About Jared Wade

Jared Wade is a freelance writer and former editor of the Risk Management Monitor and senior editor of Risk Management magazine. You can find more of his writing at JaredWade.com.

The Supreme Court’s Sarbanes-Oxley Ruling in Plain English

If you’re like me, you’re not that smart. And when you read complicated articles like this New York Times breakdown of Monday’s Supreme Court decision involving Sarbanes-Oxley, your head starts to hurt a little. Wait? What exactly happened? Will this change anything for companies?

Fortunately, Anand Rao, partner at Diamond Management & Technology Consultants, is an expert in the history of and the controversy surrounding Sarbanes-Oxley and can clearly explain exactly what you need to know about the Supreme Court’s ruling.

supreme court

Jared: What was the main controversy about Sarbanes-Oxley that the Supreme Court was ruling on?

Rao: Sarbanes-Oxley was passed in 2002 as a response to some of the accounting issues related to Enron and Worldcom. The law created the Public Company Accounting Oversight Board (PCAOB) to regulate the accounting industry. The five board members were accounting specialists appointed by the Securities and Exchange Commission. The SEC could remove board members if there was a good cause to do so.

Free Enterprise Fund, a nonprofit advocacy group, along with a small Nevada accounting firm Beckstead and Watts challenged the creation of the PCAOB in Sarbanes Oxley, specifying that the removal of board members by the commission for just cause contravened the separation of powers in the U.S. Constitution as it gave wide-ranging executive power to board members without subjecting them to presidential control.

Jared: Why did the Court rule against this structural set-up?

Rao: With a 5-4 majority ruling, the Supreme Court declared that the act “not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists.” It claimed that “by granting the Board executive power without the Executive’s oversight, this Act subverts the President’s ability to ensure that the laws are faithfully executed.” To remedy this situation the Supreme Court has ruled that the SEC now may remove the Board members at will, without the need to demonstrate a good cause.

However, the Supreme Court made it very clear that this had no bearing on the remaining aspects of the Sarbanes Oxley Act by stating that the “unconstitutional tenure provisions are severable from the remainder of the statue.” So for all practical purposes, there will be no change to the way PCAOB operates.

Jared: Will the change have any effect on companies? How about risk and compliance employees? Insurance companies?

Rao: Although the Supreme Court ruling impacts how board members may be removed, it has no impact on what public companies need to do. All public companies will continue to be subject to the same requirements as before under the Sarbanes Oxley Act and there will be no change to the operational functioning of the public companies. Similarly, there will be no impact to risk and compliance employees or insurance companies – it’s just a re-validation that the act is here to stay.

Safety, Economics and Rap

As someone who actually listens to hip hop regularly, it is usually painful to see PSAs, commercials or really any organizational attempt to use rap as a method to appeal to the younger generations. The whole presentation and execution is usually just really, really poorly done and ends up just embarrassing the creators and, ironically, making them look old and out of touch in the process.

But once in a while, I actually come across a decent one — like this “Safety Rap” made by Dominion Virginia Power that I just found at the Risk and Safety Blog. The beat is very Dr. Dre and the hook is sort of catchy. Nice job.

This economic theory battle rap featuring the lyrical stylings of John Maynard Keynes and F. A. Hayekand F. A. Hayek is pretty good, too. Hayek can actually flow. Who knew?

7 Potential Disasters Worse than the BP Spill

If forecasters were attempting to gauge the worst disasters that could happen, a major oil spill gushing for some 90-plus days into the Gulf of Mexico would probably have rated fairly high. By some estimates, this whole mess will cost BP around $60 billion. (Other, more conservative estimates have it costing closer to 1/10th that number.)

But while this might seem like the one of the worst things that possibly could happen on American soil, it isn’t. Forbes, in its latest issue, has a list of seven other incidents that could be even more catastrophic. Here’s a recap of their list.

nuclear plant

1. Nuclear Meltdown

Depending on the severity and location, a disaster at a major plant could wreak unfathomable carnage. Writes Forbes:

The industry has $19 billion set aside to pay for accidents. But what would a Chernobyl-type release of radioactive gases into the air do to death rates and the habitability of some large area? The Institute for Policy Studies says a spent-fuel fire could cost hundreds of billions of dollars.

While nuclear energy very may well be a good option in a country (rhetorically) trying to slow climate change and wean itself off of foreign oil, the possibility of a meltdown can be sobering — even when you realize that it has thus far been very effective and safe in some parts of the world for the past several decades.

gasland

2. Liquefied Natural Gas Explosion

With supertankers out there carrying some 100,000 tons of liquid methane, the explosive potential of a single ship is equivalent to the blast that would occur if two billion sticks of dynamite went off. The last major tanker explosion killed 128 people in Cleveland in 1944. The next one? Well, it would likely be much, much worse.

And anyone who has seen the controversial — and terrifying — documentary Gasland knows that there may be other, more subtle risks involved in natural gas extraction that deserve the attention of regulators and the industry.

Bhopal Union Carbide

3. Chemical Plant Explosion

The Bhopal disaster was the worst industrial accident in history. Recently — and very controversially — seven involved officials were sentenced to two years in prison and fined $2,000 for negligence more than 25 years after the 1984 Union Carbide leak of poisonous gases (mostly methyl isocyanate) that killed some 15,000 people directly (and up to 23,000 by some estimates) while also leaving another 500,000 with injuries and ailments related to exposure. Human rights groups, victims and Bhopal locals were outraged at the leniency given, particularly since proper clean-up efforts were never conducted and that the $470 million settlement paid by Union Carbide in 1989 now looks laughable by any standard.

If something like that were to occur today, it’s almost impossible to predict how much such a politically charged incident with so many casualties would end up costing. But Forbes lists a hypothetical plant explosion in Houston that kills 600 people as totaling $20 billion, according to Risk Management Solutions.

hoover dam

4. Dam Failure

I have never done any research into a major dam failure, but it sure doesn’t sound good at all.

One of the worst scenarios would be a cascading series of failures in the Columbia River Basin of the Pacific Northwest, where the dams start in Canada, pass the Department of Energy’s Hanford Reservation, with its 50 million gallons of plutonium-laced waste, and include the 6.8-gigawatt Grand Coulee Dam, the largest hydroelectric plant in the U.S. The odds of such a catastrophe are extremely low, but the costs would quickly exceed the $85 billion tab for cleaning up Hanford.

Hopefully, someone is looking into lowering the threat for all “one-third of the 80,000” U.S. dams that FEMA claims pose at least a “high” risk.

long island express 1938

5. Category 5 Hurricane Hits New York

A few years ago, I wrote an in-depth feature article for Risk Management about the hurricane potential for New York. Honestly, I’m not really sure a cat 5 hitting NYC is even close to likely over, say, the next 100 years or so, even if ocean sea-surface temperatures continue to rise to alarming extents. But a category 3 storm hitting the area is not only likely — it’s inevitable.

In 1938, the “Long Island Express” raced up the Atlantic coast at a breakneck pace, inundating Long Island, Connecticut and, particularly, Providence, Rhode Island, with floodwaters and storm surge that, while devastating even back then when the areas were sparsely developed, would lead to well over a $100 billion in losses today. The loss of life in this densely populated, frightening unprepared region could be even worse.

Here’s an excerpt from the piece I wrote about “The Northeast Unthinkable”:

Given its geography, population density and general affluence, New York’s Long Island in particular faces a tremendous risk. When the Long Island Express hit in 1938, it was eastern Suffolk County that endured the greatest winds, storm surge and flooding, resulting in approximately 50 deaths. According to 1940 census data, the population at the time was just under 200,000. Today, nearly 1.5 million people live in Suffolk. And another 1.34 million reside in the neighboring Nassau County compared to the roughly 400,000 there in 1938.

“What really drives significant catastrophe losses is a major event hitting a major metropolitan area,” says Clark. “Otherwise, you can have a lot of activity, but you’re not going to have a lot of losses. It’s those chance occurrences where you have major events hit Galveston, Houston, New Orleans, Tampa, Miami, the Mid-Atlantic or the Northeast—those are the real areas where you’re going to get the mega-catastrophes.”

According to a study by AIR, there is some $4.4 trillion worth of commercial exposure and $3.4 trillion in residential property from New Jersey to Maine. And with almost a million households in Long Island alone, this 1,200-square-mile strip of land accounts for over $1 trillion in combined commercial and residential exposure.

It is with this boom in population and wealth in mind that Roger Pielke, Jr., director of the Center for Science and Technology Policy Research at Colorado State University, set out to formulate new projections for the scale of destruction a replay of the Great New England Hurricane would cause now.

In today’s dollars, the 1938 storm caused over $4 billion in insured losses alone. But this adjusted figure only accounts for the elevated currency values and ignores 68 years of regional growth in population, infrastructure, industry and commercial enterprise. “You can’t adjust for the damages that never occurred,” says Pielke.

As someone who lives in New York, this — even more so than terrorism — is the possible disaster that disturbs me the most, in part, because I believe there is actually some sort of official developed to react to the next terrorist attack. I doubt there is any comprehensive, inter-county plan at all that will be effective in the days leading up to an following the category 3 hurricane that will someday hit.

sydney opera house

6. Ferry Capsizing

This one honestly sounds less plausible as a “worse than BP disaster” for the United States than it does elsewhere, but here’s what Forbes wrote:

Ferryboats and riverboats are extremely stable because of their wide, flat design, but they also often travel in dangerous waterways with lots of passengers. As many as 4,300 passengers and crew died after the Philippine ferry MV Dona Paz collided with a tanker, caught fire and sank in 1987.

I suppose that could happen anywhere, but it seems less likely than the others listed in the developed world — especially when compared to this last, but certainly not least, one…

volcano

7. Supervolcano

Forbes quotes a Lloyd’s report that volcanoes pose an $85 billion risk “including disruption and air travel” and includes Mount Vesuvius in Italy and Mount Rainier outside of Seattle as two of the scariest locations for a major eruption.

$85 billion sure is a lot of money, but anyone who has seen the History Channel’s “Mega Disasters” episode on what will happen when the Yellowstone Caldera blows probably has worse fears on their minds. Were this thing to erupt, the only adjusters and insurers left to tally the total will likely be roaches and reptiles.

You’ve been warned.

Mitigating Financial Risk With Tech — Not Regulation

This weekend, the leaders of the world’s 20 largest economies will meet in Toronto to discuss international financial reforms that will — hopefully — help prevent the type of global recession that occurred after the subprime crisis. Particularly on the heels of the Congressional reforms just enacted in Washington, the G-20 discussions will mostly focus on regulation.

Some feel as though a major overhaul is not altogether necessary, however.

online pharmacy spiriva with best prices today in the USA

Some think that technology and greater access to better information can provide all the risk management the financial sector needs. Kevin Heffron, deputy managing director of Trayport, Ltd.

online pharmacy seroquel with best prices today in the USA

in London is among them. His company provides electronic trading systems to brokers who trade equities, currencies and commodities, and he recently sat down to share his perspective.

tech financial risk

Jared: This weekend in Toronto, G20 leaders will discuss a whole host of financial sector regulation proposals. Generally, their goal will to be develop some standards and rules that will lessen risks – the risk of over-leveraging, the risk of contagion, the risk complicated trading. What measures do you think are most necessary, specifically in the trading and exchanges world?

online pharmacy sildalis with best prices today in the USA

Heffron: A proposal to move all trades to exchanges is among the reforms being considered in Toronto. We believe that this is an overreaction to the events and excesses of the recent past and will not necessarily lead to reducing risk. Eliminating OTC trading is not the solution, doing so consolidates trading into less flexible silos and results in less democratic markets. We believe that regulated, well-organized and transparent OTC electronic trading platforms with connections to a variety of centralized clearing counterparties, when appropriate, can be an equally effective tool to reach the G20’s goals to mitigate risk. We only have to think about the recent ‘’Flash Crash’’ to know that the exchange only model has serious flaws.

The key to mitigating risk in the OTC sector, is to broaden access to information and transparency. This approach can achieve the same regulatory goals now being sought by the G20 and the U.S, Congress without requiring the markets to restructure themselves in ways that might have unintended consequences — including potential losses of liquidity leading to higher and more volatile pricing.

Jared: So the best way to lower these risks is not through regulation, but through better information? Through better technology and more real-time, widely available information about trades?

Heffron: We support regulatory efforts, however we believe all the regulation in the world won’t reduce risk unless the information is available and accurate. It comes down to the reliability of the information — no amount of regulation can overcome the lack of accurate data or intentional manipulation. Access to technology simply focuses more eyes on any nascent problems in the financial markets.

We are developing technical solutions that increase opportunities for market users and their regulators to assess risk. Post-trade, we are providing straight-through processing to a variety of clearing houses, price reconciliation and confirmation services so you know the trade has been cleared without risk. Together with calling for a repository of pricing information, we are turning to technology to achieve the goals of the G20 Summit.

Jared: Is it a matter of the public sector being under-educated to provide proper regulation?

Heffron: While most of the non-investment community — including US Congressional leaders  — believes the world would be better off if all assets were to trade on exchanges, it is important to point out some key facts. For instance, there is a large electronic OTC commodities market operating in Europe that sees some of the world’s largest deals go through hybrid trading screens with counterparties being put together by interdealer brokers. This network provides risk management, straight-through processing, clearing capabilities, counterparty credit management, real-time reporting and transparency. If one were to look at this operation and its components, it would look very much like an exchange. In short we are bringing the same level of trading technology and risk reduction to the OTC community.

Jared: Can this concept of “more information, less risk” work in other areas as well? Both in and outside the financial sector?

Heffron: Here is an example. Large international energy companies, whose primary business is to produce and distribute electricity, trade electric power all the time. They are constantly going to the open market to manage their risks. In order to optimize this external market activity, they need to have a full and timely understanding of the risk profiles of the various operating units of their own enterprises. This requires a top-quality internal risk management system allowing them to optimize internally before executing external market transactions. Simply put, lowering the cost and increasing access to real-time data reduces risk across every industrial sector and at every level.