1. Neoliberalism, deregulation and
Sarbanes-Oxley
The legitimation of a failed corporate
governance model
Barbara D. Merino and Alan G. Mayper
University of North Texas, Denton, Texas, USA, and
Thomas D. Tolleson
Texas Wesleyan University, Fort Worth, Texas, USA
Abstract
Purpose – The paper aims to use a neoliberal ideology to frame an analysis of how the power of ideas
can be used to maintain a failed corporate governance model based on stockholder primacy.
Design/methodology/approach – The paper employs the concept of corporate hegemony to
provide an understanding of the conditioning environment in the USA in the 1990s. It examines the
tactics that neoliberals used to gain consensus for their ideology and to skillfully deflect criticism in
the face of significant policy failures that have had a global impact.
Findings – The paper highlights the power of ideology to create a desired outcome. It finds that
Sarbanes-Oxley represented a neoliberal victory in that it legitimated shareholder primacy and
continued use of a failed corporate governance model.
Practical implications – Sarbanes-Oxley did not address the systemic problems associated with
deregulation; it will not resolve the basic problem of how to prevent corporate malfeasance in an
economic environment that rewards arbitrage capitalism, high risk and a focus on short-term profits.
Originality/value – If shareholder primacy weakens accountability, as the paper suggests, then
accounting researchers need to develop models that focus on deregulation rather than on regulatory
capture and the use of state power to promote private interests. Accounting academics need to assume
the role of public intellectuals and to reject Milton Friedman’s focus on negative freedom as the sole
objective of economic activity and examine economic well being in terms of positive freedom.
Keywords Corporate governance, Shareholders, United States of America
Paper type Conceptual paper
Introduction
Neoliberalism has been called “the defining political economic paradigm of our lives; it
refers to the policies and processes by which a relative handful of private interests is
permitted to control as much as possible of social life” (McChesney, 1999, p. 1). While
couched in the language of classical liberalism, neoliberalism should be not viewed as a
simple extension of either classical or neoclassical economic theories. It is much more
draconic. Classical liberal theorists stressed the need for competitive markets and
posited a minimum role for government, but they recognized that markets were amoral
and some government oversight was needed. Neoliberals extol one aspect of Adam
Smith’s theory, i.e. free market competition, but, as George (1999) notes, they omit the
moral aspects of Smith’s treatise. Michalitsch (2004, p. 4) concluded that Hayek and his
neoliberal followers limit the functions of the state “to preventing violence and deceit,
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0951-3574.htm
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Received October 2008
Revised 27 July 2009
24 November 2009
Accepted 10 February 2010
Accounting, Auditing &
Accountability Journal
Vol. 23 No. 6, 2010
pp. 774-792
q Emerald Group Publishing Limited
0951-3574
DOI 10.1108/09513571011065871

2. protecting property, assuring observance of contracts and recognizing equal rights for
all individuals to produce and sell in any quantity”.
Neoliberalism fosters corporate hegemony since it treats the market as an
omnipotent God that should direct the fate of human beings. Critical theorists of all
persuasions, e.g. Gramsci (1971), Dugger (1989), Polanyi (1944), have long warned of
the dangers of allowing economic interests to dictate societal norms. Polanyi (1944,
p. 73) argued that “to allow the market mechanism to be sole director of the fate of
human beings and their natural environment would result in the demolition of
society”[1]. He erroneously predicted after the Second World War that the Keynesian
revolution had permanently ended the domination of society by the economic elite.
There are basic contradictions in the neoliberal message that unregulated markets
will lead to the greater social good. But, the failure of neoliberal policies and the related
frequent corporate crises have not had an impact on neoliberal rhetoric. The savings and
loan crisis, the stock market crash of 1987, the corporate scandals of the 1990s and early
2000s, abusive tax shelters, use of new financial instruments such as credit default
swaps in high risk ventures, and excess leverage all served to create enormous pain for
the global economy. Tabb (2003, p. 25) concluded that neoliberalism “has succeeded as
the class project of capital. In this, its unannounced goal, it has increased the dominance
of transnational corporations, international financiers and sectors of local elites”.
This paper builds on the work of Soederberg (2008), Stein (2008) and Cooper (2005).
Each of these studies considered the effect of neoliberal policies from a critical
perspective. Our study adds to these previous works by linking neoliberalism, agency
theory and the regulatory aspects of Sarbanes-Oxley (S-OX) to the shareholder value
concept of corporate governance. One objective of our paper is to create a better
understanding of the tactics that neoliberals used to gain consensus for their ideology
and to skillfully deflect criticism of deregulatory policies that led to a US market-driven
global recession in 2008/2009. A second objective is to make accounting academic
researchers aware of the need for more realistic research frameworks to address the
adequacy of the shareholder value corporate governance model in a global economy. In
short, we are asking accounting academics to serve as public intellectuals, critical
commentators who unmask neoliberal myths, examine the socioeconomic impact of
deregulatory policies and assess the effect of continued reliance on the traditional
corporate governance model on the lives of ordinary people.
Outline of the study
The paper is organized as follows. In the first section, we describe the relationship
between neoliberalism, corporate self-governance and global corporate hegemony. In
the next section, we discuss how neoliberals used various types of power to promote
their deregulatory agenda. In the following section, we appraise the role of profit in
neoliberal ideology and the incentives this created for corporate malfeasance. In the
next section, we examine the neoliberal and media responses to the corporate scandals
in order to demonstrate that despite strong rhetoric, reforms centered on the traditional
shareholder value corporate governance model. In the penultimate section, we link the
influence of neoliberal thought to the legislative and regulatory responses to the
scandals and discuss how the Securities and Exchange Commission used its
philosophy of corporate self-governance to apply the key provisions of S-OX to the
corporate environment. We concur with Soederberg (2008) that such an approach
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3. preserves the status quo, i.e. the traditional corporate governance model, leading us to
question if S-OX will prevent future corporate malfeasance. In our conclusion, we call
for accounting researchers to assume the role of public intellectuals and to develop new
concepts to measure the effectiveness of corporate operations and to debunk the
neoliberal notion that maximization of “pecuniary” profit will lead to maximization of
social welfare.
A return to the road to serfdom
Hayek (1944) traced the antecedents of neoliberalism in his book The Road to Serfdom.
The seeds of Hayek’s neoliberal message found fertile ground in the USA at the
University of Chicago. Milton Friedman, considered the father of the Chicago School of
Economics, became the leading advocate of Hayek’s philosophy in the USA. Friedman’s
(1953, 1981) works advocated a laissez-faire approach by government to the marketplace.
Ronald Reagan’s election in 1980 provided neoliberalism with a charismatic and effective
spokesman in the highest office in the USA. With the demise of communism, neoliberals
waged an effective media campaign to promote “free market” competition and
deregulation as essential to the nation’s well being. Pointing to a similar phenomenon in
the UK, George (1999, p. 1) argued that “the central value of Thatcher’s doctrine and of
neoliberalism itself is the notion of competition – competition between nations, regions,
firms and of course between individuals”.
Neoliberals envisioned a world made better by competition. They argued that
competitive forces:
.
allocate all societal resources efficiently; and
. result in a morally superior form of political economy.
Therefore, they suggested the government could limit its role to preserving order,
protecting individual freedoms and enforcing contracts. We view neoliberalism as an
instrumental discourse that mystifies, justifies, naturalizes and universalizes
inequality and elite economic status. Giroux (2005) depicted neoliberalism as
wedded to the belief that the “market should be the organizing principle for all political,
social, and economic decisions, neoliberalism wages an incessant attack on democracy,
public goods, and non-commodified values”. Everything is for sale; public lands are
privatized, airwaves are handed to corporate interests, the environment is polluted, all
in the name of profit. We concur with Giroux’s (2005, p. 2) scathing indictment of
neoliberalism as a “virulent and brutal form of market capitalism”.
Neoliberalism can be viewed as a return to a primitive form of individualism. It is
reflective of the Social Darwinists’ message, popular at the end of the nineteenth century.
Social Darwinists viewed Nature as exercising an “invisible hand” that ensured the
survival of the fittest. Neoliberals repackaged that message and sold Economic
Darwinism, survival of the wealthiest, as “natural” at the end of the twentieth century[2].
Klein (2007, p. 56) denounced Milton Friedman for arguing that government “must
remove all rules and regulations standing in the way of the accumulation of profits”.
Accounting agency or positive theorists accept Economic Darwinism in that they
depict the free market as inviolable and a mechanism that promotes both economic and
social well being. Positive Accounting Theory mirrors the Chicago School of
economics. Contracting enables shareholders to regain power and become the pivotal
factor to ensure the traditional corporate self-governance model works (Watts and
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4. Zimmerman, 1979; Reiter, 1998). The theory absolves government from responsibility
for ensuring equity among the populace; in fact, to do so would harm society[3].
Neoliberal strategists disseminated this message far and wide, and they succeeded in
creating a hegemonic environment that rendered inequalities invisible and social
welfare questions moot. We define hegemony as a state of being where all sectors of
society appear to be in harmony with those in power and control. It involves a way of
seeing things and convincing people that this particular way of seeing is “natural” and
right. Corporate hegemony results when economic interests become the dominant
interests in a society, and all other independent institutions become means by which to
promote economic interests (Dugger, 1989).
The Italian Marxist philosopher, Antonio Gramsci (1971), described hegemony as
the organization of different social forces under the political, intellectual and moral
leadership of a particular social force and its intellectuals. He used the term hegemony
to reflect manufactured consent which resulted from control of cultural outlets and led
to voluntary subjugation of the non elite classes[4]. Gramsci understood the importance
of ideas in enabling power. Ironically, neoliberals seem to be the only group that
heeded Gramsci’s message that ideas matter. Susan George (1999) succinctly outlined
the strategy that neoliberals have used:
If you can occupy peoples’ heads, their hearts and their hands will follow . . . the ideological
and promotional work of the right has been absolutely brilliant. They have spent hundreds of
millions of dollars, but the result has been worth every penny to them because they have
made neo-liberalism seem as if it were the natural and normal condition of humankind. No
matter how many disasters of all kinds the neo-liberal system has visibly created, no matter
what financial crises it may engender, no matter how many losers and outcasts it may create,
it is still made to seem inevitable, like an act of God, the only possible economic and social
order available to us (George, 1999, p. 3).
Neoliberals have sponsored a cadre of Gramsci’s “organic intellectuals” who have
promoted an ideology that paved the way for the economic elites to exercise power, almost
invisibly. Subjugation has been voluntary. The key to the corporate governance debate is,
and always has been, power. Berle and Means (1932) argued that managers had become
the princes of industry and no effective means existed to control them. The neoliberal
response has been to reposition the shareholder at center stage. Shareholder primacy has
become the mantra that makes the perception of corporate self-governance work. Power
asymmetries between shareholders and managers become moot since neoliberals assume
that contracting will solve agency problems (Jensen and Meckling, 1976; Reberioux, 2007).
They also assume that the relationship between managers and principals occurs on an
“even playing field” and that the “state is neutral and separate from the economy”
(Soederberg, 2008). That is not to say that neoliberals were unaware that power
asymmetries exist. They used various forms of power to gain voluntary acceptance of
financial deregulation and corporate hegemony not only in the USA, but also globally.
Concepts of power
The concept of power has been difficult to operationalize but there has been consensus
that there are three types of power – coercion, agenda setting, and manufactured consent
– with the latter form being the most effective form of power. The corporate elite have
exercised all three types of power since the 1980s, creating an amoral (if not immoral)
environment that facilitated financial reporting abuses and resulted in a spate of scandals.
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5. Coercive power
Dahl (1957) defined coercive power as the ability of one individual to coerce another
into doing something they would not otherwise do. Coercion is the most blatant form of
power but, generally, exercise of coercive power is transparent and can invoke public
criticism. Corporations exercise coercive power whenever they legitimately threaten to
move when a locality demands some form of social benefits, such as higher wages.
Public visibility renders coercive power less appealing than agenda setting or
manufactured consent, and neoliberals prefer to use these less visible means to achieve
their goals.
Agenda setting
Mills (1956) outlined how power elites exercise a more effective and less transparent
form of power through agenda setting. Agenda setters determine which issues will be
discussed and also determine what items to keep off the agenda. Neoliberal strategists
made agenda setting an art form. Political campaign contributions, lobbying and
control of the media affected the public policy agenda. Blyth (2002) pointed out one
reason that neoliberalism became the dominant ideology in the USA in the last quarter
of the twentieth century was because the “business class” united and used money to
promote neoliberal policies. Money talked.
While a complete analysis of the effect that the corporate sector had on bringing
deregulatory legislation to the top of the political agenda in the USA is beyond the
scope of this paper, we do examine the effect of deregulation on three important
groups, accountants, financial analysts, and the media, all of whom theoretically serve
as watchdogs to protect investors and the public interest. Accountants actively lobbied
Congress to reduce their legal liability; the profession donated $7.7 million dollars to
members of Congress in the 1994 election cycle. Congress listened to the profession’s
message, passing the Private Securities Litigation Reform Act (PSLRA) (1995)[5].
Passage of the PSLRA made it less risky for one group of gatekeepers, auditors, to
allow management greater latitude in selecting financial reporting methods as it
limited auditors’ legal liability.
The financial services industry also made enormous political contributions to
members of both parties of Congress in an effort to formally repeal the Glass Steagall
Act, formally known as the Banking Act (US Congress, 1933). After the crash of 1929,
Glass Steagall was passed to separate retail and investment banking in order to curb
financial speculation and protect retail investors. Beginning in the 1980s, Citigroup
spearheaded a long and successful lobbying effort to slowly erode the provisions of
Glass Steagall. By the 1990s, retail banks could earn 25 percent of their revenue from
brokerage activities. The passage of the Financial Services Modernization Act (US
Congress, 1999), better known as the Gramm, Leach, Bliley Act (GLBA), repealed Glass
Steagall and reunited investment and retail banking.
The GLBA allowed another group of gatekeepers, financial analysts, to benefit from
the investment banking activities of their firms. Bonuses were based on all earnings,
and investment banking had a much higher return than retail banking. Analysts had
little incentive to issue earnings warnings to retail investors if their bonuses were
about to benefit from an Initial Public Offering (IPO). Gutting regulation allowed
corporations to bend, if not break, the law and the public’s watchdogs to aid and abet
fraud through indifference to their fiduciary responsibilities. The cynical might say
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6. that corporate generosity paved the way for massive deregulation and that the repeal
of New Deal safeguards created a climate conducive to scandals.
Finally, as is often the case with deregulation, unbridled competition soon led to an
oligopolistic media industry. Five corporations, Bertelsmann, Disney, News Corporation,
Time Warne and Viacom, effectively controlled the US media. The corporate controlled
media rarely mentioned corporate influence on political agenda setting and carried the
standard neoliberal message. Bagdikian (2004, p. 14) examined media messages
concluding that “political slogans advocating a shrinking government and arguments
involving that idea filled the reportorial and commentary agendas of most . . . major
news outlets”. The mass media also sought to control costs by limiting investigative
reporting and focusing on feature and consumer stories (Greenwald and Bernt, 2000).
Events such as the financial industry lobbying efforts to relax Glass Steagall beginning
in 1987 went virtually unreported in the press or among academic accountants[6]. While
neoliberal discourse extolled shareholder primacy, the neoliberal political agenda served
to undermine the fiduciary responsibilities of professional gatekeepers and limit press
coverage of the effects of proposed legislation on consumers, stockholders and citizens.
The media’s bashing of government provided framing for the neoliberal message that
facilitated voluntary acceptance (manufactured consent) of that message.
Manufactured consent – the power of ideas
The third form of power, manufactured consent is the most effective means of exercising
power. Gramsci (1971) noted that establishment of both intellectual and moral hegemony
is a condition of voluntary conquest. More recently, Lukes (1994, p. 23) clarified that
message, asking “Is it not the supreme exercise of power to get another or others to have
desires that you want them to have – that is to secure their compliance by controlling
their thoughts and desires?” Voluntary subjugation will not generate resistance, since
false consciousness renders the iron chains that grip the public mind invisible[7].
Neoliberals effectively used the rhetorical technique called framing to gain manufactured
consent (Lakoff, 2003). One of the most compelling examples of framing is to depict
regressive tax policy as “tax relief”. Relief implies an affliction and a hero (the neoliberal)
to remedy the affliction; thus, although neoliberal tax policies clearly privilege higher
income groups, the public accepts this because “tax relief” is seen as just.
Michalitsch (2004) provided a similar observation about the power of neoliberalism.
She argued that neoliberalism influences the cognitive, emotional and social
dimensions of individuals. At the cognitive level, neoliberalism results in
standardized thinking. The language of neoliberalism fades out real contradictions
and social conflicts. The goal of neoliberal discourse is to achieve voluntary
subordination under dominant conditions, which results in individuals thinking there
is no alternative. Competition becomes legitimated and the “naturalness” and
“unchangeableness” of social conditions produce socially incompetent individuals. The
global standardization of the social dimension manifests itself as the standardization of
thinking (Michalitsch, 2004).
An important ideological justification of deregulation is that it would deliver wealth
and security, globally, if market forces were freed from regulatory intervention. Court
(2003) demonstrated how corporations have shaped public opinion by arguing that
regulation increases consumer costs and destroys business. He noted that corporations
have been so successful with these arguments that the public has accepted
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7. deregulation as a natural process. The Washington Consensus, composed of three
institutions, the World Bank, the International Monetary Fund, and the US Treasury,
instituted lending policies that rewarded developing nations that made structural
changes and penalized those that did not. They carried the neoliberal message that
promoting the special interests of the economic elite was in the general interest of a
society. Citizens are creatures of the economy and politicians are “stewards of the
economy” whose “overarching political mission is to insure that more and more goods
and services are available to be consumed” (Staats, 2004, p. 591). Neoliberalism frames
free markets as natural not self-constructed; markets fire people, markets crash and
human efforts to control markets are doomed to failure (Dugger, 1989; Cooper, 2005).
The role of profit in neoliberal ideology
Neoliberals not only extol individual freedom, but they also suggest that freedom,
individual liberty and well-being cannot be achieved if there is an interference with
market forces. Friedman (1981) stresses one form of freedom, the freedom of an
individual to carry out activities without interference or coercion, a negative form of
freedom. Positive accounting researchers, borrowing from Friedman, depict economic
freedom as a subset of equality of rights in that it is the right to enter into voluntary
contracts. This freedom is the dominant form of freedom in accounting empirical
research. This effectively disregards an equally important freedom, equality of
opportunity, a positive form of freedom (Rawls, 1971). Positive freedom requires
subsidies. There is a tradeoff between negative and positive freedom. Taxes curb some
individuals’ activities, but if those taxes provide a subsidy for education, they create
freedom for others by offering more opportunities from which to choose. We rarely see
discussion of positive freedom in the academic archival literature, but it is critical to
any democracy. This same research stream also fails to examine whether voluntary
contracting is a relevant model if we have structure coercion created by unregulated
markets (Rothschild, 2003).
Neoliberals have powerful think tanks that promote the neoliberal message because
they understand the importance of “training” willing subjects. Aune (2001, pp. 40-1)
examines how neoliberal rhetoric promotes “economic correctness” in order to produce
compliant subjects. He points out that neoliberals adopt a realist perspective; this
allows them to separate power from its textuality and to “craft an aesthetically unified
world of sheer power and constant calculation”[8]. Accounting (pecuniary) profit plays
an important role in legitimating the neoliberal message. The “free” market metaphor
is deeply engrained in Anglo American culture; an autonomous market, constrained
only by competition (the invisible hand), ensures that self-interested profit seeking
maximizes social well being. There is no ambiguity about accounting profit; it is the
end, not a means to an end. Capitalism Magazine, one of the many outlets for a
conservative “think tank,” echoes this message loud and clear:
In an unfettered free market the desire for profit is satisfied by honest, long range, rational
behavior: by innovating, by hiring the best people, by selling quality products and by
providing accurate information to the owners of the corporation – shareholders. As for
short-range managers the market will not tolerate them (Brook and Epstein, 2002, p. 2).
Profits at all (or perhaps any) cost became the mantra of the 1990s (Chomsky, 1999;
Stiglitz, 2003).
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8. During the halcyon days of the 1990s, increasing accounting profits and/or revenues
reinforced the neoliberal message that everyone could be rich. Arthur Levitt (1998),
SEC chairman, warned about managed earnings, but his concerns drew limited
attention from the popular press and threats from Congress to cease and desist[9].
Whether through pension plans or direct investment, the neoliberal message was that
the USA had become an “ownership” society in which all, except the clearly
undeserving who could not compete, would prosper.
Despite neoliberal arguments that the market will not tolerate amoral behavior
when greed is extolled as a virtue and accounting profit is reified, moral lapses can be
expected to occur. Neoliberals argue that Enron, WorldCom, and Health South were
exceptions; given time, the market would have self-corrected. Vidal (2002, p. 2)
suggests that when profit becomes the focal point “then everything else, from product
quality to the workforce, becomes cost to be controlled and reduced. Profits over
people, profits over environment, profits over community, (fake) profits, even, over
shareholders.” He concludes that “only a fool would believe that a lecture in ethics
would trump the incentives of profit over everything else” (Vidal, 2002, p. 2).
Deregulation, promoted by neoliberal ideology, created an environment that fostered
corporate malfeasance and earnings management.
Corporate malfeasance – the deregulatory environment
The Conference Board’s 2003 Commission on Public Trust and Private Enterprise
indicates a perfect confluence of events led to the abuse of the public trust by
corporations[10]. These events include the excessive compensation of top management,
inappropriate corporate governance mechanisms, and the inadequacy of accounting
controls and audits (Conference Board, 2003). We agree that these events provided
some impetus for the malfeasance; however, we concur with Coffee’s (2003) conclusion
that deregulation led to fiduciary neglect from traditional gatekeepers, i.e. external
auditors and financial analysts. Deregulation led not only to individual misconduct but
also to systemic corporate governance problems. Neoliberal rhetoric stressed
stockholder value, but incentives, such as stock options, designed to align
managerial and investor interests, failed. The Conference Board documented the
dramatic increase in the use of stock options in the 1990s which created incentives for
maximize short-term earnings to increase share prices.
Contemporaneously, the Government Accountability Office (GAO – at the time
referred to as the general accounting office) provided the US Senate’s Committee on
Banking, Housing and Urban Affairs with a report on financial restatements (GAO,
2002). The report documented (through estimation) the number of restatements, due to
accounting irregularities, from January 1997 to July 2002. Restatements are associated
with a drop in investor confidence in the market place. The report states that
restatements increased considerably over time; large corporate restatements increased
at a greater rate than that of small listed companies (GAO, 2002). The restatements
clearly had a negative impact on market valuation where hundreds of billion dollars
were lost. In the five-and-a-half-year analysis, the GAO estimates that “one in ten
corporations restated their financial statements due to accounting irregularities” (GAO,
2002, p. 16).
Executive compensation, in the form of stock options, was an enormous incentive
for misbehavior (Coffee, 2003); top managers re-focused the problems onto lower level
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9. managers, primarily non-US middle managers; tone at the top or ethics reform was not
considered; auditors, in some of the cases may have been misled, but in other cases
they appeared to be asleep at the switch. Jensen and Meckling (1976) promoted stock
options as a means of reconciling shareholder and managerial interests and increasing
shareholder value. Archival research, based on agency theory, proliferated throughout
the last quarter of the twentieth century and has spread globally. However, at the turn
of this century, critics, including Jensen (2001, p. 3), concluded that “typical executive
stock options are not structured properly and, as a result, reward managers for taking
actions that destroy value”. Stock options provided a means of redistribution of
corporate wealth to managers, and the costs were borne by all other societal groups,
labor, consumers, taxpayers and shareholders.
Ball (2009) disagrees with the above assessment. He argues that stock options,
conflict of interests of fiduciaries or financial deregulation were not major contributors
to the corporate scandals. He concludes markets worked “surprisingly well in detecting
but not preventing the problem” and does not recommend change (Ball, 2009, p. 323).
We strongly disagree with Ball that it is sufficient to employ a market system that
detects but does not prevent corporate malfeasance. Ball’s position supports Cooper’s
(2005) argument that the US environment has become hostile to public intellectuals
who challenge the status quo.
The neoliberal responses to corporate scandals
Conrad (2004) examined neoliberal rhetorical responses to the corporate scandals and
found that the reaction occurred in two stages. The first stage involved symbolic
placation of an outraged public. Once it became clear the scandal could not be denied,
both politicians and business leaders joined the public in expressing their outrage and
held public hearings. During those public hearings, neoliberals began to develop
rhetorical strategies to limit damage. One of the first moves was to label each scandal a
crisis. The crisis label has a therapeutic effect, it calms emotions, but more importantly
it delays the need for policy reforms.
The second rhetorical stage seeks to narrow the definition of victims and to narrow
the problem from one of governance to a more tractable issue, such as accounting. The
neoliberal response first sought to narrow victims to ownership interests, i.e. outside
investors or employee investors, and to individualize moral lapses that occurred
(Conrad, 2004). The employee as employee disappears from the scene and attention is
diverted from any systemic failure.
Once the moral lapses had been individualized, then the “few bad apples”
explanation becomes predominant (Conrad, 2004, p. 316). It should be noted that the
response in the academic community, the rediscovery of the need to teach ethics,
perpetuates the bad apple syndrome. If the crisis stems from individual bad behavior
rather than from corrupt incentives or a corrupt system, then criminal sanctions or
whistle blowing protection provide viable solutions.
Similarly, defining the problem of corporate misbehavior as an “accounting crisis”
rather than a crisis of corporate governance also suits the neoliberal agenda very well.
It, too, diverts attention from corporate governance and systemic failures and switches
the debate to arcane auditing and accounting issues. Cornehls (2004) documents the
trend in the press to individualize blame for the current scandals, placing the blame on
a handful of rogues, executives, board of directors, audit firms, financial analysts, etc.
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10. Historically, accounting issues have not generated public fervor as such issues appear
to be “mere” technical problems to be solved by the experts[11].
The media response
Williams (2003) investigated media reports associated with the corporate scandals and
found those accounts contained two basic discourses: the discourse of attribution and
the discourse of recovery. Attribution discourses followed immediately upon public
disclosure of scandals. They focused on a broad range of issues, including:
. executive wrongdoing and the manipulation of financial accounts;
.
audit failures and conflicts-of-interest in the accounting profession;
.
ineffective corporate governance;
.
deceptive stock recommendations and conflicts-of-interest in the investment
banking industry;
.
deregulation of energy, technology, and telecommunications markets; and
.
regulatory failure and political influence peddling (Williams, 2003, p. 6).
The subsequent discourses, which Williams (2003) labeled discovery discourses,
focused on “remedies” for the crisis and at this stage the deregulation issue and
political influence peddling virtually disappeared from the media accounts. The
remedies focused on criminal penalties for individual wrongdoers, reforms of
accounting standards and oversight, elimination of conflicts of interests for
individuals, i.e. separating auditing and consulting and divorcing analysts’
compensation from investment banking activities. Thus, neoliberals effectively used
political and media control to reframe the corporate scandals as a matter of a “few bad
apples” and conflict of interest problems for the “gatekeepers” of the public trust.
Schiller (1992) attributed the acceptance of corporate domination of the media to a
marriage of economics and a corporate controlled economic media. He mentions four
forms of mind manipulation (myths) that neoliberals successfully used to gain the
unforced consent of the populace. The neoliberal myths were:
(1) individualism and personal choice;
(2) the neutrality of other key social institutions;
(3) of unchanging human behavior as economically rational; and
(4) education.
It is not surprising that neoliberals’ efforts to diffuse the public outrage centered reform
on the traditional self-regulatory-model based on shareholder primacy. Their efforts
resulted in one significant “remedy,” the Sarbanes-Oxley Act (US Congress, 2002) (S-OX).
S-OX: neoliberals preserve the status quo
When President George W. Bush (2002, p. 1) signed the Sarbanes-Oxley Act on July 30,
2002, he characterized S-OX as “the most far reaching reform of American business
practices since the time of Franklin Delano Roosevelt”. Ironically, Bush, in an era
dominated by neoliberalism, referred to the New Deal, which neoliberal critics
associate with big government and market regulations. His words may be interpreted
as a rhetorical device aimed at appeasing shareholders (Soederberg, 2008).
Neoliberalism,
deregulation and
S-OX
783

11. Congressional leaders believed, or at least publicly professed to believe[12], that S-OX
would improve corporate governance and strengthen corporate accountability to the
extent that investors will not see future corporate frauds such as Enron and WorldCom
(Peters, 2004). The CEO of NASDAQ noted that S-OX was a necessary but tough
prerequisite to the restoration of investor confidence through increased transparency,
strict accountability and improved corporate governance (Greifeld, 2006). To the extent
that corporate governance practices were strengthened, contracting (agency theory)
proponents viewed S-OX as realigning the interests of agents and principals (Ribstein,
2002). But as Reberioux (2007) noted S-OX reaffirmed shareholder primacy, which he
believes led to the weak corporate monitoring systems that produced financial
scandals such as Enron and WorldCom.
The politically charged debate over faulty corporate governance practices and
shareholder primacy allowed neoliberals to use S-OX to convince the public that the
egregious scandals of the day were due to the greed of corporate executives, the lack of
transparency and the absence of accountability rather than the fault of deregulation.
Soederberg (2008) posited that by focusing on symptoms such as executive compensation,
murky disclosure and little or no accountability, neoliberals framed the debate in terms of
how companies should control their internal processes and the failure of accountants,
auditors and other gatekeepers to protect shareholder interests[13]. This position parallels
Conrad’s (2004) previously mentioned rhetorical device of drawing attention to
particulars, like internal controls, rather than systemic corporate governance reform.
Because of its length and complexity, a thorough discussion of S-OX is beyond the
scope of this paper. Some of its key provisions, however, are pertinent to a discussion of
how neoliberal ideology was preserved in the crafting of S-OX. In Section 101 of S-OX,
legislative architects created the Public Company Accounting Oversight Board (PCAOB)
and gave it broad powers, such as authority to set auditing standards (Section 103) and
to inspect the audits of public accounting firms (Section 104). These same legislators
granted the Securities and Exchange Commission (SEC) authority over the PCAOB
(Section 107). S-OX, Section 404, focused on internal control processes as the primary
means for ensuring the validity of a firm’s financial statements (SOX-online, 2009). SEC
oversight of S-OX and the emphasis on internal processes provided neoliberals with the
mechanisms to recreate the status quo rather than allow a restructuring of neoliberal
capitalism. Neoliberals continue to challenge the constitutionality of the PCAOB. In May
of 2009, the Supreme Court agreed to place the case on its docket.
From its creation in the Securities Exchange Act (US Congress, 1934), the SEC has
operated as a quasi-government agency charged with the oversight of information
about and sale of securities offered to the public. Soederberg (2008) noted that technical
experts administer the SEC and that society views the agency as a quasi regulatory
body that is characterized by objectivity, impartiality and neutrality in its efforts to
protect investors and police corporate management. Such a viewpoint serves an
important role in the SEC’s attempt to maintain the status quo, i.e. the current
corporate governance model, while it carries out congressional mandates. Through the
years, the regulatory philosophy of the SEC has basically been one of corporate
accountability via self-regulation. The SEC’s response to prior federal legislation
provides evidence of the SEC’s deference to corporate self-policing.
In 1970 Congress, reacting to a market crisis, passed the Securities Investor
Protection Act (US Congress, 1970). The Act created the Securities Investor Protection
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12. Corporation and gave the SEC more powers to regulate brokers and their firms. In
October, 1996, Congress enacted the National Securities Market Improvement Act (US
Congress, 1996), which redistributed regulatory authority between federal and state
securities regulators. The objective of each of these new laws was to give the SEC
supplemental powers to investigate questionable securities transactions and to control
corporate actors. With each new law, however, the SEC continued its reactive stance to
corporate malfeasance and its philosophy of corporate self-governance (Weismann,
2004). The SEC’s reactive stance is nothing new. Longstreth (1983), a former SEC
commissioner, noted that the SEC has repeatedly abdicated its role as a reformer and
has chosen corporate self-regulation with regulatory oversight. This creates a gap
between the statutory powers that Congress has given the SEC through the years and
the SEC’s reluctance to bring about systemic reform. Thus, the SEC has consistently
chosen self-governance as its regulatory modus operandi.
SEC’s use of self-regulation through S-OX
On the surface, S-OX provides the SEC with additional tools to its arsenal to combat
corporate fraud and wrongdoing. For example, auditors are prohibited from
performing most non-audit work for their audit clients (Section 201), and
engagement audit partners must rotate off an audit every five years (Section 203).
These requirements, along with other S-OX provisions, may give the investing public a
false sense of security, an illusion that S-OX healed what ailed corporate governance
and the external audit. On a deeper level, however, the SEC is using a self-regulatory
approach in its oversight of S-OX. Such an approach allows S-OX to preserve rather
than to challenge the underlying neoliberal philosophy now embedded in the general
corporate governance framework.
Instead of developing mechanisms for establishing the oversight of internal
processes of publicly traded firms, the SEC has continued its corporate self-governance
approach by allowing companies to self-police themselves (Previts and Merino, 1998).
To achieve its goal of continued self-regulation post-S-OX, the SEC has required
management and boards of directors to be more proactive in overseeing and
monitoring financial reporting, particularly internal control processes (Tracey and
Fiorelli, 2004). This approach of self-policing improves disclosure but, with no
corresponding internal scrutiny by the SEC, fails to provide an accurate measure of
corporate risks (Weismann, 2004).
Although S-OX appears to reduce the conflict between agents and principals by
requiring greater accountability on the part of agents, it never attempts to reverse the
underlying dependency of self-regulated corporations on deregulated financial markets
(Soederberg, 2008). Thus, S-OX recreates the dependency conditions that resulted in
fictitious shareholder value for the investors negatively impacted by corporate
scandals such as Enron, WorldCom and Tyco International. In addition, S-OX
inadequately addresses the divergence of shareholder interests and management
control identified by Berle and Means (1932). The power and information asymmetries
that existed between shareholders and managers before S-OX still exist after the
passage of S-OX. These shortcomings lead us to agree with Stein (2008) that S-OX was
more about government rationalization of existing neoliberal thought and practices
encompassed in the state and less about protecting investors. We posit that S-OX was
largely symbolic and that its discourse fails to question the validity of the fallacious,
Neoliberalism,
deregulation and
S-OX
785

13. but prevailing, viewpoint that a corporation is a nexus of contracts, best regulated by
free market forces as defined by neoliberalism. The SEC’s laissez-faire approach to its
regulatory oversight and application of key S-OX provisions to the corporate world
causes us to question whether S-OX will deter self-interested behavior, earnings
management and fraudulent financial reporting in the future.
Because S-OX was constructed to fit the prevailing neoliberal corporate governance
framework, it neglects to examine the broader forces of neoliberalism – deregulation,
the promotion of free markets as being “moral” forces reflecting societal resource
allocations and the greed fed by stock market-related incentives. The ineffectiveness of
S-OX can be seen in stock options backdating abuses that followed the passage of
S-OX: Tenet Healthcare – 2003, American International Group – 2005, Take-Two –
2009, and Quest Software – 2009, just to name a few. S-OX was also unsuccessful in
addressing the boarder forces of neoliberalism that contributed to the subprime
mortgage crisis. While upper-level management of companies such as Citigroup,
Lehman Brothers, New Century and Washington Mutual made millions in bonuses and
stock options, S-OX did not provide other stakeholders, including regulators, with the
transparency to see the risks associated with collateralized debt obligations (CDOs) or
mortgage-backed securities (MBS) and the resulting exigencies of such speculation.
This has been a spectacular failure of the policies of the Washington Consensus, not
only impacting the USA but also contributing to a world-wide recession.
Conclusion
Despite the passage of S-OX, neoliberals continue to promote shareholder primacy
based on traditional corporate governance measures (self-regulation) and financial
deregulation. We have tried to highlight how the standard explanations for the recent
corporate failures mask the underlying systemic problems that exist in deregulated
market economies. Neoliberals skillfully used rhetoric to frame issues defusing
criticism; they understand the importance of support from a cadre of Gramsci’s (1971,
p. 330) “organic intellectuals”. They have think tanks and a media infrastructure that
propagate the free market “faith”. They also have an impact on higher education,
through endowed chairs and centers. The corporate scandals have shown that mere
facts will not break the hold that neoliberalism has had globally and, particularly, on
the American mind; it will take a concerted effort by critics to reframe the issues in a
manner that highlights the growing contradictions between neoliberal theory and
societal well-being. Corporate managers (the economic elite) exacted a premium from
all other stakeholders by manipulating earnings. This not only allowed them to receive
excessive compensation, but also resulted in the loss of jobs to thousands of workers
and huge losses to investors.
We argue that Sarbanes-Oxley preserved the status quo; it reflects an effort to
maintain shareholder primacy in the face of ever-growing evidence that the traditional
model, corporate self-regulation and financial deregulation, has been detrimental from
a societal perspective. Neoliberals successfully diverted attention from the systemic
failures of deregulated markets. Despite neoliberal assertions that the omnipotent “free
market” would not permit managers to adopt a short-term perspective nor to issue
“false financial reports”, financial reporting abuses continue. Reberioux’s (2007, p. 508)
claim that “shareholder primacy as a corporate governance mode is the main driving
force behind the crisis” and that “shareholder primacy weakens, rather than
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14. strengthens managerial accountability” deserves further examination. Models that
reflect actual corporate relationships need to be developed. We posit that
Sarbanes-Oxley served only to legitimate the traditional shareholder value corporate
governance model. S-OX masked the inadequacies of the current model by focusing on
technical solutions, such as transparency and internal processes, in a last effort to
resurrect a failed governance system.
Accounting academics could have an important role in reshaping public opinion.
Berle and Means (1932) warnings about the effect of separation and control need to be
reasserted. The message should be clear – contracting (agency theory) does not work
in a global economy. We strongly disagree with Ball (2009) and other positive
accounting theorists who suggest that it is sufficient to employ a market system that
detects but does not prevent corporate malfeasance. We need new models that
accurately reflect the power asymmetries between managers, owners, and the public.
Rather than developing models that focus on regulatory capture and the use of state
power to promote private interest, academic researchers need to develop models that
focus on deregulation. This implies that archival researchers must rethink the
dominant paradigm, shareholder value and agency theory that has been used to
examine issues of corporate governance. We need a new research framework that
requires researchers to examine government inaction rather than government action.
More importantly, we need accounting academics to reject Milton Friedman’s focus on
negative freedom as the sole objective of economic activity and examine economic well
being in terms of positive freedom. Equality of opportunity should be at least as
important as an individual’s right to pursue activities without interferences.
Government needs to be more, not less, active in controlling the economic elites that
have dominated the global economy for over a quarter of a century. All accounting
academics should be cognizant of the limitations of our current theoretical frameworks
to raise and address significant accounting issues. Empirical researchers need to
question whether or not a model, designed to explain the impact of accounting, can be
based on models that do not reasonably reflect actual economic relationships.
In a world of arbitrage capitalism that leads to extensive use of credit derivatives to
enhance short-term profit maximization, funded primarily by workers’ pension funds,
a deregulated economic system creates undue economic risk. We need to develop new
concepts to measure the effectiveness of corporate operations and to debunk the
neoliberal notion that maximization of “pecuniary” profit will lead to maximization of
social welfare. Neoliberals successfully narrowed the impact of the scandals by
limiting the losses to “investors” (either owner or employee); the thousands of
employees who lost their jobs have only been mentioned tangentially in the debate.
Critical accounting researchers need to strive to make those employees visible again.
We need to expand the concept of corporate performance measurement to reflect “full
earnings” not just profit to the owners and to recognize that the shareholder primacy
and the traditional corporate governance model will not work in a complex global
economy. We also should begin to exam the impact of accounting on positive freedom
and begin to examine measures that will increase the opportunity for individuals to
succeed. Finally, we concur with Cooper (2005) who concludes that the harrowing
effects of neoliberalism on the daily lives of people require that we have more
academics who serve as public intellectuals. We need more critical commentaries on
the impact of accounting on socioeconomic well being.
Neoliberalism,
deregulation and
S-OX
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15. Notes
1. In a very interesting book, Pollin (2003) outlines three fallacies associated with neoliberalism,
the Marxian (wage), the Keynesian (speculation) and the Polayni (social) problems. He
argues that neoliberalism exacerbates inequalities of individuals and nations.
2. Social Darwinism became far more popular in the USA than in the UK where Spencer lived;
Andrew Carnegie (1901) carried the message forward in his Gospel of Wealth, which was
published in book form in 1962. William Graham Sumner (1963) was its most eloquent
academic proponent.
3. See Goldstein (2002), who quotes Alan Greenspan (1963), who argued the free market system
is a “superlatively moral system that the welfare statists propose to improve upon by means
of preemptive law, snooping bureaucrats and the chronic goad of fear”.
4. Gramsci (1971) and Gramsci and Smith (1985) examined nineteenth century hegemonic
cultural forms, such as newspapers, novels, and theater; Gramsci noted that to be effective
these cultural forms required both widespread literacy and technological advance. He
suggested these bourgeois cultural forms, functioned to exert control over the working
classes by making their interest appear to be tied into the interests of the dominant classes.
5. See OpenSecrets.Org, the web site of the Center for Responsive Politics (2009) that
documents all political contributions in the United States by source. Accountants’
contributions were evenly split between Democrats (51 percent) and Republicans (49
percent). With this dollar amount, the accounting industry ranked 22nd out of 80 industries
in campaign contributions. (Center for Responsive Politics, 2009). See also, Huffington (2003)
who documents the auditing profession’s use of money and media “to grease the way” for
passing favorable legislation and for lobbying Congress to block SEC action.
6. Schlesinger (2002) provides an excellent overview of the financial services industry’s efforts
to repeal Glass Steagall beginning in 1987. GLBA, which allowed for full integration of
underwriting, securities and insurance activities, went into effect on March 11, 2000.
7. See original institutional economists (OIE) like Dugger (1989), who regard emulation as a
central attribute of corporate hegemony. Foucault (1980) recognized that a dominant
discourse often leads to voluntary subjugation of the disciplined.
8. The commodification of all aspects of life, subject to cost benefit calculation, finds an
extreme application in the work of Gary Becker’s work. Becker (1986) defines marriage as a
two-person firm for the production of children.
9. See Schlesinger (2002) and Frontline (2005) for discussion of Congressional and corporate
threats to limit the SEC efforts; see Barr and Lambert (1998) for the profession’s earlier
reaction to Levitt’s proposals.
10. The conference board is an independent not-for-profit organization advocating in the public
interest from a large corporation point of view.
11. Previts and Merino (1998) discuss the public’s reaction to “accounting” crises in the USA in
the twentieth century.
12. In terms of neoliberalism rhetoric, the political leaders of both parties enthusiastically
endorsed S-OX as a regulatory instrument capable of restoring the vibrancy of free markets.
On July 15, 2002, the US House of Representatives passed HR 3763 [107th] Conference
Report, i.e. the Sarbanes-Oxley Act, by a roll call vote of 334-90. Ten members of the House
were not present to vote. Ten days later on July 25, 2002, the US Senate vote on HR 3763
[107th] Conference Report was 99-0. One senator was not present to vote.
13. Over the past several decades, corporate internal control processes have become a first-order
policy option to respond to a plethora of national problems. The early 1970s saw overseas
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16. bribery scandals and the Watergate controversy, resulting in passage of the Foreign Corrupt
Practices Act (FCPA) (US Congress, 1977). Langevoort (2006) notes that the FCPA required
public companies to implement an adequate system of internal controls. The focus on
internal controls as a response to crises continued with passage of the Patriot Act (US
Congress, 2001) to combat terrorism. It is not surprising that internal control processes were
a major part of S-OX in response to the corporate scandals and resulting market turmoil.
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About the authors
Barbara D. Merino is Horace Brock Chair and Regent’s Professor of Accounting at University of
North Texas. She has published numerous articles in scholarly journals, such as The Accounting
Review, Accounting Organizations and Society, and The Journal of Business, Finance and
Accounting.
Alan G. Mayper is a Professor of Accounting at University of North Texas. His teaching
interests are primarily financial accounting and accounting theory. He has published in the top
tier research journals in accounting, including Journal of Accounting Research and Accounting,
Organizations and Society.
Thomas D. Tolleson is a Professor of Accounting at Texas Wesleyan University. His teaching
interests are primarily in cost accounting, fraud examination and ethics. He has received
outstanding teaching awards at both the undergraduate and graduate levels and has published
in Journal of Applied Case Research, Perspectives in Business and Research on Accounting Ethics.
Thomas D. Tolleson is the corresponding author and can be contacted at: ttolleson@txwes.edu
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