Republicans for Sarbanes-Oxley
The accounting lobby fights to keep its regulatory earmark with help from Representatives Campbell and Pearce.


John Berlau

If there is one issue that may somewhat unite the GOP presidential field and the Obama administration, it’s disdain for a nearly ten-year-old law signed by George W. Bush. The Sarbanes-Oxley Act of 2002, rushed through Congress as a “fix” after the Enron and WorldCom implosions, added billions in regulatory costs in the supposedly deregulatory Bush era. And it has little to show for itself in preventing subsequent financial scandals.

Now, as presidential candidates are championing the cause of paring red tape, the burden of Sarbox’s accounting mandates on small and midsize public companies has been picked up by nearly every GOP candidate from new front-runner Newt Gingrich to media favorite Jon Huntsman. Even the Obama administration has joined the Sarbox critique to a surprising extent.

From Paul to Gingrich to Huntsman to Obama
“I would repeal Sarbanes-Oxley, which adds a substantial amount of paperwork cost,” Gingrich replied in mid-November, when asked by a high-school student in Osage, Iowa, how he would grow the economy. And in the past few months, Gingrich’s has called for Sarbox’s repeal at presidential debates, at the Iowa State Fair, and in interviews with Bloomberg Television and CNN’s Piers Morgan.

Mitt Romney, Rick Perry, and Herman Cain have criticized aspects of Sarbox, and Michele Bachmann and Ron Paul (who was one of three House members to vote against the law in 2002) stand with Gingrich in calling for repeal. So does Huntsman, whose “Time to Compete” jobs plan proclaims that “this hastily written law has only added a massive compliance tax on companies without providing any real measures to prevent corporate fraud.”

But perhaps the most surprising recent critic of Sarbox has been the Obama administration. Election-year politics may be playing a role, as Obama is presenting himself as a pragmatist on regulation and this is one costly law that Obama does not have ownership of (as opposed to Obamacare and the Dodd-Frank financial overhaul). Still, the recent recommendations of the president’s Council on Jobs and Competitiveness were substantive, and, given this administration’s pro-regulation philosophy, extraordinary.

Pointing out that “the data clearly shows that job growth accelerates when companies go public,” the Jobs Council noted with dismay that there were fewer U.S. venture-backed initial public offerings (IPOs) in 2008 and 2009 than in any year since 1985. The data also show that even the recession years of the early ’90s had more IPOs than any year since Sarbox went into effect.

The council blamed, among other things, “unintended consequences stemming from . . . Sarbanes-Oxley regulations.” It then called for exemptions from many provisions of Sarbox for companies with up to $1 billion in market capitalization.

Sarbox Empire Strikes Back — with Some GOP Help
Given this remarkable consensus on the need for Sarbox deregulation, one would think it would be smooth sailing for a bill that doesn’t even go as far as the Obama jobs council recommends. H.R. 3213, sponsored by freshman Rep. Stephen Fincher (R., Tenn.) and slated for a vote this week in the House Committee on Financial Services, creates an exemption for companies with up to $350 million in market capitalization — a far lower figure than the $1 billion put forth by Obama’s council. And it exempts these companies from just one subsection of Sarbox — Section 404(b), which mandates audits for “internal controls.”

But exemption even from this subsection alone would do many entrepreneurs a world of good. The Securities and Exchange Commission (SEC) initially estimated that Section 404 compliance costs would be $91,000 per year. In 2009, however, an SEC study found that companies actually spend, on average, $2.3 million annually on compliance with just this one Sarbox section. Moreover, the study revealed that the long-term burden on smaller companies is more than seven times greater than that imposed on large firms.