Outlook & Opinions


by Nick Gillespie

The dumbest government policies are almost always the fruit of the bipartisanship that sets Beltway hearts beating with patriotic arrhythmia. Think the Patriot Act, No Child Left Behind, the authorization of force in Iraq and the TARP.

A particular offender is the Sarbanes-Oxley Act of 2002, which rewrote accounting and disclosure rules for publicly traded companies in the United States. Garnering just three nay votes in the House and Senate and signed by George W. Bush (the nation's first MBA president), the act was supposed to prevent scandals like those that brought down Tyco, Enron and WorldCom. It created the Public Company Accounting Oversight Board and mandated "internal control reports" - expensive assessments of how well companies are following the dictates of the board. Executives who approve shoddy paperwork face fines of up to $5 million and jail time of up to 20 years.

It was never clear how more accounting and reporting regulations were supposed to squelch fraud. But government bean-counters, even more than generals, always fight the last war.

Larger firms lobbied for passage of the act, figuring they could absorb the costs that would hobble smaller competitors - which is just what happened. According to a 2008 Securities and Exchange Commission survey of officers at publicly traded firms, Sarbanes-Oxley cost the average company $2.3 million a year in direct compliance costs (staff time, documentation and external audits), compared with supporters' estimates of $91,000 in annual costs.

The same survey found that only 20 percent of respondents believed the benefits outweigh the costs. That result echoes a 2008 report from the Association of Certified Fraud Examiners that found firms with the new controls "experienced greater fraudulent financial statement manipulations than organizations lacking these controls."

Markets don't like the law, either: Foreign companies listed on U.S. exchanges show falling stock prices compared with competitors who don't need to comply.

Even as Washington takes tighter control over U.S. business, Sarbanes-Oxley is the subject of a Supreme Court case (Free Enterprise Fund v. Public Company Accounting Oversight Board) that could undo the whole megillah. Even so, the act should be remembered as a case study in hysterical legislating, which always produces more harm than good.

Nick Gillespie is editor in chief of Reason.tv and Reason.com.

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