The problems at commodities and futures broker Refco Inc. that emerged over the past week made for another interesting case study in the debate over the necessity of the internal control provisions contained in the Sarbanes-Oxley Act.

Refco, a brokerage firm, just went public this summer, raising $583 million in its initial public offering. The company saw its stock price surge through the following weeks -- major investors soon included a couple of the biggest pension funds in the country and the biggest shareholder in the company, Thomas H. Lee Partners LLC, saw their initial capital outlay nearly double.

But last week, the boom times ended abruptly. Refco disclosed its chairman and chief executive, Phillip R. Bennett, was being forced out, rumor leaked that the Securities and Exchange Commission was launching an investigation and word spread of the existence of a sister company allegedly saddled with more than $430 million of Refco's debts stretching back to the 1990s. The stock price freefell over the span of seven days after a trading half was lifted, erasing about $2 billion in market capitalization. The humbled brokerage firm sold off its remaining viable line of business (a regulated futures-trading unit) and entered into one of the largest Chapter 11 bankruptcies in history. Meanwhile, Refco's auditor, Grant Thornton LLC, found itself the target of an investor lawsuit that's sure to seek class-action status in the coming weeks.

Former chief executive Bennett, whose has been charged with securities fraud with a bond for release set at $50 million, hasn't offered up much by way of public comment, but somewhere along Refco's road to becoming a public entity, there was some shady accounting practices. The bad debt, made to look like a receivable on Refco's balance sheets, is unlikely to be repaid.

For detractors of Sarbanes-Oxley, Refco can serve as a prime example that shady business transactions and dishonest executives can always trump internal controls. The problem of C-level executives who use their business prowess for deceit, don't care about building a strong foundation for their company and upholding its reputation. No amount of documentation is going to overcome that.

Champions of Sarbanes-Oxley (and likely lawyers for auditor Grant Thornton) will point out that the required internal controls were not yet in place at Refco. Details are now emerging that Refco, which planned to achieve SOX compliance by the February 2007 deadline, was only in the process of evaluating, testing and implementing its internal controls. Auditors at Grant Thornton had not yet been able to attest to those controls.

While investors may be out a significant chunk of change, the company only got to live the high life of a stock market darling for a few months, not years Perhaps just the very fact that work was going on in order to implement those controls is how the problems was discovered in the first place.

Too often, it seems the most interesting part of the story is a detail never clearly brought to light in the aftermath of a good accounting scandal -- how'd they get caught? Those details are casually reduced down to boiler point language in an SEC filing, that the discovery of "accounting irregularities" led to further internal investigations. When the occasional whistleblower does make it into the spotlight, things can go either way depending on the circumstance -- whistlerblowers at Enron and WorldCom were named "People of the Year" by Time in 2002; in the case of HealthSouth Inc.'s former chief financial officer Weston Smith was sentenced to 27 months in prison, by far the stiffest sentence of any executive brought to trial.

So what's the takeaway from all of this? Maybe it's just that after three years, what exactly Sarbanes-Oxley means for ensuring corporate governance is still up in the air, as yet another scandal breaks and more questions are sure to arise over the candor of the individuals in charge at Refco. Integrity is a tricky thing to ensure in a company's bottom line, no matter how much documentation is required.

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