Ms. Pelosi and other Democrats have been quicker to recognize what many traditional champions of free enterprise have been slow to see: the law's disastrous consequences for our nation's ability to compete. Congress passed this law hastily in 2002 after the egregious accounting frauds at Enron and WorldCom. The intent was to hold publicly held companies and their executives more accountable and weed out bad actors; but that's not been the effect. Four years after passage, it is now evident that the costs of Sarbox clearly outweigh the benefits.
Consider first the costs. Recent estimates from the American Electronic Association, for example, show that U.S. companies are spending $35 billion annually simply to comply with the law as opposed to original federal estimates of $1.2 billion. A University of Nebraska study found that audit fees for Fortune 1,000 companies, on average, increased a staggering 103% from 2003 to 2004. The costs of being a U.S. public company are now more than triple what they were before the law passed, according to a study conducted by the Milwaukee-based law firm of Foley & Lardner. Some smaller firms report that they are spending 300% more on Sarbox compliance than on health care for their employees.
Based on a growing body of theoretical and empirical research, the SEC's Advisory Committee on Smaller Public Companies concluded that Sarbox places a disproportionate compliance burden on small public companies, making it more difficult for them to compete with foreign companies and to a lesser extent with larger U.S. companies. Consider the survey by the American Electronics Association, which found that companies with sales of $100 million and under are spending 2.6% of their revenues on Sarbox compliance--enough to tip many of them from profitability into unprofitability. This makes it something of a challenge for these companies to innovate, compete or grow--or even survive.
As a result of these burdensome costs, enterprises are deciding not to go public, or else are opting to back out of our capital markets. Explaining his company's absorption into privately held Koch Industries, Peter Correll, the CEO of Georgia-Pacific, said, "There is a lot of time spent by top management on things that are not value-adding, but are simply bureaucratic and are required by a raft of regulation." In fact, the Foley & Lardner study found that 20% of public companies are considering going private just to avoid Sarbox compliance. It's no wonder, then, that the London Stock Exchange--eager to exploit a competitive advantage--now promotes itself by reminding companies that by listing on the LSE they are not subject to Sarbox.
Beyond the direct cost of compliance to individual companies, a recent University of Rochester study concluded that the total effect of the law has reduced the stock value of American companies by $1.4 trillion. That is $1.4 trillion that could be invested in infrastructure improvements, jobs, innovative technologies or research and development. As Sun Microsystems CEO Scott McNealy says, Sarbanes-Oxley throws "buckets of sand into the gears of the market economy."
The true beneficiaries of Sarbox are the nation's large auditing firms, which now maintain a regulatory oligarchy composed of a handful of entrenched services corporations. They will continue to champion Sarbox, since it provides a guaranteed market for their services. Surely this law was not intended by its authors to become a full employment act for the same auditing industry which was implicated in the original malfeasance of four or five years ago.
Sarbox highlighted the importance of financial transparency and management integrity. And those in the corporate world who break the law should be punished. They are: Over 700 prosecutions have been launched since 2002 to address corporate crimes. Nevertheless, not one conviction was a result of Sarbox. Meanwhile, Sarbox clearly failed to prevent the massive accounting scandal at Fannie Mae.
On top of everything else, the Public Company Accounting Oversight Board (PCAOB), which is central to the operation of the law, violates the separation of powers principle and the federal Constitution's Appointments Clause--which is why the Free Enterprise Fund has joined with a team of legal experts to challenge the PCAOB's constitutionality. Since the Sarbanes-Oxley law is not severable, the result would be to throw out the entire law.
The PCAOB performs an executive branch function, but the president does not have the authority to appoint or remove members of the board; they're appointed by the SEC in consultation with the chairman of the Federal Reserve and the secretary of the Treasury, and may be removed only by the SEC. In short, PCAOB is not accountable to any elected official or the citizens. It therefore violates the Appointments Clause (Article II, Section 2) of the U.S. Constitution, which calls for appointment by the president with the "advice and consent" of the Senate--not the SEC.
American financial markets have long been at the center of economic growth, innovation and world commerce. Unfortunately, Sarbanes-Oxley is undermining our financial markets; and in its current form it is also unconstitutional. For the sake of the free enterprise system and America's prosperity, I hope that the desires of Ms. Pelosi and Mr. Spitzer to reform this well-intentioned, but misguided attempt at reform will soon be joined by many others in Congress--and in the Bush administration.
Mr. Factor is the chairman of the Free Enterprise Fund.
Copyright © 2006 Dow Jones & Company, Inc. All Rights Reserved.
No comments:
Post a Comment