Tuesday, January 24, 2006

Sarbanes-Oxley considered harmful

From Reason. You Can Be Too Careful: How the government’s new corporate accounting rules impede efficiency and stifle innovation.
Critics in academia and business journalism—and many from the corporate world itself, most of whom are reluctant to talk on the record and thereby show “bad faith” regarding the law—have many complaints about SarbOx, from its picayune requirements to its overall cost. While all such guesstimates should be taken with a grain of salt, one financial consulting firm, the Johnsson Group, has put the 2004 costs of SarbOx compliance at $15 billion. The critics also argue that the law’s benefits are apt to be small.

SarbOx probably won’t cripple the American economy, any more than the Clean Air Act or the Americans with Disabilities Act did. But it’s bound to create bad incentives and unintended consequences. Far from increasing the efficiency of capital markets, it will discourage some businesses from going public, since most of its provisions do not apply to privately held companies; will encourage some now-public companies to go private; and will keep some foreign companies out of the U.S. stock market.
Think edge effects here. It is not the modest amount of productivity damanged or that the legislation doesn't do what it is intended to do. It is the affect it has on the rest of our culture.

The costs of SarbOx compliance, while not driving anyone out of business, will siphon revenues toward legal and accounting work. That drain may, in the words of Forbes’ Rich Karlgaard, “succeed in stopping the next Enron, but…crib-kill the next Cisco, Microsoft and Starbucks” by leaving them less capital with which to expand.

Bob Merritt: I got so frustrated, it wasn’t worth coming to work. I’d
rather be the guy that holds the pole that the surveyor looks down than be CFO
of a public company.

Stephen Stanton: We actively encourage clients: Don’t change your
system; don’t upgrade anything; don’t change anything for the last three months
of the year.

Karen De Coster: The average accountant or corporate finance individual has
seen the light in regard to the sheer folly of it all, from having endured
microscopic attention to even the most insignificant tasks. The more ridiculous
the compliance procedures get, the more the average worker tends to
blow it off as frivolous.

Charles Wilson: SarbOx is definitely discouraging smaller
companies from going public, and it discourages good opportunities for
investing in little companies. I have friends running private companies who say
going public now would be just impossible.

Like that.

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