Sarbanes-Oxley: The Conundrum of Compliance

By March 15, 2007Economy

Fervent debate this week over Sarbanes-Oxley, the 2002 legislation passed in the heat of overreaction to the admittedly serious corporate scandals of the day. The burdens of compliance — to little if any apparent benefit to the public and stockholders — have sent businesses rushing to London instead of New York to list themselves.

John Berlau of the Competitive Enterprise Institute stakes out the free-market position on Sarbanes-Oxley, but adds an interesting fillip, arguing that the rules effectively keep entrepreneurs and small-scale investors from reaping rewards for prescience and risk-taking. Berlau calls for a thorough rewriting of the law, rather than more modest regulatory changes.

SEC Commissioner Chris Cox is not inclined toward statutory changes. In a speech to the Chamber of Commerce, which has been working on Sarbanes-Oxley and capital markets, Cox argues to mend it, even bend it, but don’t end it.

We don’t need to change the law, we need to change the way the law is implemented. It is the implementation of the law that has caused the excessive burden, not the law itself. That’s an important distinction. I don’t believe these important investor protections, which are even now only a few years old, should be opened up for amendment, or that they need to be.

(Text of speech here. Bloomberg story here.)

Meanwhile, top busines executives attending a Treasury conference at Georgetown Tuesday expressed great unhappiness at all the regulatory burdens. As reported by Bloomberg, New York Stock Exchange chief John Thain reported serious problems.

“There’s definitely something going on here we have to be concerned about,” said Thain about the competitiveness of U.S. markets. He noted that only one of the largest 25 initial public offerings in 2005 was done in the U.S., and only two of the top 25 offerings were done in the U.S. in 2006.

Thain put much of the blame on the 2002 Sarbanes-Oxley Act, which requires companies to attest to their internal financial controls.

Cue the Clash: “London calling, to the faraway towns…”

Also attending was Warren Buffett, who reported this week that Sarbanes-Oxley increased his firm’s auditing costs from $10 million to $24 million.

Paulson’s opening address (text here) was a model of “on the one hand, on the other hand,” but he certainly signaled no Administration intention to scrap or rewrite Sarbanes-Oxley.

In the end, the best insight we encountered in this week’s Sarb-Ox frenzy was a political one, as Berlau commented on the prospects for reform.

[Before] their victories in 2006, some savvy Democrats such as New York Sen. Chuck Schumer and Speaker Nancy Pelosi started talking about Sarb-Ox’s burdens. Pelosi told CNBC in October that the law had “unintended consequences,” adding, “I don’t think you need the whole package.”

Sticking with their words by cutting away the most burdensome pieces of the Sarb-Ox package would go a long way in persuading investors that Democrats can support some reasonable regulatory reform.

A good piece of advice.