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April 21, 2005

More On The Aftermath Of Sarbanes-Oxley

Even as I was asking, The Financial Times was offering an article documenting woes in the wake of the Sarbanes-Oxley of 2002 (access requires subscription).

It seems that the more obvious demands imposed by Sarbanes-Oxley in financial accounting - the expense, the time investment, the extra audits - are just the tip of the iceberg. The required mix of "proper" business controls and personal liability is causing a chain reaction that affects boards, organisational structures, professional advisers and the daily efficiencies of all public companies - and many private ones, even though technically they are not covered by the act.

The results are having an impact on the way companies hire, structure their organisations, work with lawyers and accounting firms and even choose software systems. They are also driving higher-than-anticipated expenditure in unexpected areas...

Sarbanes-Oxley has also forced a change in companies' relationships with auditors and lawyers. "What it has done is made your outside accountants regulators," says Anthony Abbate, president and chief executive officer of Interchange Bank, a New Jersey-based finance house, and an outgoing member of the Federal Reserve Board.

In the past, he or his chief financial officer could ask an auditor for an opinion on a proposal. Now, he says, "they don't even want to hear about what you're doing. If they say, 'Yes, you can do it,' or they remain silent, they become complicit and subject to their own regulatory body. So you're basically flying on your own."

It appears that not even the "going dark" option is a full solution.

With companies coming to realise the knock-on effects of Sarbanes-Oxley, some are busily trying to jump ship by going private. But in the long run, that will not be a solution.

For a start, private companies such as Wise Metals Group, a Baltimore-based producer of aluminium cans, have become subject to the same tough regulation since starting to offer public bonds...

Private-company status is also no haven from Sarbanes-Oxley. If a private company wants to leave open the possibility of an acquisition, particularly by a public company, it will probably have to show that it is compliant with Sarbanes-Oxley.

The article does note some unexpected positive aspects of Sarbanes-Oxley, but even these might be filed in the category of "creative destruction":

But if there are unintended consequences, they are not all negative. Mr [Michael] Critelli [chief executive of Pitney Bowes] found that the regulation could be used as a tool to force changes he wanted to make at Pitney Bowes - such as increasing shared services. "It turned out to be a blessing," he says.

Combine this with the post-recession oil shocks, and it's almost a wonder that the U.S. economy has done as well as it has.

April 21, 2005 in Sarbanes-Oxley | Permalink


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"SarbOx" is the latest boondoggle for the Big Four accounting firms. They are treating this legislation as one giant piece of paperwork. It's not the principle but rather the regulatory blah, blah, blah that is getting pushed by these rent seekers. The SarbOx principle is simple: "tell the truth". But that is lost in the application. Alas.

Posted by: pgl | April 21, 2005 at 09:11 AM

"Combine this with the post-recession oil shocks, and it's almost a wonder that the U.S. economy has done as well as it has."

Or, alternatively, there's an awful lot of whining on this subject that we'll still be hearing a hundred years from now; whining that proves that CEOs have a god complex and can't bear the thought of someone overseeing them, but that actually has very very little relevance to whether the provisions are causing true hardships. I mean, damn, now you can't ask outsiders for some way to implement some dodgy and immoral scheme --- my heart bleeds. Let's get real --- it's not all proposals that outsiders don't want to discuss as the article wants you to believe.

Posted by: Maynard Handley | April 21, 2005 at 06:18 PM

Maynard --

You have a point, but I think there is more afoot here than just the usual resistance to oversight. One of the keys here is the observation that there is no case law, meaning that the legislation was too ambiguous to provide adequate guidance. Either that or courts are just cannot be relied upon to stick to the plain letter of the law.

In any event, even if on balance Sarbanes-Oxley was the right approach at the right time -- and I'm not really arguing otherwise -- it is useful to know if there are transition costs that may be having effects on the pace of economic activity.

Thanks for your comment -- its nice to have some dissent.

Posted by: Dave Altig | April 22, 2005 at 10:10 AM

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