ban steering payments, liar loans, and prepayment penalties and give Americans … transparency” (Nichols, 2010, para. 4-5). But that isn’t all. These new acts would also create yet another oversight/regulatory organization called the Consumer Financial Protection Bureau to regulate mortgages, credit cards, and other financial consumer products (Hall, 2010, fig. 1). Not only does this act establish a new bureau, it also creates a “council of regulators” led by the Treasury to monitor “threats to the financial situation” (Hall, 2010, fig. 1).

And as if you couldn’t already guess, today in the news we see increased pressure from the government on big players in the market including Goldman Sachs, Dell, and AIG. Goldman Sachs agreed to settle by paying a $550 million dollar fine – the largest fine ever charged by the SEC after being accused of securities fraud (Craig, Scannel, 2010, para. 3). Dell admitted to accounting fraud back in 2007 and agreed on a settlement with the SEC today – The company must pay a $100 fine and restate its earnings for the 2003 to 2006 accounting periods (Ogg, 2010, para. 2-3). What Dell was caught doing was violating GAAP, the Global Accepted Accounting Principles, by “fudging” the timing of recognized expenses and income to meet analyst’s quarterly earnings forecasts (Ogg, 2010, para. 1,4). And if that isn’t enough, the AIG settled with the Ohio State Attorney General with a $725 million fine (AFP, 2010, para. 1). The AIG was also accused of accounting fraud to achieve stock price manipulation (AFP, 2010, para. 2).

As we can clearly see, after each financial crisis the response is likely to be the same.

AFP. (2010). AIG to Pay 725 Million Dollars to Settle US Fraud Lawsuit. Retried from http://www.google.com/hostednews/afp/article/ALeqM5h0MtX-uuAB1z2f3dcmONOLRCIWaw

Craig, Susanne, Kara Scannel. The Wall Street Journal. (2010). SEC Split Over Goldman Deal. Retrieved from http://online.wsj.com/article/SB10001424052748704229004575371601322076426.html?mod=WSJ_hpp_LEFTTopStories

Hall, Kevin. McClatchy Newpapers. (2010). What’s this big finance-regulation overhaul really do? Retrived from http://www.mcclatchydc.com/2010/07/15/97609/whats-this-big-finance-regulation.html

Ogg, Erica. CNET. (2010). Dell to Restate Earnings Due to Accounting Fraud. Retrieved from http://news.cnet.com/8301-31021_3-20007390-260.html

Ogg, Erica. CNET. (2010). Goals Led Dell to Cook the Books. Retrieved from http://news.cnet.com/Goals-led-Dell-to-cook-the-books/2100-1014_3-6203071.html?tag=mncol;txt

Nichols, John. The Nation. (2010). Financial Reform Passes, But What Does That Mean? Retrieved from http://www.thenation.com/blog/37541/financial-reform-passes-what-does-mean

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