What was the defining event for investors in the fall of 2001? (Hint: not 9/11). I’d say it was the collapse of Enron. That’s because until Enron it was unthinkable that a public company valued at $70 billion could suddenly go belly-up, without any warning from the firm’s accountants or independent auditors. Then, just when Enron was being dismissed as a fluke, a repeat performance occurred at telecommunication giant WorldCom. (Full disclosure: I owned WorldCom stock at the time).
To make sure that no more Enrons or WorldComs could ever happen again, Congress passed the Sarbanes-Oxley Act in July 2002. The law’s main objective was to make earnings reports of public companies more reliable. Its method: Hold executives and accountants accountable for the accuracy of the numbers.
Has SarbOx worked? That question is the focus of NBR’s Good Friday special, “Sarbanes-Oxley: Five Years Later.”
One of the things we learned from our reporting and research is many observers answer the question with a resounding “Yes.” They point to new data on corporate earnings restatements (a sign of possible “cooking the books”).
Two new studies show that although corporate earnings restatements in 2006 rose to record levels, more than half of the restatements came from smaller companies. Those firms were not subject to the internal controls safeguards under the Act’s Section 404. Among larger companies, which had no such exemption, earnings restatements have declined steadily.
But has that success come at too high of a price? Critics of the law note that SarbOx compliance costs have turned out to be far greater than were intended. They claim that’s hurting America’s competitiveness. They also say many companies are trying to avoid having to comply with the law, by either listing their stock on foreign exchanges or by going private.
What this all comes down to is a classic battle over regulation. Should government do whatever is necessary to protect investors -- regardless of the cost to business? Or is it time to amend SarbOx so that its costs don’t exceed its benefits?
This controversy doesn’t impact just corporate executives or accountants. If you own stock in a public company, you’re indirectly picking up the tab for SarbOx expenses. (Of course, if that’s the price you pay to avoid being a shareholder in the next Enron -- maybe you’re not complaining!)
The bottom line: Be sure to tune into NBR on Good Friday (April 6) for “Sarbanes-Oxley 5 Years Later.”
Comments
WE NEED MORE SARBANES OXLEY LAWS YET AS A FAN OF SMALL CAPS IT HAS HURT SOME OF THEM YET IT KEEPS ALL COMPANIES IN LINE I APPLAUD THE SARBANES OXLEY LAW ITS THE BEST BUSINESS LAW WE VE EVER HAD IN OUR ENTIRE HISTORY ITS HIGH TIME OUR GOVERNMENT STEPPED UP TO THE PLATE ON THIS ISSUE KEEP US VIEWERS POSTED ON THE LATEST ON IT PLEASE
Middle of the fairway approach for SOX
It would be ideal for investors if the U.S. could reach the middle of the fairway on accomplishing the goals of the Sarbanes-Oxley Act (the “Act”). Canada has taken a middle of the fairway approach, by imitating the Act’s requirements with one major difference; there is no involvement by external auditors. Could this approach work for the U.S.? In both countries, managements of public companies are one hundred percent responsible for effective internal controls over financial reporting, U.S. companies just pay for the evaluation twice.
To accomplish the middle of the fairway approach, the U.S. Congress would need to strike out the Act’s Section 404(b) that specifically requires attestation on internal controls by external auditors. Doing this removes some value, but this is fallacy because the struggle is not how to keep everything that adds value but rather how to achieve the best value. If the Act’s Section 404(b) were amended Section 404(a) remains unchanged as does the Act’s requirements for auditor independence, corporate responsibility, and enhanced financial disclosures. The costs of compliance with the Act would drop by at least fifty percent. More importantly, the Act’s provisions on corporate criminal fraud accountability and white-collar crime penalty enhancements remain intact, promoting assurances to investors for accurate and reliable financial information.
If par for the course is an agreeable score to all parties (most especially to investors and those charged with protecting them), the middle of the fairway is an excellent place to be. So far, I have not heard this option seriously discussed by those with the power to get us there, the U.S. Congress.
As a small investor, Barbara Roper much more closely echoed my concerns and opinions (than did Glenn Hubbard), as one who is wary of the equity markets. I think it's a no-brainer that it should be incumbant, and if necessary burdonsome, upon any company that takes it upon themselves to go 'public'. It is not a right to be incorporated, and it shouldn't be a cake walk. The nuance I am concerned with is that I don't want requirements to be so impossible that only large corporations can afford to meet them. I'm not surprised there has been a chorus of complaints, though I don't I'd be wrong to say most of it is to be expected, and are cyncial. After all, a corporation as we have come to see, seeks to always maximize profits, so it is always going to bump up against and try to eliminate rules that confine its profits (seen in a narrow corporate point of view). Barbara echoed my thoughts that the bar should be high for any corporate entity to meet. Long live Sarb-Ox. I'm sorry to hear the dean of Columbia Business School, Mr. Hubbard, indicate some thoughts to the contrary.