With an argument used historically by the Left, Part I explains how financial moral panic was the zeitgeist for the Act. In a financial moral panic, false cause obscures a more complete understanding of cause-in-fact by blaming what are really routine market losses on individuals deemed to have acted in exceptionally opportunistic ways. The Act's legislative history shows how financiers came to be viewed as folk devils and financial predators. Framed this way, their misconduct would distract investors and others from ambient economic anxieties about the ongoing market risk of unrealized gain in financial assets, an anxiety made more acute during a price bubble. Unfortunately, structural economic insecurity transcends individual misconduct. Indeed, this insecurity is intrinsic to our economic system.
Turning from cultural studies to financial reporting, Part II explains, again, why the balance sheet no longer reflects a firm's financial position. The aim here is to provide a critical counterpoint to the prevailing view that financiers at Enron and other firms destroyed "real" shareholder value, often with bogus deals involving off-balance sheet arrangements. Indeed, managers' fiduciary duties to shareholders may have obliged these managers to use such arrangements (and, indeed, may continue to do so) for the sake of increasing residual return. To show how better cash flow reporting may have stemmed these losses, this Article discusses the statement of cash flows, a relative late-comer to the financial reporting model. This is part of a plea for reporting a firm's effective capital structure to improve the overall usefulness of public reports to financial reporting's diverse constituencies, i.e., investors, financial regulators, managers, auditors, and information intermediaries. More granular disclosure would benefit investors (even though it might increase firms' reported volatility) by reminding investors of the unavoidable uncertainty of future financial states of the world. Part III then discusses the SEC's OBS disclosure rule. In truth, despite its substantial limitations, the rule contributes to the evolution of financial reporting because the rule makes firms say more about their effective capital structure. But more is needed.
Part IV recommends some technical improvements to these technical problems. First, the SEC should require firms to disclose a transparency ratio on the balance sheet which suggests the magnitude of OBS items not otherwise disclosed. Revealing the fact of nondisclosure would seem to be a corollary of disclosure. Such a financial transparency ratio would reduce the information gap between firm insiders and outsiders without too much reporting "noise." Second, the SEC should require the reporting of more firm-level information about cash flow to help market intermediaries further disaggregate the firm's cash flows into tradable units. The SEC could do this through the statement of cash flows.29 If adopted, these suggestions would increase transparency, enabling traders and other financial intermediaries to further complete funding markets. Also, the SEC should institutionalize market-wide surveillance of effective capital structure to increase the agency's in-house knowledge about funding trends. So informed, the SEC could better mitigate future financial moral panics by responding to fear with facts. Part V points out that there will always be an Enron and that, therefore, transactional law faculty should proselytize students (and seek curricular rents from deans) in order to increase the transactional and financial sophistication of law students, who could then better inject sobriety into future panics.
Jose M. Gabilondo,
Financial Moral Panic! Sarbanes-Oxley, Financier Folk Devils, and Off-Balance Sheet Arrangement
, 36 Seton Hall L. Rev. 781
Available at: http://ecollections.law.fiu.edu/faculty_publications/89