Sarbox and Auditor Liability

Sarbox and Auditor Liability

The Bush administration alleges that fear of lawsuits is forcing accounting firms to engage in the equivalent of defensive medicine, unnecessarily driving up audit and compliance costs. The implication is that those costs would decline if auditor liability were limited.

Or would it?

The latest survey from Financial Executives International finds that the cost of complying with the much-maligned Sarbanes-Oxley regulations at large corporations dropped 23 percent last year. The big driver was a 10 percent cut in the hours spent by company employees and fees paid to outside lawyers and consultants, as everyone gained greater experience with new regulations concerning internal controls.

One component of compliance costs that barely budged, however, was fees paid to outside auditors. It is unclear whether that is because the auditors remain stuck on the learning curve or because their hourly billing rates are rising as fast as the number of hours billed are declining. Either way, it casts doubt on whether there will really be any savings from limiting auditor liability, or whether those savings will ever make their way to investors and consumers.

More Bankers for the Fed

It's generally agreed that lax oversight by bank regulators contributed to loose lending standards by subprime mortgage lenders. And recently the Office of the Comptroller of the Currency opened an inquiry into whether a similar problem may have developed with syndicated loans that are behind all those recent leveraged buyouts.

Given all that, it's somewhat surprising that President Bush has nominated two banking industry executives to fill vacancies at the Federal Reserve, which has a well-deserved reputation as the most hands-off of the bank regulatory agencies. Elizabeth Duke of TowneBank in Hampton Roads, Va., is a former chairman of the American Bankers Association. And Larry Klane heads up global financial services at Capital One Financial in McLean, which is both a bank and credit card lender.

Are these the sort of regulators who are likely to bring a skeptical eye to industry practices that have contributed to a credit bubble that threatens the soundness of the global financial system? Not bloody likely. Which is why the Senate might want to give these nominations more than the usual cursory review.

Who Pays the Gas Tax?

Let's hear it for Maryland's new governor, Martin O'Malley, who had the courage last week to suggest an increase in the gasoline tax to pay for badly needed transportation projects, including a proposed purple line for Metro and some form of transit along the jammed Interstate 270 corridor.

With gasoline prices and refining profit near all-time highs, you might think this is precisely the wrong time to raise such a tax. In fact, it's the perfect time. Because in the medium to long run, economic theory and practice suggest that much of this increase will be paid for by refiners rather than consumers.

Think of it this way: Today's high prices are the point at which supply and demand come into rough balance. But if the state increases the price at the pump, demand will fall and refiners will have to lower their wholesale price to sell the same amount of product. The price cut will offset a portion of the tax increase.

Of course, you don't have to be an economist to figure this out. If, in the end, consumers pay for gas tax increases, then why do oil and refining interests spend so much time and money to lobby against them?