Wednesday, November 01, 2006
Talking sense on Sarbanes-Oxley
Although raised as a securities lawyer, I don't blog much on the topic for two reasons. First, I'm out of practice. Second, I am the corporate compliance officer of a public company, so I do not want to run down laws that I need to support in practice, whatever my private opinions. However, when Chuck Schumer says that we have too much regulation of corporate governance, I feel as though I have the air support to comment in the abstract. Therefore, I offer a few quick points:
1. Many of the changes required by the Sarbanes-Oxley law were sensible, and inexpensive to implement.
2. Certain other changes, particularly as the relate to corporate controls, are extremely expensive to implement, so much so that they are obviously chasing both American and foreign companies away from our public capital markets. That's a bad thing at many levels, and contrary to the predicted result of the law, which was to improve confidence in those markets. It may also have been unnecessary. As Andy McCarthy writes at the link, "for the umpty-umpth time, the big post-Enron prosecutions of corporate fraud were accomplished by pre-SarbOx laws, which were more than adequate to the task of punishing real swindlers, which in turn severely discourages such behavior."
3. Sarbanes-Oxley's incremental auditing requirements along with the more aggressive posture of the Securities and Exchange Commission have been a huge boon to public accounting firms, especially the big four. Not only did the Enron scandal reduce the competition in that field by 20% (by producing the destruction of Arthur Andersen), but they have been able to use fear of liability to greatly increase the "required" work at huge cost to public company stockholders. If we see a movement to scale-back SarbOx, expect sanctimonious public accountants to lead the charge in opposition. Whether sincere or not in their opinions, they will be defending their own financial interest.
4. There is an additional "hidden" cost to SarbOx: Directors now spend a huge proportion of their time on procedural matters, which cuts into intelligent discussion about the substantive business of the corporation that they are supposed to be managing. It would not shock me if some academic were able to prove that there is actually less oversight of business fundamentals than there was before SarbOx elevated process to the same importance as outcomes. Anybody who has spent any time in board rooms in the last five years at least suspects this to be true. The world's most famous corporate lawyer, Marty Lipton, issued a long "thought piece" to his clients last week making essentially this point.
5. The politics of corporate governance regulation are such that there will be no chance of reform unless the Democrats take over at least one house of Congress. That is not enough to make me hope that it happens, but as long as the "party of Benedict Arnold CEOs" is in charge Democrats will attack deregulation rather than take credit for it. So there's one possible silver lining.
4 Comments:
By 
D.E. Cloutier, at
Wed Nov 01, 01:22:00 PM:
Ronald Reagan said at his inauguration, "Government is not the solution to our problem; government is the problem."
I will go even further. Every single problem in my life had its genesis in some governmental decision.
By 
, at
Wed Nov 01, 02:51:00 PM:
Chucky Schumer was the person who was complaning about the prices of cereal a few year ago yeah one flake whinning about the prices of others and then wants gun bans why dont chuck schumer do usa favor and resign and stop being such a stupid brainless jackass
By Assistant Village Idiot, at
Wed Nov 01, 06:42:00 PM:
Nice to know there's a possible upside to Democrats taking the House. Thanks for passing it along.
By Purple Avenger, at
Wed Nov 01, 11:29:00 PM:
The problem is that dems solution for the problem is likely to be even worse than what there is now.
Normally, dems are not associated with relaxation of regulation on business. This would be foreign territory for them.
