The Bernstein Perspective: Reform Policy

The public market needs accounting guidance, but Sarbanes-Oxley is too burdensome.

By Charles Bernstein, Editor-at-Large -- Chain Leader, 2/1/2006

The Sarbanes-Oxley Act, passed by Congress in 2002, was supposed to help protect investors from corporate abuse. Yet this corporate governance act, quickly passed in the wake of scandals such as those at Enron and WorldCom, has not benefited the “little guy” to the degree that was expected. Instead, Sarbanes-Oxley mandates have cost public companies too much time and money.

The act makes financial reporting more complicated than ever before. Many corporations have had to divert employees from their core business. In effect, it has inhibited job growth and resulted in hidden costs for business, workers and consumers.

Bad for Business?
Sarbanes-Oxley is supposed to be a cure for corporate misbehavior, but instead it punishes American businesses as a class. And the mandates are most burdensome for small and medium-sized companies. If smaller companies opt to go private, or not enter the public market in the first place, how much entrepreneurial spirit will go untapped because it is unfunded?

With the appointment of Christopher Cox last July as chairman of the Securities & Exchange Commission, things might improve on Wall Street. They certainly can’t get any worse.

Cox, 52, a former California congressman for 17 years in Orange County and a former securities lawyer, knows the ropes. But so did his predecessor, William Donaldson, who tried to push business regulations over the objections of prominent Republicans and the White House.

Cox had appeared to be more understanding of business issues and concerns. But on Jan. 4, the Securities & Exchange Commission issued standards about when and how financial penalties would be imposed for wrongdoing, standards that some don’t consider business friendly. They also seem to make official one of Donaldson’s informal principles.

Tough Enforcement
Cox told the New York Times, “Penalties on corporations are an important part of our enforcement program. They enable the [SEC] to achieve deterrence, and we believe it is essential to our mission of investor protection.” The commissioners said they would seek penalties when a company profited from a violation and when punishment was necessary to deter violations. But the SEC commissioners indicated they would try to avoid hurting shareholders.

Another item on the agenda of Cox and the SEC: reforming disclosure rules for executive pay. The commission was expected to propose new regulations in January. Time will tell if they make accounting easier or even more complicated.

Change Is Good
Today’s accountants do need guidance. And unfortunately, recent history has shown that corporate America needs a system of evaluating internal financial controls, review of these controls, and procedures to prevent and punish fraud.

But the Sarbanes-Oxley Act is burdensome and expensive, and it urgently needs revamping so that it makes sense, is fair to public companies and their shareholders, and does not stifle business growth.