Sometimes the people charged with enforcing the law can’t bring themselves to admit that the law isn’t working.
For instance, during Prohibition, the time of gangsters, speakeasies, and Al Capone, the government appointed the “National Commission on Law Observation and Enforcement” to judge the effectiveness of the liquor ban. The commission in fact determined that Prohibition was not working, but it refused to call for repeal.
This piece of history came to mind last week while listening to a congressional hearing on the fourth anniversary of the Sarbanes-Oxley Act (Sarbox). Chairman Christopher Cox of the Securities and Exchange Commission testified that Sarbox “Is not perfect in every respect. But the vast majority of its provisions are net contributors to the nation’s economic health. And those parts of SOX that aren’t working as well as they should—notably Section 404—can be made to work better through better implementation.”
Well, the vast majority of the Washington Nationals may be great baseball players, but if they can’t bring in the runs, the team isn’t going to win. It’s the same with Sarbox.
That Section 404 to which Cox referred has, according to one economist’s estimate, already cost the American economy about $1 trillion in direct and opportunity costs. And for what gain? More than 700 corporate crimes have been punished and $250 million in ill-gotten gains restored since 2002, all based on pre-Sarbox laws. We didn’t need Sarbox to restore investor confidence in the marketplace. Meanwhile, new foreign issuers of stock have virtually disappeared from the American marketplace, as companies seek out friendlier regulatory environments, such as London.
Cox conceded that smaller companies have had to endure “greater than anticipated costs” in implementing Section 404 provisions, but also have received “significant benefits,” such as greater management attention to internal controls. But if the actual costs have exceeded the benefits, Sarbox has destroyed economic value. Why not come out and say so directly?
Cox reassuringly stated that “it is management’s responsibility to determine the form and level of internal controls appropriate for each company, and to determine the scope of its assessment and testing,” and that public accounting firms must “recognize a range of reasonable choices” in how a company chooses to interpret Section 404. That’s all very well and good — until the plaintiffs’ lawyers or the SEC investigators come calling, or the Public Company Accounting Oversight Board’s own auditors conduct their regular (and intense) investigations of auditing firms. In the current circumstances, where the standards are in flux and the penalties severe, both companies and auditors have little choice but to implement Sarbox in the strictest — and most expensive — manner possible. No one wants to “bet the company” trying to save money for shareholders if the costs can be years of litigation and possible jail time.
One hero of the hearing was Rep. Scott Garrett (R., N.J). He told Chairman Cox that under Sarbox, “Honest companies are being punished and the U.S. economy is having to carry the weight.” His forthrightness is refreshing and rare, and we only can hope that other members of Congress will join him in supporting Sarbox reform and striving for economic freedom.
One bad idea to ease the burdens on small companies was recently proposed by Sen. John Kerry (D., Mass.). The senator would have the government make grants to small businesses to help them comply with Sarbanes-Oxley regulations. Kerry noted that the Government Accountability Office has reported that firms with a market capitalization of $75 million were spending $1.14 in audit fees per $100 of revenue, while firms with a market capitalization of over $1 billion were paying only 13 cents per $100 of revenue. As Kerry said, “if Congress is asking these small firms to take on the costly burden of complying with Sarbanes-Oxley, the least we can do is chip in and help pay for it.”
It’s a nice gesture, and at least it recognizes that Sarbox is causing huge costs for smaller companies. But this corporate welfare for auditing firms will not solve the problem, and will just keep government growing, rather than the economy.
So that’s Sarbox at four: The law is a disaster. SEC Chairman Chris Cox is for it. And John Kerry hopes to fix it by making government bigger.
– Mallory Factor is chairman of the Free Enterprise Fund. A version of this article originally ran in the New York Sun.