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Is SOX Working?

Home Depot will be the test case.

Ventana QuickTake™

Take
Home Depot is the subject of an informal investigation by the SEC because of allegations the company was overstating earnings by routinely inflating “Return to Vendor” charges. Retailers assess these charges to suppliers when they return goods damaged in transit, for example. While Ventana Research does not believe the Sarbanes-Oxley Act (SOX) will always prevent major frauds perpetrated by a few senior executives, a company’s internal controls should be able to either prevent or detect these sorts of shenanigans, especially if (as alleged by a former employee) they are widespread.

If, indeed, the company’s controls were faulty and yet passed review by internal and external auditors, we expect an outcry — particularly since for several years Home Depot has trumpeted its standards of corporate governance. The fraud alleged at Home Depot is precisely the kind that SOX was supposed to prevent. If it did not do so in this case, it raises serious questions about the effectiveness of a law that has cost public companies in the United States billions of dollars to implement. We also think the opposite is true. If it turns out that the claim is specious, then (depending on the circumstances) Home Depot will be able to demonstrate the value of its internal control systems by showing why the charge was unfounded from the start.

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