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.
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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 presidentialdebates, 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.
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I learned about Sarbox firsthand when I franchised my then successful business and was required to obtain a simple audit.
Every accountant I spoke to brought up Sarbox as the reason they either no longer performed audits or charged ridiculous fees to complete them.
I cannot justify the cost of an annual audit which in my case, would otherwise be a quite simple matter were it not for the liability imposed upon the accountant by this law.
Just another example of the "experts" knowing what's best for the rest of us.
To the extent possible, the cost of Sarbanes-Oxley is passed on to the customers and clients of the afflicted firms. Should it be repealed, those firms will struggle to retain the advantage by immediately firing bookkeeping and accountancy personnel while maintaining their pricing structure. As burdensome as such regulations are, they become even more destructive when stirred. Perhaps it's a wiser course to retain Sarbanes-Oxley as a cautionary, while working toward being more blasted careful.
You don't seem to understand the necessity of allocating scarce resources where they can be used most productively. If personnel who do nothing but SOX compliance can be freed up to do more productive work either at their current firms or at new firms when their old ones let them go when SOX is repealed, that is a good thing. Yes, it's a pain to have to find a new job, but society as a whole will benefit greatly when these workers are doing something more productive, for example cost-accounting in an expanded treasury area, than assuring compliance with SOX.
In short, more wealth is created when workers are producing something of value than when they are filling out forms for the government.
By your logic, we also shouldn't even consider eliminating or severely scaling back the Department of Energy, the EPA or the Department of Education because of all the employed people that would immediately be put out of work. Sarbanes-Oxley is the biggest waste of business resources in the last 30 years. Will internal audit departments be eliminated? Perhaps. But why not allow a company to spend it's resources on something that might improve its value? I would expect to see a reduction in pricing structures as companies race to grab market advantage over one another.
What a disgrace...this right here shows everything that is wrong with Congress.
It appears that there is a need for an anti-regulation Grover Norquist as well to hold these politicians' feet to the fire.
The first regulations placed on disclosure and the issuance of securities in the US came in 1933. Since then, the capital markets of the US have surpassed those of the rest of the world. Absent assurance on the part of investors that a set of standards is being met, the markets would dry up.
Regulation in this instance is for the benefit not just of the investor but of the company that is thus able to offer securities in the public arena
Trust me when i tell you, Sarbox is like the TSA, it doesn't made financial statements safer for users or investing decisions wiser, its a lot of motion and expense for little added value.
Yes our markets were deep and effective up until 2002, look at IPO activity since then and where it is happening, its not happening here. Why does it make sense for a US company to list on the LSE or the TSE over the NYSE? one guess
I am a CPA who performs audits of public companies. I can assure you that the internal control audit provision is a complete waste of company time and resources. The standards put forth by the PCAOB force our firm to document our internal control audit using a check the box approach, an approach that this legislation supposedly was designed to discourage. We rely on these PCAOB standards because we have to and to protect us from litigation. The professsion does not encourage auditors to use judgment and when auditors do, its always safer to default to the most punitive and costly position to the client. Its just the way the litigation environment operates and its a cloak we use to avoid actually thinking and taking responsibility for properly serving the investing public.
Sarbox did not prevent MF Global, Lehman, Fannie Mae, Countrywide or any of the other recent scandals. Its solely designed to create false comfort, much like removing your shoes at the airport during the TSA screening does little to actually improve airline safety, but merely creates the appearance of 'doing something.'
Small entreprenurial companies suffer most from this regulatory burden. The incremental compliance costs hit them harder. When my clients invariably complain about the cost of compliance, i reply that its a 'tax on public companies that cannot be avoided' and if they want to avoid it, they should have stayed private.
I think my profession is embarassing itself by continuing to lobby for this ridiculous, costly and ineffective legislation. How is the investing public served when good companies choose to remain private to avoid the legal and civil liability and the related compliance headaches? This legislation denies investors ground floor opportunities, resulting in those opportunities only being available to private equity investors, which discourages wealth creation and proper capital allocation.
As a retired CPA, I've always thought there was a simple answer available to the 'standards' issue. Accounting firms shouldn't audit financial statements, they should guarantee them -- assume financial responsibility for any subsequently discovered fraud.
Why? Because no firm in its right mind would accept the assignment under those terms unless it got complete control of what went into the financials. During my forty year career I've seen a sort of Gresham's law of accounting standards, in which increasingly detailed rules drove out broad principles. And what did those rules accomplish? They provided a thicket of ambiguity in which you could justify most anything, at least in the short run. (See Enron)
With CPA's on the hook, you wouldn't need no stinkin' standards or Sarbox.
I don't agree with that, but frankly that system already exists, albeit through the threat of class action litigation and SEC sanctions and that's precisely why the profession is governed by standards rather than principles, because as long as you adhere to the standards, regardless of the output or result, you can claim you did what you were supposed to do if something goes awry, never mind that you checked your brain at the door.
In my opinion, a better answer would be to make audits optional, and see what the market says the opinion is worth. Some companies, especially early stage and based upon an idea or technology rather than the hard 'numbers', may find an audit is not worth the cost, while GE and others will likely find they need an audit to avoid a steep discount in the public markets.
With respect, I believe you contradicted yourself. I don't think the system I suggested 'already exists, albeit through the threat of [litigation & sanctions]', precisely because, as you said, the multitude of standards provide 'cover' to justify decisions that the accountants would never make on the basis of basic principles.
One of the things I did in my career was review audits where the enterprise went bankrupt, to see if our firm should have insisted on adjustments to the financials that would have made the problems evident earlier. In all cases, the accounting in the periods prior to the collapse was both justified on the basis of some standard's technical detail and just plain wrong from a common sense point of view. If there was a very direct connection between making these decisions and liability, I think common sense would prevail.
In any event, I'm sure this is all moot; given the way Washington works, I can't see this suggestion ever seeing the light of day.
I am sure i wasn't clear in my original reply. what i meant to say was standards or principles or full liability, Firms already are on the hook legally because a clever trial lawyer can make anyone hiding behind professional standards look like an idiot and saddle them with liability.
Explicitly giving CPA firms that liability would merely increase the cost and complications of audits, especially for smaller reporting companies. If that's the route we want to go, i would suggest just letting insurance companies co-opt the audit function entirely and 'insure' a companies financials by doing whatever due diligence they see fit prior to issuing the policy. They could spread the risk across all their clients and be more thoughtful in what they actually assessed as risk areas. A little litigation reform sprinkled in to tamp down frivolous class action lawsuits over minor issues and that might be more useful and cost effective to the marketplace.
But the best solution is to make audits voluntary and let the market price in the value. Look at the rating agencies (which i think function similarly to the audit field, but the value they add is more directly quantifiable). Their ratings downgrades are effectively ignored now...
I agree with the CPA above. The internal audit controls is a complete waste of time, but it sure makes accounting firms lots of money. Most regulations are a waste and not every company is an Enron, but the belt of the government is wide and it doesn't matter whom it hits.
As a republican, this is embarrassing! This is the one of the worst articles of have read yet that advocates the repeal of Sarbanes Oxley! We look silly advocating repeal because it is costly. Perhaps we should advocate lawyers reduce their hourly rate? Raw material suppliers lower their prices?
A little knowledge of business, financial reporting and sarbanes would be helpful before calling for elimination of sarbanes.
Actual quote from article:
"By requiring resources to be spent on auditing “internal controls” that were trivial for shareholders yet lucrative for auditors — such as employee passwords and possession of office keys — Sarbox Section 404 actually diverted attention away from ensuring accurate reporting of a company’s financial condition."
This is equivalent to saying time spent verifying the accuracy of the reports diverted attention from verifying the reports were accurate. Pure Nonsense!
Sarbanes creates jobs, creates more efficient financial reporting process, improves accuracy, reduces cycle time and reduces opportunities for fraud.
Your comments are complete nonsense. Being in the financial reporting field, I can tell you right now that Sarbanes-Oxley does NOT create a more efficient financial reporting system. It often conflicts with external audit procedures and places a huge burden on a reporting entity's employees to comply with requests during financial reporting cycles. It does not improve accuracy, but only identifies controls that could potentially minimize errors. It has done absolutely nothing to discourage the kind of wholesale fraud that takes place at the upper echelons of executive management, as it's designed for a much lower level of fraud detection. The payback for the cost of controls is usually minimal or negative.
You have made one accurate statement, however. It has been a boom for the accounting industry, just like government largess has been a boom for the legal profession.
