SOX and the Prevention of Fraud (Take 3)

SOX doesn't prevent fraud?  So claim some of the persons most hostile to the Act.  As Larry Ribstein has firmly concluded, "SOX was not designed to stop fraud at the top."  Who apparently agrees with this?  Stephen Bainbridge, possibly.  The Conglomerate, apparently.  

The data, however, suggests otherwise.  First there was the data from the Stanford Securities Class Action Web Site showing a decline in the number of fraud suits brought in 2006.  Then there was similar data produced by PriceWaterhouse.  These are discussed in the post here.  Similarly, observations at the trial of Joe Nacchio suggested otherwise. 

The latest data comes from Deloitte.  The Deloitte Forensic Center has studied a different data set, SEC cases.  The study found that the number of cases based upon financial statement fraud have declined steadily since 2003.  So did the number of "fraud schemes" identified in the SEC releases.

It is of course the case that this data in isolation would not tell us a great deal about the incidents of fraud.  Cases brought by the SEC may or may not reflect the trends within public companies.  Nonetheless, the data, when coupled with the other sources, suggests a decline in the incidents of fraud, at least when measured by the number of private class action or SEC enforcement suits filed.  There is no doubt that some of the decline is likely explained by the record high stock market among other factors.  Nonetheless, the data, and common sense, suggest that when more people are involved in the financial disclosure process (disclosure committees, auditors checking internal controls, independent audit committees containing financial experts), those at the top have a harder time engaging in, and maintaining, financial fraud.

We await a discussion of these varied sources of data on the other corporate governance blogs.