Redstate

You might wonder why Senator Sarbanes and Rep Oxley are retiring at the same time.

The cynic in me suggests two possible reasons:

+ As SOx strangles more businesses, they might face increasing problems with the electorate.

+ As surviving businesses struggle to stay on the right side of the law, they might be offering lucrative consultancy contracts to former legislators who are expert in the provisions of SOx.

Quentin Langley
Editor of http://www.quentinlangley.net

and having CFO/CEO's accountable for the company's financial data is also a good idea.

However, huge negatives include the one-size-fits-all nature of the current SOX legislation. It is a small business killer and most of the regs just make busy work for accountants and lawyers. Unnecessary expenses that drive IPO's overseas.

Also, where's the scrutiny of non-profits and government/private ventures (like Fannie Mae)? There's a whole lot of fraud going on in those sectors, specifically in the education and medical (Medicaid/Medicare) areas-yet congress won't even take a peek.

Si vis Pacem, Para Bellum

that fraud is bad.

So the question becomes then, what sort of rules give you the best fraud reduction with the least onerous legal requirements?

Clearly the system was "broken" before SOx, but if SOx didn't fix the "system", what will?

Why do we need regulation to combat fraud? Why not just rely on existing law against fraud, and use the civil courts the way they were intended?
--
If you're seeing shades of gray, it's because you're not looking close enough to see the black and white dots.

Corporations like rules, just not too many rules. It levels the playing field by setting up standards and a proscribed why of behaving, which reduces risk. Otherwise, in order to complete, corporations are forced to race to the bottom and hope they don't get caught. Which is neither good for society or for the corporations themselves.

Besides, I thought class actions lawsuits were bad and shouldn't be encouraged.

This is a whole different diary, but...

In my experience, actually not all corporations are equal in terms of liking rules. The big boys don't really care, because they're large and established enough to absorb the costs of any new rules.

It's the little guys who hate the rules because they just add barriers to entry, increase their early costs when they're trying to build steady revenue, and cause needless stress on the already busy founders.

I see no race; I just see a squeeze out.

--
If you're seeing shades of gray, it's because you're not looking close enough to see the black and white dots.

I'm not going to deny that the little guys don't like rules in the abstract. But I think that is only because they have never really thought how hard it would be completing against the big guys if there were NO rules.

Anyway, I'm a moderate when it comes to regulation and rules. Too little is bad, too much is bad, and the trick is to find the optimum mix. Unfortunately, our current system isn't designed to figure out what the optimum mix is nor to make the necessary modifications to accommodate changes in the business landscape that occur over time. And I can certainly understand the complaint that in many areas (if not most) there are far too many rules and regulations. You can blame a lot of that on special interest groups, corrupt politicians and, of course, the tragedy of the commons.

That most new rules end up favoring the Big guys over the smaller guys. And that most Laissez faire benefits the smaller over the larger. Exceptions of course can always be found.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Big guys are more capable of absorbing the incremental cost of regulation.

Laissez faire promotes competition and smaller companies are better able to move quickly in a competitive environment.

_______________________________
If "pro" is the opposite of "con", what is the opposite of "progress"?

I think it is clear that during the Clinton administration they were ignored for the benefit of FoB, but that doesn't mean the system itself was broken.

It is rather facile to argue that the system must have been broken because of a few high profile and illegal instances.

Nobody suggests that because murders continue to happen in the US that 'the system is broken' and there must therefore be a new law to make murder even more illegal than it is now. Sometimes better enforcement is needed, but that does not mean that new laws are necessarily needed.

Quentin Langley
Editor of http://www.quentinlangley.net

>>and as soon as Sarbanes and Oxley are out of there, my sources who work on banking and financial services matters on the Hill tell me, it will be rewritten. Thank goodness. It should be possible to keep the handful of good provisions, and gut the bad, with little difficulty.

But isn't it funny how laws are so much harder to repeal than to enact? Not constitutionally, of course. Same procedures apply. But in practice bad laws just seem to hang around.

I have long thought that it should be harder to pass laws and easier to repeal them. Perhaps if 51 Senators or 208 Congressmen sign a petition saying they oppose a law it should lapse. Perhaps all laws should have sunset clauses and only survive if positively reaffirmed.

Quentin Langley
Editor of http://www.quentinlangley.net

>>Sarbox behaves like a tax in that it affects everyone in your industry symmetrically and often doesn't disadvantage you vis-a-vis your competitors

Then it impacts you vis-a-vis your competitors. Bigtime.

The major impacts on foreign companies headquartered outside the US are those with share listings in NY. That may become less common.

Quentin Langley
Editor of http://www.quentinlangley.net

>>>The major impacts on foreign companies headquartered outside the US are those with share listings in NY. That may become less common.
<<<

The title of your post was "Unless you are NYSE." I've read Sarbox pretty closely but I evidently missed where it specifically mentions NYSE listings. Was that part of the subsequent rule-making that Sarbox mandates? My reading of the actual statute suggests that it covers any publicly owned company subject to SEC regulation, other than "investment companies" within the meaning of the 1940 Securities Act (those of course are covered by Gramm-Leach-Bliley and a raft of other laws and regs).

I can't be too specific but I've seen little movement toward going private in the industries I know well, in which most or all of the companies are nearly the same size. In these cases, they all suffer from Sarbox in roughly the same way, and their competitive pressures are driven by other factors. It certainly would be a different story in industries characterized by a greater variance of company sizes and more market fragmentation. Also in industries like the North American auto industry where it no longer makes business or financial sense to be public in the first place. And as I said, many smaller public companies (regardless of industry) are becoming very interested in becoming private.

I can well imagine based on your arguments that many industries subject to Sarbox will see a reduction of competition and therefore competitiveness, as regulatory compliance becomes one of those evanescent "synergies" that investment bankers and hedgies force companies to try to capture. The drive to over-regulate American business will have far-reaching effects. And as it's being done by Republicans, we have much reason to fear that it can only get worse.

Any company listing on NYSE, NASDAQ or otherwise answerable to the SEC has to comply. Companies listing on the London Exchanges don't.

Interesting side note, there are increasing numbers of private companies getting caught up in SOX, not because the law requires them to report, but because the banks that have to report, want their borrowers to report so that if something comes up later, they can sey "Hey, we made them do SOX, talk to their auditors!"

I know a few newly minted accountants, they would like to thank the good senators Sarbanes and Oxley for the jobs program that created so much work they got big 4 internships with the extra pay that comes with such work history upon graduation.

SOx has hurt accounting firms in other areas of their business. For example, earlier this year, my husband left PricewaterhouseCoopers in part because, if he transferred to a US office with the firm, he wouldn't be able to do tax consulting-- only compliance. That's a result of SOx. Sure, audit firms are picking up more audit work. But they're losing other very high value work in spades.

You're right to point to many companies going private-- I dealt mostly with high-grade private equity investee companies and private equity investors in my former work, and SOx was seen as another motivator to go this route, which is preferred for a number of reasons by private equity investors with regard to both English and US registered companies. As you note, SOx does have an impact beyond the US, on companies incorporates elsewhere, but who operate at a high level in the US. However, in my opinion, it has helped move a lot of investor money to companies incorporated outside of the US, who don't do substantial dealings here. That's not good, in my opinion.

Liz Mair is the editor of WWW.GOPPROGRESS.COM, a RedState-style blog for libertarian, mainstream and moderate Republicans

...have responded to Sarbox by divesting their (huge and profitable) consulting businesses into other entities, so I doubt the work is entirely disappearing. A few firms (I'm strongly resisting the urge to name names but in present company I'm sure there's no need to) are trying to square the circle and remain in both businesses through management controls and internal auditing. On balance, a huge amount of new and mandatory work is being created, and people are profiting greatly from it, but it of course consumes capital that could be far better utilized. And as you point out, that's extremely bad for America as a whole.

Another ironic Sarbox effect, considering that its intent was to improve governance, is that it makes top-quality directors harder to recruit, now that they face personal liability. I think America's big-company boards were already going in the wrong direction, toward business-school professors and ex-politicans in assorted colors and genders rather than the hard-headed and independent-minded current and retired CEOs you really should have on a board. And Sarbox will make this worse.

I think Sarbox is part of a larger trend toward reduced public financing of American business that will have many unforeseen and interesting effects. You and qlangley rightly point to the reduced attractiveness to global investors of American public equity, but as this trend accelerates, what will the results be? I believe the most vicious problem faced by large American businesses today is their ownership structure. As Republicans are fond of pointing out, America is now an ownership society. American businesses have significant ownership by pension funds, insurance companies, mutual funds, and more recently, hedge funds. In other words, they're ultimately owned by retirees and other people whose primary goal is short-term financial performance. American managers can't be globally competitive when they can't even make long-term plans.

This may mean that global capital will make decisive future moves toward other countries, and America's "muscle-using" businesses (Jack Welch's term) will suffer capital starvation. (It's already happening.) What happens then? Well, America is full of brilliant, highly-motivated people. They will find ways to create global value without requiring so much capital. Viz, in information-intensive industries. (Capital is really just information in the first place.) Interesting times ahead.

Thanks for the info!

Don't tread on me.

Quentin Langley
Editor of http://www.quentinlangley.net

then it is certainly not worth it. I would doubt that compliance costs are that much, after all the economy is booming not tanking.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

The figure quoted (I have seen 1.5, not 1.4) is not annual compliance costs, but the total loss to the value of companies quoted on the Stock Exchange.

More, including Alan Greenspan and Invstors' Business Daily on the subject at NCPA

Quentin Langley
Editor of http://www.quentinlangley.net

I'm not sure total cost is the right measure to look at, I think marginal cost is where the focus needs to be. Some amount of accounting is necessary without any regulation just so the owners know how much the company made. And there are offsetting profits being made by some of the companies involved in the compliance work (whether or not that is beneficial to the economy is a separate question, and there I concur it isn't particularly beneficial).

All that being said, since the point of a company is to pass on its profits to its owners, who are the stock holders, I think that means the $1.4/5 trillion figure is a good estimate of the marginal cost, since those costs must be taken out of profits, and profits directly influence value of a company.