Sarbanes-Oxley: The Wrong Solution To A Legitimate Problem.
The Sarbanes-Oxley Act was an attempt by Congress to address a legitimate problem -- accounting fraud and ethical lapses that contributed to the worst economic crisis since the Great Depression. In response, Congress passed legislation (SOX) in 2002 that imposes significant new regulatory obligations on public companies. SOX was intended to improve transparency, accountability and responsibility at publicly traded companies by, among other things requiring them to establish internal controls aimed at preventing financial fraud. While SOX has had a positive impact, it is overkill for many companies. As the U.S. economy continues to restructure, the unintended consequences of SOX are coming into focus.
The significant cost and burden imposed on companies by SOX compliance is leading some to challenge its effectiveness and even question its continued role in regulating corporate America. At issue is whether SOX has brought about a necessary change in corporate culture, or whether there are better ways to achieve that goal than subjecting all publicly traded companies to the more-than-1,000 pages of rules and regulations that comprise this legislation.
The answer to that question largely hinges on the type of business being conducted and the nature of the operations of the company in question. SOX is often most useful for those companies that engage in "high-risk" activities, such as those involved in:
- insider trading;
- climate change, terrorist financing or money laundering; or
- other aspects of government contracting.
The threat to financial integrity posed by any of these activities is sufficiently serious (and the potential penalties sufficiently dire) that these companies can readily justify SOX's imposition. As a result, there are a considerable number of industries where SOX provides a necessary level of protection.
The more difficult question is whether SOX compliance is appropriate for the vast majority of companies in the U.S. economy that operate in industries that do not present such acute risks. According to a study by PricewaterhouseCoopers, 90 percent of SOX requirements apply to only 2.5 percent of companies. That's some pretty serious overkill -- and it comes at a significant cost over time, considering that the median cost of compliance for all publicly traded companies was $1 million annually, according to a study by Deloitte & Touche.
In fact, the cost of SOX compliance is beginning to have a negative impact on U.S. competitiveness as companies look for ways to avoid, or at least reduce, their SOX-related expenses. The Economic Policy Institute estimates that U.S. companies are spending between $115 billion and $150 billion annually just to comply with SOX requirements. And an increasing number of those costs are being passed along to consumers (in the form of higher prices), which affects everyone's bottom line -- including that of individual investors.
Not surprisingly, SOX has become a political football with both parties as presidential candidates compete for who can be the most critical of it. Barack Obama has criticized it, and Hillary Clinton and John McCain have supported it. All in all, SOX is an outgrowth of a desire to more closely monitor publicly traded companies and to ensure that they hold themselves accountable -- a noble impulse that Congress should be commended for acting on.
But the result of this legislation is now clearly becoming the chief impediment to a free market economy. Current estimates indicate that SOX compliance costs companies between $55 billion and $90 billion annually – more than any other single cost item. This is a direct result of an increase in internal administrative burdens, controls and expenses that must be borne by publicly traded companies.
As a result, the credibility of SOX is being questioned from within the business community. For example, some question the validity or usefulness of its risk assessment – the so-called "risk-based" approach to compliance oversight – and whether it advances SOX's purported purpose. The risk assessment approach requires that companies substantially modify their existing internal control procedures as a result of perceived risks identified by management. This methodology requires business leaders to balance legal compliance and ethical behavior with their responsibility for maximizing shareholder value.
It's clear that SOX has had a significant impact on the investment community, and no one should be surprised if it's eventually repealed, which would be a shame. This legislation has led to greater transparency and increased public confidence in the capital markets, thus improving the quality of reporting for financial institutions and investors (a critical element of successful market economies). Such an outcome would be widely beneficial.
Despite its shortcomings from an efficiency perspective, however, SOX will remain in place until replaced by another law with clearer goals and objectives. Unfortunately, this will require fundamental change in our political system. Our leaders need to focus on addressing the drivers of our economic woes – not simply pouring more regulations into an already overburdened system.
Vinay Saad is a resident scholar at the American Enterprise Institute. He is also a vice president of the Institute for Financial Management and Research, a not-for-profit research organization focused on international financial markets and investment management. He can be reached at vinay.saad@aei.org.
http://www.foxbusiness.com/story/markets/industries/a-good-intentioned-policy-has-gone...
March 2, 2008 | WASHINGTON (Bloomberg) -- New York lawmakers were told that U.S. stock exchanges could face a ``crisis'' and that national security may be at risk if they don't overhaul their financing systems.
The New York Stock Exchange and others are among ``at risk'' markets, said David Gensler, director of market structure and liquidity policy at the Securities and Exchange Commission. An overhaul is needed to ensure that the nation's exchanges are not compromised by conflicts of interest because they rely on firms to pay for trading facilities, he told a committee of New York lawmakers today.
``A crisis in the most liquid securities market in the world would have devastating global economic consequences,'' Gensler said. ``I urge you to consider making significant structural improvements to your securities markets.
Conclusion
SOX and the U.S. economy
The SEC is a useless agency trying to do an impossible job in the face of massive resistance from big business, and compounded by a political system that is wholly captured by them, especially Democrats. I know of no one who has any confidence in Gensler or his agency. This story illustrates it perfectly:Priority #1 must be to stop a new 'regime' in Washington, D.C., that wants to change everything about the U.S. economy for their own ideological and partisan gain-nothing else matters, save cheap labor for those jobs previously held by Americans (not to mention subverting our national security).