ShareThis Page
News Columnists

Investor protection act had its consequences

| Sunday, Nov. 19, 2006

In reaction to several major accounting fraud cases four years ago, Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002 -- better known as the Sarbanes-Oxley Act -- to make corporate accounting more transparent. The objective was laudable, but the legislation might be a prime example of a law that caused unintended consequences.

In a speech a week ago, retired Federal Reserve Chairman Alan Greenspan strongly suggested that Congress was too hasty reacting to the perceived need to tighten financial reporting requirements. "Sarbanes-Oxley passed both houses with almost unanimous votes. Any bill that goes through Congress with that sort of vote cannot be good," he said. He added that the bill passed "with the vast, vast majority of the House and Senate not having read the bill." Greenspan characterized the section requiring a company's auditor to attest to the effectiveness of internal controls as a "nightmare."

Proponents of the legislation argued that fraud by executives at Enron and WorldCom were classic reasons to pass a law to protect shareholders. The law's adversaries, however, warned that the increased costs the law mandated would be burdensome in terms of time and expense spent complying with it. They also argued that the tools to fight corporate fraud already existed.

Sarbanes-Oxley had some good provisions, but for smaller companies, the cost of compliance was significantly more burdensome than for larger companies -- the fact that probably has led to unintended consequences.

Proponents of the legislation have argued that the law has not prompted an exodus of companies from the public sector. In recent months, however, some have chosen to leave the public sector by making offers to shareholders to become privately owned. How much Sarbanes-Oxley influenced these decisions is impossible to determine, but a few have been bold enough to suggest that it at least was part of the reason.

An equally unquantifiable, but nonetheless logical, consequence of the legislation is the probability that some companies that contemplated going public did not because of the legislation.

More tangible evidence of the consequences of Sarbanes-Oxley, however, is the number of companies going public on foreign exchanges instead of in the U.S.

Some members of Congress have recognized shortfalls in the legislation. Greenspan praised efforts by Sen. Chuck Schumer, D-N.Y., and Rep. Barney Frank, D-Mass., to overturn some sections of the legislation. Schumer has a direct interest in the consequences of the original law because he represents New York's financial center, which probably is being negatively impacted.

No sensible person opposed to any part of Sarbanes-Oxley is arguing for shoddy accounting that opens the door to corporate fraud. But a law that was touted as the most important financial legislation since the Securities and Exchange Act of 1934 should have been considered more completely for the impact it could have.

The law can be fixed, but had it been more carefully crafted, some of the unintended consequences would have been avoided.

All of this brings up another point, which is that a well-constructed fraud is very difficult to uncover.

Regardless of how many teams of accountants a company employs, if control is vested in the wrong hands with access to critical controls, records can be altered and misrepresentations offered in lieu of facts.

As difficult as a well-constructed fraud can be to uncover, the tools to do it have been around for decades, as have the penalties once fraud is discovered.

The saving grace is that the vast majority of companies operate ethically and on the right side of the law. In time, maybe one of the intended consequences of Sarbanes-Oxley will be worthwhile for U.S. equity markets -- foreign investors will recognize that our markets are the most transparent of any around the world.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.

click me