Corporate Fraud Panel Calls for More Jail Time for Wrongdoers, and Better Protection for Whistle Blowers Major Loss of Confidence in SOX SEC Outperforms OSC BDO Dunwoody Weekly CEO/Business Leader Poll By COMPAS in Canadian Business For Publication April 3, 2008 COMPAS Inc. Public Opinion and Customer Research April 3, 2008
1.0. Introduction On the heels of widespread coverage of accusations of wrongdoing at Biovail, the COMPAS panel of CEOs and business leaders was asked about appropriate remedial action with respect to corporate misrepresentation in general. The panel takes a tough line, recommending greater use of jail sentences and strong legal protection for whistleblowers. These recommendations come along with evidence of a substantial loss of confidence in the effectiveness of Sarbanes-Oxley. Panelists were asked to score the performance of the U.S. Securities and Exchange Commission and the Ontario Securities Commission. Neither earns a higher score but the SEC does somewhat better than the OSC. These are the key findings from this past week s Internet survey of CEOs and business leaders on the COMPAS panel. The weekly business survey is undertaken for Canadian Business magazine under sponsorship of BDO Dunwoody LLP. 2.0. Tough Action Wanted Panelists call for a range of tough action with tougher sentences and stronger protection for whistleblowers at the top, as shown in table 2. They also call for stronger legal liability on external auditors. Panelists calls for such tough measures come at a time when they are losing confidence in the effectiveness of the Sarbanes-Oxley reforms. Threequarters of responding panelists agree that the Sarbanes-Oxley ( SOX ) accounting regulations in the U.S. and SOX-light in Canada will do very little to protect companies against fraud from the inside because dishonest executives 2
will always look for ways of tricking the system. This is a jump from 53% in 2006. Table 2: (Q1) On a 7 point scale, where 7 means agree strongly and 1 the opposite, please indicate how much you agree or disagree with the following opinions about fighting business crime. RANDOMIZE 1 Mean 7 6 5 4 3 2 1 DNK Our courts need to impose tougher sentences on securities criminals. March 2008 5.7 41 23 18 7 4 3 3 1 Much stronger legal protection for internal audit whistleblowers is key. March 2008 5.7 31 29 22 13 3 1 0 1 Putting dishonest executives behind bars is a very effective way of keeping the capitalist system honest and effective. March 2008 5.5 32 27 19 9 6 3 4 0 June 2006 5.6 31 30 20 11 2 4 2 1 1 The preface to the series of questions: Securities regulators have accused Biovail of wrongdoing over a four-year period. This includes: US$8-million in fake revenue and misstated foreign exchange losses in the second quarter of 2003, falsely claiming a truck accident caused poor earnings in the third quarter of 2003, and improperly moving US$47-million in R&D expenses off Biovail's balance sheet and onto a special purpose corporation; while the U.S. SEC accuses founder Eugene Melnyck of improper trades involving Cayman Island trusts, for which he agreed to pay a one million dollar fine to the Ontario Securities Commission last year. Past high profile accusations of wrongdoing included Enron, Worldcom, Tyco, Martha Stewart, and Conrad Black. 3
Mean 7 6 5 4 3 2 1 DNK The Sarbanes-Oxley ( SOX ) accounting regulations in the U.S. and SOX-light in Canada will do very little to protect companies against fraud from the inside because dishonest executives will always look for ways of tricking the system. March 2008 5.4 21 31 23 7 7 6 1 6 June 2006 4.7 9 23 20 17 13 8 2 7 Much stronger legal liability on external auditors is key. March 2008 5.2 20 25 28 14 7 5 1 1 U.S. prosecutors are overzealous in prosecuting executives in order to further their own political careers. March 2008 4.7 23 16 17 13 14 8 6 3 June 2006 4.2 13 16 15 14 14 16 9 3 Media and legal hype about corporate scandals often does more harm than good, shrinking the assets of innocent investors. March 2008 4.5 16 16 20 16 10 14 7 2 June 2006 4.2 16 11 21 15 11 13 12 2 The following verbatims provide a nuanced sense of respondent opinion: A crook is a crook - in fact, give me a good "honest" crook who uses a gun any day over these "wolves in sheep s clothing". They deserve absolutely everything that they get, because not only do they steal, they steal from the basis on trust; or they betray you and steal from you all at the same time, In short, they are not only crooks, they are lying crooks. 4
Anyone remember Bre-X? Canada should have tougher securities laws and jail sentences for offenders. I operate a Canadian division of an NYSE/SEC listed company and all SOX has done for us is raise our cost of internal controls and audits with little real value to the business. What's happened is costs have been passed on to customers or less profits to shareholders. No one has figured out an effective way to legislate morality or ethics yet, so I doubt more stringent controls will stop these events. Leopards can't change their stripes. It is not a matter of imposing stronger sentences for the most part it is really a matter of imposing "any sentences." The saying is that if you have to commit white collar crime, do it in Canada. The Canadian judicial system has been very lenient with those perpetrating corporate white collar crime. There is a need to ensure executives are held accountable for their actions, and that there are suitable repercussions for misconduct. By extension, why is it that Canadian corporations continue to seek out board members and/or executives as fiduciaries who have admitted to or have been demonstrated to have been culpable in corporate fraud/misconduct? The cost of governance compliance is a huge burden on honest companies. The legal system has enough teeth to deal with corporate criminals once they've been caught, where we may need more resources is in the police investigation of potentially illegal activities. The SOX rules are an over-reaction to past scandals and for the most part just penalize good ethical companies. If an 5
individual is dishonest and unethical they will find a way around the SOX rules. The U.S. it seems is twice as aggressive [at] protecting investors and taking action against corrupt managers as compared to Canada. 3.0. Canadian and U.S. Regulatory Regimes Rated Both Canadian laws and the OSC are perceived as somewhat less effective than U.S. securities laws and the SEC, as shown in table 3. Table 3: (Q2) With respect to protecting investors, what performance score on a 100 point school report-card type scale would you give RANDOMIZE MAR 2008 DEC 2007 The U.S. Securities and Exchange Commission 61 N/A U.S. securities laws 60 N/A Canada s securities laws 52 57 The Ontario Securities Commission 50 53 4.0. Methodology The COMPAS web-survey of CEOs and leaders of small, medium, and large corporations was conducted March 26-28, 2008. Respondents constitute an essentially hand-picked panel with a higher numerical representation of small and medium-sized firms. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than 6
comparably sized general public studies. In studies of the general public, surveys of 127 are deemed accurate to within approximate 8.7 percentage points 19 times out of 20. The principal and co-investigator on this study are Conrad Winn, Ph.D. and Tamara Gottlieb. 7