A Tremendously Costly Law

EARLY this year, an unusual full-page ad appeared in the Wall Street Journal and other financial newspapers. The ad attempted to refute claims from businessmen about the costs imposed by the mandates of the Sarbanes-Oxley Act, the “corporate reform” law Congress passed in 2002 after accounting scandals hit Enron, Worldcom, and other companies. Yes, procedures stemming from that law “are neither simple nor inexpensive,” the ad said, but the costs are well worth it if the result is restored investor confidence. “The [law’s] greater goal and promise,” the ad proclaimed, “is that the rigorous demands of compliance can lay the groundwork for improved and more reliable financial reporting, leading to a higher level of public trust.”

The ad’s message itself was not unusual; it mirrored the standard response the law’s defenders give to complaints about cost. A Washington Post editorial intoned, “The nation’s corporate chieftains . . . complain about the cost of this new regulation, not pausing to mention the cost of Enron-type scandals.” But what this newspaper ad shows is that not all corporate chieftains oppose this law. The expensive ad was not paid for by a pension fund or another group representing the investors the law was intended to serve: Its sponsor was, rather, PricewaterhouseCoopers, the multibillion-dollar accounting firm making a bundle in fees for doing all the audits the law has ended up requiring of business. By creating so many hurdles for public companies, the law has birthed a golden goose for those who audit them. And ironically, despite the media and legislative clamor to “get” the big accounting firms after Enron imploded, it’s the Big Four accounting firms that have turned out to be the big winners from Sarbanes-Oxley.

About the Author

John Berlau

John Berlau, director of finance policy and a senior fellow at the Competitive Enterprise Institute, is the author of George Washington, Entrepreneur: How Our Founding Father's Private Business Pursuits Changed America and the World.

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EARLY this year, an unusual full-page ad appeared in the Wall Street Journal and other financial newspapers. The ad attempted to refute claims from businessmen about the costs imposed by the mandates of the Sarbanes-Oxley Act, the “corporate reform” law Congress passed in 2002 after accounting scandals hit Enron, Worldcom, and other companies. Yes, procedures stemming from that law “are neither simple nor inexpensive,” the ad said, but the costs are well worth it if the result is restored investor confidence. “The [law’s] greater goal and promise,” the ad proclaimed, “is that the rigorous demands of compliance can lay the groundwork for improved and more reliable financial reporting, leading to a higher level of public trust.”

The ad’s message itself was not unusual; it mirrored the standard response the law’s defenders give to complaints about cost. A Washington Post editorial intoned, “The nation’s corporate chieftains . . . complain about the cost of this new regulation, not pausing to mention the cost of Enron-type scandals.” But what this newspaper ad shows is that not all corporate chieftains oppose this law. The expensive ad was not paid for by a pension fund or another group representing the investors the law was intended to serve: Its sponsor was, rather, PricewaterhouseCoopers, the multibillion-dollar accounting firm making a bundle in fees for doing all the audits the law has ended up requiring of business. By creating so many hurdles for public companies, the law has birthed a golden goose for those who audit them. And ironically, despite the media and legislative clamor to “get” the big accounting firms after Enron imploded, it’s the Big Four accounting firms that have turned out to be the big winners from Sarbanes-Oxley.