Lets be specific here, Sarbanes-Oxley was originally created as an outcome of the Enron event, the annihilation of Author Andersen and the Worldcom fraud well back in 2001 and its fair to say that enough people believe this that we are being partially prosaic stipulating it again however this isn't quite the case.
If we roll back a little further in time to the days of the 1973 market and the scandals of Penn Central as well as the corporate corruption payouts of Watergate we see the whole event playing out again, albeit in the past and congress at that time held many hearings into corporate governance policy. Much work was done over several years for what its worth which took us right into 1978 but nothing surfaced and for several reasons. Then in 1995 congress went through the process again and entered into a debate on tort reform legislation dubbed as PSLRA but still nothing substantial was enacted. In 2002 however, forty two witnesses presented over a period of about ten days of public hearings and the senate handed over to Sarbanes and Oxley. Enron was toast however Worldcom was coming to light and the senate needed to restore some semblance of public confidence in the investment community so both the senate and the house accepted the legislation. Interestingly the Sarbanes-Oxley act is so similar to the 1978 bill that it is apparently word-for-word in parts.
10 days and 42 debates, is that detailed?
George Bush certainly thought so and commented that 'SOX is the most far-reaching change to the securities laws since the New Deal.' and he wasn't wrong with that statement, but how far reaching are we talking about here?
National Venture Capital Association (NVCA) President Mark Heesen yesterday argued with congress that proposals by the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) should lower the costs of Sarbanes Oxley compliance for small companies. He is concerned that the accounting profession will not change its high cost practices but in the same token why should the cost of implementing Sarbanes-Oxley be transferred to accounting firms? Of course the big four firms do hold in part an oligopoly over 404 based audits and presently publicly listed firms are bearing the brunt of these costs. One could liken it to a permanent Enron tax on the business community for the foibles of some scaramouch of the past.
So how unpalatable is this cost and how far reaching is it?
Well Diane Casey-Landry, ACB president and CEO believes community banks should be exempt of 404 burdens because they are duplicative and thus they are nothing more than additional burden of costs.
Testifying before the House Small Business Committee: 'Bankers called again yesterday for community banks to be exempt from Securities and Exchange Commission internal control reporting requirements because smaller banks are already required to report to regulators and that the commission should further delay compliance with section 404'. Perhaps the solution to the 404 section is a permanent delay and this wouldn't be the first rescheduling of the mandate since it was released.
She also estimated that approximately fifty companies a year leave the Americas Community of Bankers NASDAQ listing and 20 percent of those are delisting primarily to reduce the burden created by the Sarbanes-Oxley Act, It is all a bit of a worry and yet American community banks unregistering is only the tip of the iceberg.
It is argued by many on Wall St that the introduction of Sarbanes-Oxley has had a major effect on the cooling off of listings on US capital markets particularly where firms have cross listed to raise market visibility or liquidity. In theory such companies would weigh up the costs of Sarbanes-Oxley against the benefits of being registered in the US and many businesses simply retreat to their home markets. The numbers are actually quite staggering with a 76% reported increase in registration cancellation on the period after Sarbanes-Oxley was released against the period before the act.
What is totally ironic about the delisting process in the context of the Sarbanes-Oxley act is the cure for corporate ills seems to have exacerbated the decease. To be concise when a company unregisters from a US exchange it enters into a pink sheet arrangement which is not regulated by the securities exchange commission and has very little compliance requirements at all. Most companies that used to be pink sheet listed were tightly held, low traded in volumes, often small businesses and many never met the requirements for a business traded on a national securities exchange. The argument here is that if one of the goals for Sarbanes-Oxley is to improve investor confidence then it has to have failed drastically if the companies that it is targeted for simply move into the clandestine world of pink sheets. What's worse is that investors generally feel uncomfortable with such arrangements and have a tendency to cash-in on their investments which over supplies the companies share volume deflating the share price of the business.
Way back in early 2006 the securities exchange commission which ultimately has the responsibility for enforcing the Sarbanes-Oxley act attempted to address the cost issues for section 404 of the mandate by exemplifying a companies 404 requirements when they had a market capitalisation of $100 million or less and revenue no greater than $125 million but such commercial classing of regulation is fraught with pitfalls, particularly where businesses spin off divisions to fall below the threshold.
Mr Levitt the former chairman of the SEC reasoned that it is probably the smaller public companies that are more likely to have control insufficiencies and should be watched most by analysts, he saw such a standard as pushing such businesses to a 'second class'.
So where and why did Sarbanes-Oxley go so wrong?
If one was to pull apart the mandate section by section, the rulings themselves seem harmless enough, by themselves and then capital markets welcome such standards. Actually the rulings are really quite straight forward and then the US economy is not the only one to take on such compliance initiatives. Even as far a field as India, registered entities have to comply with a revamped Clause 49 which has been likened as a 'SOX equivalent' in places. In Australia, the federal government has 'embarked on a comprehensive initiative' for Corporate Law Economic Reform Program or CLERP as it is more colloquially referenced.
Amazingly while the debate for a transparent accounting view of a business is not new or regionalised to the US, debates have raged on in congress for the best part of twenty years and still the outcome was poor. Professor Bainbridge believes 'that you'd have to show congress has a functional institutional memory' for it to evolve the program appropriately. such that the 1978 and 1995 legislative efforts were actually pertinent to the deliberations in 2002, seems implausible.'
So the US business community is left with ten days and forty two witnesses for a totally profound law rushed in so quickly that sections 307 on legal ethics weren't even adopted on the floor except through some parsimonious discussion.
Perhaps Sarbanes-Oxley went wrong less on what it attempts to achieve and more in its preparation and delivery. Perhaps some consideration of a wider impact on the business community that is already cooking needed to be taken into account.
