The Evils of Sarbanes Oxley

Sarbanes-Oxley Hurting Jobs, Wages

Faced with the growing expense of keeping up with Sarbanes-Oxley, small and mid-sized companies are increasingly pursuing two options: buying up stock to take the company private or selling out to larger companies. The study found that 20 percent of responding companies’ management were considering buying up enough of their company stock to take their company off the public stock exchanges. Fourteen percent are considering mergers.

It’s interesting to me that whenever the government imposes some new regulatory law, it tries to extend it to as many private individuals and businesses as possible -- yet always sees fit to exempt itself.

But to me, even if one were to accept the validity of preventive law (which I obviously don’t) this is completely backwards. For example, in the case of Sarbox, as a private investor I have, and have always had, the simple solution of not investing in a company if I’m unsure of its accounting practices or if I have any other doubts about them. No need for the government to assign independent auditors, as I’m not forced to give any private company or individual my hard-earned money. On the other hand, if I say: “I think the EPA has a history of poor budgeting and it seems to lack internal controls, so this year I’ll hold back that portion of my taxes which goes to fund them”, the government throws me in jail! Given that I’m forced to fund these agencies, it seems to me that it is much more important that they be policed by independent auditors and forced to jump through hoops to prove that they are using the public’s money properly, than it ever is to make private companies and individuals do it. Just a thought for our representatives in Washington….

Institute of Management Accountants Speaks Out About Impact of Sarbanes-Oxley on U.S. Industry
Quote:

"The Sarbanes-Oxley legislation was intended to protect the interests of shareholders and it has merit," Sharman said, "but now, three years later, the overly burdensome and complex requirements are impeding business performance. Companies have been forced to spend money -- more than $32 billion of what would have been shareholder income -- on costly procedures to satisfy regulatory requirements."

A few choice quotes from the article:

"Have you ever wondered what it would be like to spend a few years behind bars? Well, since the passage of the Sarbanes-Oxley Act in 2002, if you are a CEO, CFO or, and here's the rub, any other c-level executive (including CIO), it is much more likely you won't have to waste too much time wondering."

"Since its passage in 2002 and the subsequent establishment that summer of the President's Corporate Fraud Taskforce (which handles all cases of corporate fraud), more than 693 fraud convictions or guilty pleas have been secured in 577 separate cases involving 1,299 individuals."

I had good intentions of summarizing and then analyzing the Sarbox Act before actually posting other items here. But I've been so busy over at Thrutch, that I'm not sure when I'll have time to devote to this topic. As a compromise, I'll post news items here with little commentary, just to get them up.

I've started a thread on the Silicon Investor message board to keep track of companies who delist their shares due to the cost of Sarbox compliance. Please feel free to post additional examples.

I am a full time trader and investor, and a part-time student of Objectivism. In the past few months several companies in which I hold long term investments have elected to de-list their stocks due to the exorbitant cost of SarbOx compliance. Having followed the companies over several years, I was quite sure that there was nothing wrong with the companies themselves, and I counted myself happy to own a part of their business. Moreover, as a long term investor, I found myself agreeing with their decision to de-list -- given that the compliance costs were effectively coming out of my own pocket, and the return on investment was minimal, if not negative. Nonetheless, I am worse off than had the regulations never come into effect, since my investments are now much less liquid, and I am deprived of the opportunity to invest in other companies who also have chosen to de-list.

This damage to me as an investor, from a bill touted to “protect” investors, first provoked my interest to look further into the details and implications of the Sarbanes-Oxley legislation.

As a student of objectivism I knew that in principle any government regulation is bad -- but as I looked into the details of the Sarbanes-Oxley Act, I was still staggered by the magnitude of the injustice perpetrated on corporate America (and by extension, on America itself).

Following my preliminary research, I decided to create a site to document the effects of the Sarbanes Oxley Act. My purpose is mostly personal – I want to see first hand, and in relatively real time, the effect, in all its gory details, of the government treating individuals as guilty until proven innocent and of needing protection from themselves. For those acquainted with the Objectivist concept of “chewing”, the site can be thought of as my attempt to chew the implications and effects of this Act in order to concretize the wider principles involved. And although eventually I hope to create a full-blown website documenting my findings and thoughts, in the interim I wanted to start this blog to assist me in keeping track of my research and to solicit comments to help sharpen my thinking on the issues.

The fact that I am focusing on Sarbanes Oxley does not mean that I think it is the most important issue extant. Rather I have chosen to focus on it because it is a relatively new bill, and as such I believe it will be easier to observe the effects as they unfold (as opposed to tracking the effects of Anti-Trust or the establishment of regulatory agencies such as the FDA).

A short survey of sites and editorials critical of the Sarbanes Oxley bill shows that the criticism is aimed mostly at the practical level of implementation, wording and cost-benefit analysis, with little emphasis on the moral or logical aspects. The thrust of this blog will be to show that the critically important aspects are precisely those that have been largely unaddressed, i.e. the danger of reversing the principle of “innocent until proven guilty” to “guilty until proven innocent” and the idea that it is the government’s function to protect citizens from themselves. However, in order to chew the principles properly, one must also observe and compile the actual effects flowing from the bad ideas, and so this blog will document the costs of the regulation, the number of companies dropping out of public markets, CEO’s and CFO’s quitting rather than assuming indefinable or incommensurate risks, etc.

As this blog develops, and with this introduction as context, any constructive comments or criticisms will be welcomed and can be sent to SarboxAsEvil@yahoo.com