Today, Congress will be wrestling with a trillion-dollar issue — literally. The stakes for the U.S. economy are that high, and getting higher, so we should all pay attention.
Christopher Cox, chairman of the Securities and Exchange Commission, will appear at a hearing of the House Financial Services Committee on “Sarbanes-Oxley at Four: Protecting Investors and Strengthening the Markets.” Rep. Mike Oxley (R., Ohio), co-author of the legislation, will chair the hearing. Mark Olson, chairman of the Public Company Accounting Oversight Board, which implements the Sarbanes-Oxley Act (“Sarbox”), will also testify.
In its four years, Sarbox has damaged the American economy as badly as a group of unsupervised four year-olds would damage a playroom. U.S. companies have spent tens of billions of dollars in compliance costs (about $35 billion), far more than the SEC’s 2003 estimate of $1.2 billion, with small companies hit especially hard.
Companies, both domestic and foreign, have decided that the costs and uncertain enforcement of Sarbox are too high a price to pay for the benefit of access to American capital markets. In 2005, 23 of 24 firms that had raised more than $1 billion in capital didn’t register their security offerings in U.S. markets, according to the New York Stock Exchange. The London Stock Exchange listed 129 companies last year, while only 6 chose New York and 14 the Nasdaq.
And yet our economy is booming in comparison to Europe and Japan. Something is wrong, and that something is Sarbanes-Oxley.
A number of companies, even large companies such as HCA and Aramark, have decided that the best thing they can do is go private. Even Ford Motor Co. has said it is thinking of leaving the public space. When it costs an average of $1.8 million in additional costs just to operate as a public company (according to a survey by the law firm Foley & Lardner), small-cap companies with revenues under $100 million have to wonder whether the costs make sense. Of course, these “going private” transactions not only raise the cost of capital, they also reduce the number of securities in which ordinary Americans can invest their hard-earned money.
On September 12, 2006, a group of organizations in the biotechnology, electronics, health, and medical-device industries issued a call to reform Sarbox. These are the kinds of companies that drive innovation and economic growth. But small companies with revenues under $100 million spent an average of 2.55 percent of revenue on Sarbox compliance in 2004. These companies should be spending this money on R&D, not auditors and lawyers.
Everyone favors tough prosecution of corporate criminals who steal shareholder money and cheat the investing public. But the criminal provisions in Sarbanes-Oxley expand the ability of the government to wield a terrifying regulatory tool and put a further chill on entrepreneurship. Under Sarbox, it is now possible for CEOs and CFOs to be sent to jail for the misdeeds of others. These executives are required to certify corporate reports without traditional good-faith protections, and can be found criminally liable for honest mistakes. Uncertainty on the limits the government will put on criminal prosecution under Sarbox has had a chilling effect on the risk-taking that drives economic growth and innovation.
We already have the tools to fight corporate crime. The recent Enron trials were based on statutes that had nothing to do with Sarbox. This episode alone shows how the legal system can be effective at punishing corporate crime and corrupt executives. But there have been more than 700 corporate crime convictions and more than $250 million paid in restitution since 2002, all prosecuted under pre-Sarbanes-Oxley laws.
Until the law is reformed, companies will continue to move offshore, switch to foreign exchanges, and go private to avoid burdensome compliance. All of these are perfectly legal strategies, of course, but they hurt the very same investors that Sarbox intended to protect. These enormous costs cannot be what Congress intended when it enacted Sarbanes-Oxley. They must be reduced or eliminated for America to continue to grow and prosper.
Here’s an idea: Why not make Sarbanes-Oxley compliance optional for public companies? If investors — including large pension and asset funds — truly believe the provisions of the law are valuable in deterring corporate fraud and protecting shareholders, then companies will likely comply with Sarbox in order to access U.S. capital markets. Small companies, meanwhile, will be able to decide whether their money is better spent on auditing costs or research. At the least, these decisions will be left to individual companies, which could still access U.S. capital markets, the greatest pool of money in the world.
It will be interesting to hear today from PCAOB chairman Mark Olson. My organization, the Free Enterprise Fund, has filed suit challenging the constitutionality of the PCAOB. Its members are not appointed by the president, as the Constitution requires, but rather by the Securities and Exchange Commission. The SEC claims it has “broad and pervasive oversight” of the PCAOB, but in fact the organization runs independently, setting its own salaries and interpreting the Sarbanes-Oxley Act in a broad way that goes beyond the letter of the law and does even more damage to the economy. Ordinary Americans will be interested to learn why Olson, a public employee, is paid $615,000 a year, while his fellow commissioners scrape along on only $500,000 annually.
For the SEC to fulfill its statutory mandate to protect investors, chairman Cox should be truthful about the impact Sarbox has had on the American economy and urge its repeal or reform. In fact, pushing for significant reform of the law that bears his name would be an admirable legacy for the distinguished Rep. Mike Oxley.
– Mallory Factor is the chairman of the Free Enterprise Fund.