Sarbanes-Oxley: Does the Fix Need Fixing?

By Richard DeKaser
Chief Economist
National City Corporation

The Public Company Accounting Reform and Investment Reform Act of 2002, colloquially known as Sarbanes-Oxley or SOX, was initially received with open arms.  The congressional votes were a landslide; 97-0 in the Senate and 423-3 in the House, and President Bush proudly claimed it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt."

My how times can change; today SOX and/or its implementation, is under assault as unnecessarily onerous.  Based on the panel I moderated at NABE’s Policy Conference, however, this opinion is far from universal. 

First up was Alex Pollock, a fellow at the American Enterprise Institute who considered the legislation yet another vain attempt to legislate morality.  He characterized the corporate accounting and governance scandals as symptomatic of the greed that often accompanies economic or financial booms, and the legislative reaction as imposing excessive costs on the overwhelming majority that play by the rules.  In particular, he recommended that Section 404 of the legislation – which requires controls to be certified by management and attested to by auditors – be made voluntary, at least for smaller companies. 

Mark Seetin, director of government for the American Stock Exchange, expanded on this latter point, asserting that more than a dozen companies delisted from the AMEX over the past year because of the burdens of Sarbanes-Oxley.  He cited these delistings as merely the “tip of the iceberg”, and asserted that increased evidence of overseas initial public offerings (IPOs) indicates that the competitiveness of U.S. capital markets has been eroded.

Dissent came from Steve Harris, special counsel to Apco Worldwide and previously staff director of the Senate Banking Committee, where he was instrumental in shepherding the law through Congress.  He reminded us of how damaging the accounting scandals were and emphasized that externalities warranted a new regulatory apparatus, since perpetrators don’t suffer the consequences of their actions alone.  While acknowledging that some fine-tuning may be in order, especially to rein in unnecessarily expansive definitions of what controls are subject to accounting oversight, he claimed that the decline of accounting scandals was evidence of success.  The increase in overseas IPOs, he countered, was more a reflection of financial markets abroad maturing than of competitive disadvantage here in the United States.